CONCLUSIONS AND RECOMMENDATIONS
The Defence Industrial Policy
1. We
very much welcome the publication of the Defence Industrial Policy,
bringing as it does a useful, though long overdue, increase in
transparency to this important area. The way its provisions and
statements should be interpreted will inevitably have to be developed;
by further debate and through "case law". Indeed, in
some areas, including the use of competition and open markets
and in risk management, the Policy's utility will be evident only
with the passage of time. (Paragraph 23)
2. From whatever direction
one views the defence research environment, in terms of the adequacy
of the MoD's long-declining research budget or the aims to which
it is applied, it is clear that great care will be needed to protect
those parts of the UK's scientific base upon which the fighting
effectiveness of the Armed Forces depend. (Paragraph 14)
Opening up markets
3. We
welcome the sensible and balanced approach to the use of competition
under the Defence Industrial Policy, recognising as it does that
its benefits in the short-term may bring disadvantages later on.
Though curtailing competition in order to secure such a more favourable
scenario in a sometimes distant and uncertain future has risks
of its own, it is right that the MoD should be alive to the issue
and give it early consideration in each project. (Paragraph 28)
4. We are happy to
lend our weight to a campaign to address the lack of open markets
in other countries. Ministers and their officials must maintain
pressure for reciprocal treatment from other defence manufacturing
countries. An open market approach might help the MoD secure good
value for money in its procurements, and as such might earn our
commendation, but not if other countries fail to adopt a reciprocal
approach which allows UK industry to compete overseas on merit,
and if as a result the scope for home-grown competition dies.
(Paragraph 33)
The 'Framework Agreement' and the 'Declaration
of Principles'
5. The
UK defence industry would suffer more than most from a retreat
into protectionism. It is precisely because of the success abroad
of UK firms that pressure must be maintained on the US and European
countries to level the playing field. (Paragraph 37)
6. We welcome any
initiative that encourages movement towards a rationalised and
efficiently managed defence market in Europe. It is important,
however, that any developments on that front do not create agencies
and programmes which foster European preference at the expense
of the UK's two-way trans-atlantic trade. In that regard, we join
the House of Lords European Union Committee in its warning about
the need to guard against a European Commission report on 'a Defence
Equipment Policy' becoming "a tool for protectionism or constraining
the ability of Members States to order armaments independently".
(Paragraph 41)
7. Another concern
about a formalised vehicle to take the European Commission's agenda
forward is that it might risk undermining the prospects for further
progress by the six nations of the 'Framework Agreement' and the
four of the OCCAR. organisation. Trying to do what the Framework
Agreement and OCCAR are intended to do, but with three of four
times the number of countries, risks being a backward step. (Paragraph
42)
The ITAR Waiver
8. We
are disappointed about the suspicion with which some in Congress
have viewed the draft agreement on a UK waiver for the US International
Traffic in Arms Regulations, not only because with the delay in
implementing it the benefits for both the US and UK remain unfulfilled,
but more importantly because of the message that the delay conveys
about the nature of the UK-US relationship. (Paragraph 52)
9. The importance
of the waiver extends beyond its immediate procedural and legal
scope, because it is a touchstone for our relations with our closest
ally. A failure to implement this first step in bringing closer
together the industrial side of that alliance has the potential
to become the thin end of a damaging and undesirable wedge in
the political side (Paragraph 54)
Nimrod MRA4 and Astute Submarine
10. The
way production of the Nimrod MRA4 aircraft is brought to a stop
will have to be very carefully managed. Although the MoD and BAE
Systems are considering continuing some low-risk production work
to maintain skills, there remains a real risk that vital skills
will be lost and will be very difficult to replace. (Paragraph
65)
11. In many ways,
the root causes of the Astute submarine programme's problems had
some similarities with Nimrod's. There was, in particular, a degree
of over-ambition in terms of sizing up the technical risks. (Paragraph
68)
12. On one level the
MoD could stand by its Nimrod and Astute contracts and insist
on delivery by BAE Systems against the terms of those contracts.
But the MoD needs those programmes to be delivered, and would
have only a hollow victory if its insistence left the programmes
stalled. In hindsight, it is clear that the firm discounted its
bids by under-pricing its risks—either in error or by being
blinded by a must-win determination. If the MoD now has had to
renegotiate the contracts in a way which more reliably reflects
those risks, then digging into its pockets to rescue these programmes
might indeed be, as the Minister put it, a "sensible use
of taxpayers' money". It is important, however, that in bailing
out the contractor the MoD does not pay more than that earlier
unwarranted discount—to do so would send a message that
commitments made in firm-priced contracts are in reality little
more than a basis for further negotiation at the first sign of
trouble. (Paragraph 77)
Future Carrier
13. There
is significant merit in the novel 'Alliance' arrangement for the
Future Carrier programme. There may be some very difficult issues
to iron-out, which may yet defeat the MoD. But we welcome the
way the Alliance model is trying to avoid some of the pitfalls
of the Nimrod and Astute programmes. We welcomed Lord Bach's assurance
that the discussions with France on a possible co-operation with
its carrier programme would not be allowed to jeopardise the UK
Carriers' in-service dates. (Paragraphs 81, 82)
Managing smaller firms at arms' length
14. We
welcome the Ministers' robust approach to safeguarding the position
of smaller firms. Smaller firms provide the essential foundation
for the UK defence industry, and the MoD must ensure it considers
the implications for such businesses as it develops its procurement
processes and policies. (Paragraph 85)
Procurement 'Agility'
15. Slippage
continues to be a problem, particularly on older 'legacy' projects.
But even in regard to newer projects which should be able to be
fully moulded according to Smart Acquisition principles, there
remains a question about the agility of the Department's procurement
systems. (Paragraph 93)
16. We are disappointed
that the MoD has so far been unwilling to share its thinking with
us on where the capabilities added by some programmes may be subject
to a "hard look". (Paragraph 96)
17. We are impressed
with Sir Peter Spencer's determination, as the new Chief of Defence
Procurement, to make Smart Acquisition truly agile and responsive
to equipment customers' needs. He appears to share the view of
the Chairman of the Defence Industries Council, and our own, that
"we need to be prepared periodically to refresh Smart Procurement".
(Paragraph 103)
The Watchkeeper and Future Rapid Effects System
programmes
18. The
Watchkeeper UAV and Future Rapid Effect System programmes are
instructive. They are interesting case studies, beyond their increased
relevance following the Strategic Defence Review New Chapter,
on two counts. First, they both exemplify the MoD's efforts to
explore opportunities to bring important new capabilities into
service more quickly. Second, and to some extent in conflict with
that desire to speed up their progress, the MoD has maintained
a cautious approach in both with a view to reducing project risks.
In the case of Watchkeeper, the caution has been directed at reducing
the likelihood of fielding a UAV platform unable to contribute
fully to 'networked' capabilities; and in the case of FRES, to
deal with the "cutting edge" technologies involved and
to explore opportunities to take advantage of US experience in
developing very similar capabilities in a similar timeframe. As
such, these programmes demonstrate that the MoD is still finding
some difficulty in balancing increased agility against decreased
risk, and it may continue to do so unless, to pave the way, it
facilitates greater investment in technology demonstration research.
(Paragraph 103)
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