Examination of Witnesses (Questions 20
- 39)
TUESDAY 13 MAY 2003
SIR RICHARD
EVANS, MR
NICK PREST,
MR JOHN
HOWE AND
MR COLIN
GREE
Q20 Mr Cran: What do you mean "there
are differences"?
Sir Richard Evans: There are always
going to be—and it brings you back into the point that was
made earlier about the wider issues—in the chase part of
a procurement process debates that take place and arguments which
are about degree rather than necessarily absolute principle. The
carrier is probably the classic case in point.
Q21 Mr Cran: I am going to get on
to that in a minute. You are going to pre-empt me I see.
Sir Richard Evans: I do not wish
to pre-empt you but I think the carrier is a classic case in point
where there is a great debate about whether this particular definition
is acceptable with everybody. The fact of the matter is we are
suppliers. We clearly want a say in the context of making a contribution
where we think we can add value to the process that leads up to
the decision taking, but we do get to a point where we have to
forget about definitions because we have to get on with the job.
I must say we have fought cat and dog with my colleague on my
left here, Mr Howe, in the run-up to the selection of the carrier
programme. Actually it is quite interesting, despite the various
press commentaries and media coverage that exist today about the
differences between us, we have now got a combined team working
on the carrier programme together. It is interesting but to my
knowledge it has not got a French guy in it, although there may
be some buried beneath it. The point I am making is you do get
to a point where we have to stop arguing about the definitions
of ownership and get on with the delivery of the task. The carrier
is an interesting case where probably on this issue of ownership
there has been the most fearsome debate, certainly that we have
attempted to use in order to persuade people to join our particular
opinion. Having got to the decision point, the guys behaved sensibly
and got together, and I think we have now a very effective team.
If anything, I would say that the MoD team now are running behind
the industrial team, which is an interesting turnaround.
Mr Howarth: Do you want to expand on
that?
Q22 Mr Cran: We are dying to hear
from you.
Mr Howe: I am dying to speak.
Just two points to follow that up. Of course the Thales bid for
the carrier was itself a 100% British bid. Had we won the contract,
the work would have been done in the United Kingdom, the design
would have been done here, the ships would have been made here,
and it would have been no less British in terms of content than
the BAE bid. I think the second thing about the carrier is the
point you have just touched on, Sir Richard. Both companies were
competing ferociously until three and a bit months ago. Since
that time, something which is not generally recognised, both teams
have turned themselves around and integrated and there is now
a very great co-operation between the companies. I really do emphasise
that.
Q23 Chairman: Will that wonderful
team be allowed to transfer to the building of the French carrier
programme? That would then make it really easy for us to say how
wonderful this new arrangement is that Sir Richard and you have
mentioned?
Mr Howe: Where I understand the
French are on their carrier programme at the moment, as you probably
know, is that they are studying options and looking at a number
of different options for the second aircraft carrier. If they
choose a design which is similar to the UK Alliance version, then
I very much hope there would be ample scope for industrial co-operation
from which your company as well as ourselves ought to benefit,
but that is speculation at the moment because the French have
not made their decision on which design they want.
Q24 Mr Cran: Can I come back to the
point you really touched upon, Sir Richard, which is the Future
Carrier policy. The two of you are mates now naturally because
you have to be and we would expect no less, but I did recall,
when the process was going on as to what arrangement was going
to be chosen, innumerable press articles and comments and all
the rest of it which really seemed to be emanating from your outfit,
Sir Richard, essentially saying you were British and they were
French. I cannot put a quote to that, I cannot say you said that,
but I am just saying a climate occurred which all of us were quite
able to read about in the press and hear about on the radio. Is
that unfair?
Sir Richard Evans: No, I do not
think it is unfair.
Q25 Chairman: Would you use that
card?
Sir Richard Evans: I certainly
recognise the arguments that you have just described. Whether
it is unfair or not I think is for others to judge. We fight these
campaigns in order to win. The point I am really making is that
a point comes when decisions are taken and you have got to get
on with the job. I have no doubt if a similar situation arose,
not on carriers but on something else, we would behave in precisely
the same way in order to support our position and our argument.
I think there is a wider issue here that people need to understand
which is something of a peculiarity about this industry. If you
look at this industry worldwide there is a huge amount of collaboration
and co-operation that takes place between companies. That collaboration
and co-operation creates dependencies that are very unusual. Certainly
in my limited period of time in terms of the car manufacturer
ownership it was unthinkable to think in my particular case that
Rover, for instance, would collaborate with Ford in the context
of product development for instance.
Q26 Chairman: But you sold it.
Sir Richard Evans: We sold it,
that is absolutely true, but the point I am making here is the
motor car industry, which is a very high capital intensive investment
business, has some fundamental differences in the context of the
way that companies behave towards one another. The fact is that
in the aerospace and the defence industry there is, I think, a
much greater degree of co-operation and inter-dependence upon
one another which is evident over the complete spectrum. It is
certainly the case also in the civil aviation business. We are
partners at BAE SYSTEMS of Airbus yet we actually undertake a
huge amount of manufacturing work for Boeing. When you think about
these arguments and the way they are progressed, one needs to
look a little bit further under the skin to find out what exactly
independence is about and who actually has it.
Q27 Mr Cran: That is perhaps why
you started off agreeing with the definition and then, as you
pursued your argument, you argued yourself into a draw by saying
the definition probably was not that helpful.
Sir Richard Evans: I think a draw
in this situation is not a bad outcome.
Q28 Mr Cran: Because I am clearly
going to get nothing else out of you on that subject, can I ask
you, your industry has been subject to the most enormous amount
of restructuring, what industry has not, but I can think yours
has over the last decade or so. What trends do you see in the
future that you would like to highlight to us?
Sir Richard Evans: I think in
terms of the broadest industrial base, the process of consolidation
will continue. It is largely going to be driven by the ability
to afford the investment that is necessary to sustain the product
end of the business and it is also extremely important in the
context of growing the business, which means taking market share.
In this business, like any other business, we can have the finest
quality of technology, the finest engineering that you will find
anywhere in the world, but if the order book is empty it is very,
very difficult to apply it to make some profits, deal with the
shareholders, continue to keep people employed, etcetera. We have
to go where the markets are and the fact of the matter is today,
certainly in terms of the western world, the two major markets
are Europe and North America. To be successful any of us have
to have the ability to penetrate those two markets and we have
to do the things that are necessary therefore in order to achieve
that objective. I might say that in the context of America, although
there is a bit of a honeymoon that has been going on in the context
of American defence expenditure over the last two or three years
this position will change, there will be revenue pressures on
the Americans in the budget and the Americans will come looking
to see how they can penetrate in other markets to see how they
can make up for it. That means there will be fewer players going
forward. They will, inevitably, be bigger than they are today
and they are likely to be much more international in the context
of ownership by definition of equity ownership. There are differences
by which they portray themselves in the markets in the context
of how they ground themselves. I have to say I cannot see anything
other than a continuation of a global form of consolidation continuing
for the foreseeable future.
Q29 Mr Cran: I take it that you all
agree. One last question, simply this: you have said that the
restructuring will continue, of course. Does government have a
role to play in this? If so, are there measures that you would
like to see government implement or do you think, "Keep the
hell out of this, this is something for the market place, allow
us to take decisions"?
Sir Richard Evans: No, it is not
something that the government should step back from. Again, a
peculiarity of this industry is that it is a relatively seamless
relationship in government simply because of the nature of the
work this business performs. It also has another peculiarity in
that government is a major customer for the industry. Those two
issues, defence and therefore being a major customer, make this
different to the motor car industry or retail sectors. I guess
the issue that I would highlight—and comments that have
been made may add to this—is this whole issue of technology
and the limitations that are imposed in terms of moving technology
around. If we were to look at European collaboration and consolidation—and
the same certainly applies to trans-Atlantic consolidation—the
fact of the matter is we have to have a process whereby we can
freely within the entities we create allow technology to move
and therefore be used and be turned into product for the market
place. At the moment that is exceedingly difficult and certainly
in most cases right now utterly impossible. I would give you in
the context of my personal position an example which is JSF. The
time when we need to argue our corner on this is either when we
go and buy product or, alternatively, if we consolidate and we
do something in the context of bringing entities together. There
is absolutely no point, for instance, in going into the States
and seeking to obtain some sort of redress in the context of the
way technology can be moved and applied after the event. We have
a serious problem at the moment on JSF, I am not talking just
the industrial side but the UK position broadly, in that unless
we are able to access the necessary technologies that support
this particular programme, we will never have completely autonomous
capability in the context of the updating and operating of the
product. That is an example that clearly makes the governmental
position exceedingly important for us. However this consolidation
takes place, the fact of the matter is that there has got to be
a position for government in here in the context of dealing with
this, if not other issues as well.
Mr Cran: That is very clear. Do you all
agree with it?
Q30 Chairman: If, Sir Richard, you
decided to do a deal with a foreign company, would you have to
consult the government or would the government use its golden
share to prevent you if it so wished?
Sir Richard Evans: We certainly
would have to because although there is not in the case of BAE
SYSTEMS today such a thing as a golden share because the origins
of the golden share have been substantially changed over years,
the fact of the matter is within the articles of association of
the company, at the behest of government, in the context of diluting
some of the earlier conditionalities that went with the golden
share, no single shareholder is entitled to hold more than 15%
of the equity. No more than one or two or however many people
are entitled in to act in concert in order to apply the equity
ownership of a combined shareholding in the company, and therefore
there is no way in our particular case that we could make any
significant move that involved the change of the equity position
in the business without the consent and support of government.
Mr Green: Just a couple of points,
if I might. First of all, we need to recognise that defence is
an industry and, as Sir Richard said, it is both a customer and
a definer, so it generates technology and it uses technology,
and on the question about the Britishness or otherwise of defence
contractors you have to ask a couple of additional questions in
terms of how is that technology controlled and to what degree
does, therefore, market access flow from it and thereby wealth
creation. Thus when looks at the Britishness or otherwise of an
entity in this market, it is not who owns the shares, it is where
is the wealth generated and what is the freedom of use for technology
generated in that programme? These are the wider issues quite
rightly addressed in the Defence Industrial Policy and the test
is going to be how many teeth are applied to those wider issues
or are they there as "tick the box" type statements.
Q31 Mr Cran: I do not understand
that. What do you mean by adding teeth?
Mr Green: In other words, are
we going to seriously apply weight to the wider issues so they
will genuinely be a counter balance to the four key issues or
is it always the four key issues will dominate and therefore we
will always select on the basis of the four key issues and the
wider issues are just there for the purpose of the record?
Q32 Chairman: It could mean that
the government has in its tool box the ability to make any choice
it wishes because if it wishes to draw one of the other arguments
out to rationalise its decision it is perfectly easy to do so.
I cannot see what difference and relevance this packaging of four
inside the box and the rest outside the box has, the government
still has the flexibility that it had previously.
Mr Green: The government must
always have the final say, there is no question about that, regardless
of what the weights on a particular score sheet might say.
Chairman: Rachel has rebranded herself.
She is representing a Scottish constituency but we know all about
repositioning and re-branding.
Q33 Rachel Squire: I have just been
reshuffled. Thank you, Chairman. I think I had better repeat,
given the discussion that has taken place so far on the future
aircraft carrier, that I do have a strong constituency interest,
namely Rosyth Royal Dockyard and I know Babcock Rosyth are working
closely with Thales, BAE SYSTEMS and indeed Rolls-Royce on that
project. I should also say, particularly because I want to pick
up on some of the points on research and technology that I had
the benefit some years ago of doing the Industry and Parliament
Trust Scheme with British Aerospace, as it then was, which certainly
gave me an introduction to the national and global perspective
of defence industries that has been referred to. I do recall that
one of the major lessons I learned from that trust scheme was
the importance of research and technology, and picking up on Sir
Richard's opening comment that one of the major issues is technology
for industry, now as it was then, Mr Prest's comments about the
need to focus more effectively on technological development and
how the procurement cycle became decoupled from R&T. Can I
ask some questions to further explore this whole area. Firstly,
as you well know, one of the factors in the MoD's procurement
decisions is the need to protect the UK's scientific base. Can
I ask you your views on whether you think the Ministry of Defence
does enough to honour that commitment in its procurement decisions?
Sir Richard Evans: I think it
is very difficult to produce precise examples of where maybe that
actually has not happened. My guess in answering that question
is we would certainly look to the recent events regarding DERA,
and the privatisation of part of that organisation that has taken
place, where I think only time will tell whether we have put into
place here the necessary protections, and those protections incidentally
are dual edged. They are protections in the context of protecting
what we actually have and what we have generated thus far in a
relatively small scientific fraternity who have generated, if
you look historically in terms of pound for pound, some quite
extraordinary achievements in terms of the creation of scientific
invention and making that available for application. But also
the protections that are required to give others the confidence
to share that technology with us, and I am talking here at the
UK plc level as opposed to the industrial level, giving others
the confidence to share their technology with us in a way that
historically has been the case, and here I am obviously referring
to the close relationship that exists, and has existed, within
the scientific fraternity of the MoD and a number of the US governmental
establishments. We are assured that the appropriate protections
have been put in place to deal with both of these issues, i.e.
the leakage of technology out as well as the protection of technology
coming in. It is an interesting question as to whether or not
those protections will continue to maintain the same opportunities
for us that we have enjoyed in the past. In that context I think
nobody today can say definitively yes or no but certainly a number
of us have got concerns as to whether or not we will continue
to derive the benefits that we have had in the past from the work
in this area that has been done.
Q34 Rachel Squire: when you say that
we continue to derive the benefits we have enjoyed in the past,
do you see any realistic prospect for significantly more collaboration
in the research and technology area, particularly with US partners?
You referred earlier to the problems, the difficulties, over the
JSF and its technological development. Where are the particular
blockages that are not even guaranteeing the continued level of
co-operation but are also preventing the development of closer
collaboration in the future?
Sir Richard Evans: If we just
stay with the US position at the moment. I think there is a sort
of broad understanding that the inhibitors in the context of the
sharing of technology are largely generated around the political
positions that are driven, for instance, out of Congress and out
of DoD. Obviously in the context of jurisdiction the State and
Justice Departments have an interest in this area. I think there
is a significant degree of truth in that and you have only got
to look at some of the recent utterances. I think Henry Hyde recently
made a very strongly worded statement regarding the US tightening
up its rules with regard to the sharing of technology. It is wrong
to believe that this is a political issue alone.
Q35 Mr Howarth: Who said that?
Sir Richard Evans: Congressman
Henry Hyde. You need to remember that the sharing of technology
also has significant implications at the industrial level and
there is no doubt at all, taking the case of JSF, that a dilution
of those controls today of the nature that we are looking to obtain
in due course will dilute the commercial benefits that in this
particular case the other American partners enjoy in the JSF programme.
Quite clearly when we come to look at significant updates to the
aircraft, having the ability from our indigenous resources to
both manage and control those updates on the basis of the technology
that has been transferred in its crudest terms takes business
opportunities away from the US companies. Although we see the
front of the State Department, Congress, the DoD or whatever,
protecting the American territory on these technology issues,
do not believe that this does not enjoy a huge amount of support
from the industrial base that lies behind it but you do not actually
see that when you look at where the blockages are. The blockages
certainly are created through the legislative process and, indeed,
in most cases significant changes to that process do actually
have to go to Congress itself. There is a big commercial implication
to the changes that we are seeking that work to our advantage
here in the UK but correspondingly very much against the industrial
advantage of the US companies involved in that particular programme.
Mr Green: Perhaps I could add
to that?
Q36 Rachel Squire: Yes, I was going
to ask you, Mr Green, to do so. I know you talked earlier about
how to control that technological development and collaboration
and I would like you to comment on how, frankly, we can better
ensure that the British lead in certain technological and scientific
research and development is equally protected as well as shared.
Mr Green: As Rolls-Royce, of course,
we are a major participant in the JSF programme and we are wrestling
right now with this real issue. It is important to recognise that
from the aerospace side of the defence industry there is an incredibly
close relationship between what happens in defence and what happens
in the commercial marketplace. Technology is only of value if
it is able to be brought to market and, in other words, sold to
customers who are prepared to pay money for it. As technology
itself is matured on real programmes then you seek to reuse that
technology across a wide range of products. It is not only a question
of sharing the technology, it is also sharing the ability to exploit
that technology. What we are seeing is a significant difficulty
in making sure that the technology is able to flow freely across
the Atlantic in order that it can be used and exploited in commercial
programmes as well as the specific military programme that is
being done, in this particular case the JSF. Again it comes back
to these wider issues of what are the additional benefits associated
with participation in a defence programme. Perhaps the UK is a
little purist in the way in which it goes about these things and,
therefore, tends to look at it very much from the confines of
the particular defence requirement that is being met and does
not pay enough attention to the wider issues in terms of technology
that is generated and then how do we exploit it so that it genuinely
generates wealth on both sides of the Atlantic.
Q37 Rachel Squire: Can we move on.
Obviously we have talked about collaboration, sharing with the
US, but can I ask you about collaboration with your European partners
in defence industries, both the views about the controls and the
ability to collaborate on technological development and also your
opinion as to whether one of the restrictions on that could be
perhaps the impact that it would have on partnerships with the
US defence industry and their concern that there is too much sharing
of very valuable information.
Sir Richard Evans: One of the
principal arguments that is deployed by the US in the context
of maintaining its existing policies is the question of leakage.
There is absolutely no doubt at all that the fact that we have
a number of relationships into not just European companies but
companies also outside Europe is a significant issue that recurs
whenever we pursue this issue of getting some sort of alleviation
with regard to the current rules. The leakage issue is a major
issue. It is very much a hangover from the old Comecon days when
there were genuine and absolutely correct concerns about leakage
into the Eastern Bloc countries. I have to say that I think in
recent times, and certainly post 11 September, these issues are
more difficult to deal with than they were prior to that. Certainly
I could not give you specific examples where, for example, there
has been consideration on a piece of technology that we require
in the US because of a relationship that we have, say, in Europe
or Australasia but, nevertheless, it absolutely recurs every time
you raise this issue on the Hill: leakage. I do not have to say
it today but there are some parts of Europe that are clearly more
focused for attention than maybe they were a few months ago. These
are all territories with whom we have important programmes in
the UK, not speaking specifically on behalf of BAE SYSTEMS but
the UK as a whole has a large number of dependencies on European
collaboration.
Rachel Squire: Thank you.
Q38 Syd Rapson: In the Defence Industrial
Policy document there is a quote under the importance of the UK
defence industry which says that "the UK has also led the
way in encouraging an open and competitive defence market . .
. improving industry's efficiency and effectiveness and increasing
the value for money for the taxpayer". Would you say that
is true?
Sir Richard Evans: I think it
is largely true because currently the UK is the only country in
the world that is a major procurer of defence equipment that actually
has opened its market up. It is an interesting fact that the UK
today is the second largest importer of defence equipment in the
world, second only to Saudi Arabia. If that does not demonstrate
the success of the open shore policy then I am damned if I know
what does. You certainly will not find anybody else who is in
that situation.
Q39 Syd Rapson: If I can squeeze
the question again. Are there any major defence manufacturers
in the world that are opening up their markets as we are? Are
we leading the way hoping that others will follow by example?
Sir Richard Evans: We are. We
are way out ahead of the pack. Sure, you can find examples where
it could be said that Nick in the land systems business could
go and invest in and take stakes in German entities or Scandinavian
entities but it is amazing how difficult that is to do in practice.
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