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Jane Griffiths (Reading, East) (Lab): Thank you, Madam Deputy Speaker, for the opportunity to take part in this important and interesting debate. I come to the debate having taken note of the Defence Committee's report, and as a member of the defence committee of the Western European Union. In September, the Committee met in Hengelo, in the Netherlands, to discuss defence procurement, and we looked at the issue from a pan-European and international perspective. The issues addressed at the meeting were extremely similar to those addressed by the Select Committee in its report and by the Public Accounts Committee in its recent report on major projects.
One of the main issues that the Committee sought to address was international collaboration in the defence industry. The view was that this has tended not to work very well. In shipbuilding, for example, good ships have been built in collaboration projects between European countries, but have cost about 25 per cent. more than they would if any country had built them alone. So it would seem that, even in collaboration between European countries, there is the same problem of cost overrun.
To address this problem, a European defence agency is in the process of being established, but it is important that there is a will for it to succeed. The point of the
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European defence agency is to ensure that there is sufficient capacity in Europe for national Governments to meet their own needs for defence and security, and for European needs to be met. But it is important to remember that decisions on defence have an impact on the economies of the individual countries involved. A nasty, cynical mind might think it would be all too easy for policies to be tilted to ensure a beneficial outcome for one country's defence industry. We must ensure, in all our wider interests, that that does not happen.
In the last few years, we have seen consolidation in the defence industries of both Europe and the United States. Key European players in defence say that we must not have "fortress Europe"; but it must be borne in mind that the defence industry is unique, in that it is a market whose customers are just about always Governments. Improving defence procurement will have an impact on the defence industry. In fact, it could be argued that improvements in the defence industry will bring about improvements in defence procurement. But the US accounts for nearly 40 per cent. of the world's defence spending, more than double that of the European Union—and it is worth remembering that great big China's proportion is only 6 per cent. The needs of the US will dominate the world's defence market, whether any of us like it or not.
As a result of action taken by the then US Defence Secretary, William Perry, we have seen a massive rationalisation of the US defence industry which has resulted in just five major airframe companies, three missile companies—down from nine or 10—two armoured vehicle land systems, and only three shipyards. Progress in Europe has been even slower. According to the head of marketing at BAE Systems, Sir Charles Masefield,
"Firstly, the defence budget shown there of the combined European companies is only 115 billion, less than half the total annual US defence budget, in fact just 41 per cent. Instead of 5 airframe manufacturers chasing that greatly reduced budget, you can see we have 7, we have double the number of missile companies in Europe, we have three times the number of armoured vehicle companies in Europe, and we have nearly four times the number of shipyards."
In the US there has been a move to deliver the industry that delivers the economies of scale, to deliver an improved performance on procurement. We in Europe are much slower in achieving that.
There is, however, a danger that European defence industrial consolidation will result not in a better European industry able to compete and collaborate with large US companies, but in the "fortress Europe" that I mentioned earlier, in which preference will be given to European solutions for European requirements. Similar problems in the US could also damage defence procurement. The Defence Committee has expressed concern about that, saying:
"A careful balance is needed, with the UK government using its influence in Europe to avoid any undue European-preference policy emerging while also playing a full part in rationalising the defence equipment market in Europe."
Ideally, in market terms, the US and Europe need an integrated marketplace. In a lecture in Rome 17 May 2001, Sir Charles Masefield of BAE Systems said:
"But what about the transatlantic consolidation? I believe if you look at the US and European situation, we have of course as I've shown, the four mega companies in the United States, Boeing,
- Lockheed, Raytheon and Northrop Grumman. We have in Europe, Finmeccanica, BAe, EADS and Thales. How are those going to play in the 10 years ahead? Well no-one knows but my guess is that this sort of thing will gradually happen and if we were to meet in this room in ten years' time, I wouldn't like to predict what would be the marriage in those global companies, but instead of 8 major defence companies in the world, I believe it is much more likely there will be 3 or maybe 4 . . . I believe each of those 3 or 4 will be transatlantic global companies, rather than either the United States or European companies."
One important piece of work for the European defence agency will be to look forward to how the different countries in Europe will be able to carry out their defence procurement in this kind of world. How will we meet the different requirements of the different countries in such a marketplace? In particular, how can we be sure that in a global marketplace UK defence procurement is driven by the requirements of the UK military, rather than just by what the large companies are willing to offer? I don't pretend to have any answers to those dilemmas now, but they are being discussed.
Mr. Kevan Jones (North Durham) (Lab): Does my hon. Friend agree that the defence White Paper allows the market to help drive the efficiencies to which she alludes, rather than creating a rigid policy under which national Governments would decide what the future of the defence industry in their countries should be?
Jane Griffiths: My hon. Friend makes a very sound intervention and he is absolutely right. That very point is being made, and it is contributing to the discussions that are taking place in what I hope is a positive way. It is well understood within the Western European Union, for example, that the UK invites competition in its defence procurement industry, while other states do not. That is an obvious difficulty, and hopefully, a body such as the European defence agency will play a part in opening things up.
I end with a very short story that shows the difficulties associated with truly opening up transatlantic defence procurement. The new helicopter for the newly re-elected US President is being built by AgustaWestland, mainly at its factory in Italy, which the WEU's defence committee visited last year. Because it will carry around the President of the United States, it has had to be called US101 to make it sound American.
5 pm
Mr. John Burnett (Torridge and West Devon) (LD): It is a pleasure to follow the hon. Member for Reading, East (Jane Griffiths), who made a very thoughtful contribution. Unlike the hon. Member for Stockton, South (Ms Taylor), she did not assert an ambition to join the armed forces. I have had a pleasant few minutes to dwell on what would have happened had the hon. Member for Stockton, South been able to join my troop in 42 Commando. I do not know what line she would have followed, or what specialisation she was keen on.
I am concerned that there are some unanswered questions about defence procurement, and I want to begin by asking a few of them. Today is indeed the time to ask them, and I hope that the Minister will answer them when he winds up. I have an outstanding shipyard in my constituency, called Appledore, which still exists despite going into receivership last autumn. Earlier this
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year, the assets were bought by DML, and I am delighted that that happened. Before going into receivership, Appledore had some 600 employees plus 300 to 400 self-employed personnel working in the shipyard. Given that it provided jobs for more than 1,000 people, it was an extremely important employer—in my constituency, regionally, and indeed nationally. Its work force was outstanding, and it had a great reputation for its high skills. It competed in the commercial world for commercial orders, but it was not successful when it came to Ministry of Defence orders.
I was pleased that DML Plymouth bought Appledore's assets. DML is not solely reliant on the MOD for orders and work; it actively seeks and tenders for commercial orders worldwide. It now has a proven track record in the construction of super-yachts. Some are being built as we speak, and I hope that further yachts will be ordered in the near future. DML took on Appledore's superb design team of some 50 people straight away, and a further 50 are now employed on a super-yacht construction contract. So about 100 of the original 1,000-strong work force—only about one tenth—are re-engaged.
DML Appledore is currently competing in the MOD tender for the 1 Castle class offshore patrol vessel. Appledore has built a number of these vessels in the recent past for the Royal Navy—but only as sub-contractors—and also for the Irish navy. Its record is excellent. Vessels were constructed on time to a fixed cost, and to top quality. It also built the arctic survey ship HMS Scot on a sub-contract from BAE Systems. She has been at sea nearly every day since her construction, and every report that I hear is of her excellence.
DML itself has a turnover of some £500 million sterling a year, so we now have the financial muscle to compete for MOD orders. I point out to the Minister that neither DML nor Appledore has ever had a prime MOD contract for the construction of a Royal Navy ship.
If we win the OPV contract, a further 200 employees will be re-engaged for at least 18 months. Importantly, it will give the MOD a further shipyard to engage in the competitive tendering process—a shipyard that is used to competing in the commercial world where the competition is extremely tough, and a shipyard that understands that the future for British shipbuilding is to be in the forefront of technology, building sophisticated niche vessels.
On the role of competition in winning MOD orders, I have reason to be dubious, if not cynical, about the process. Three or four years ago, Appledore tendered for two alternate landing ships logistic. The order was won by the north-east—Swan Hunter, I believe—as the hon. Member for Stockton, South said. We took that on the chin, on the grounds of fair competition. A few months later, out of the blue and without any further tendering process, orders for two further vessels were placed at Govan, despite our numerous attempts. The only satisfactory explanation I can find for this order is that it was just in time for the Scottish elections.
My question to the Under-Secretary is this: how can a senior Cabinet Minister direct an MOD order, whether it be for construction or refitting, to be placed at a shipyard other than the one making the
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most competitive bid? Why cannot commercial confidentiality be lifted and full scrutiny allowed after the exchange of contracts and completion? Bidding itself is an increasingly expensive process and the inherent costs of the favoured lease-maintenance deals are extremely high.
Research and development, construction and maintenance are not the only costs that shipyards have to bear. On lease-maintenance deals, banks are always involved and they usually buy and lease. The banks will want to extract watertight indemnities as well as pick up capital allowances. Bank charges will be substantial; legal costs will be high. Documents such as leases, performance guarantees, collateral warranties and so forth have to be drafted and agreed. There is the risk to the shipbuilder of having to take the vessel back when the lease expires, often with very little residual value left. It is a complex process, very costly in management time, bank charges and professional fees. Do Ministers really believe that that is the best way to manage procurement and provide value for taxpayers' money? It is a question that I should like to hear answered when the Under-Secretary winds up the debate.
Along with other hon. Members, I recently attended a presentation given by BAE Systems at which that company suggested that shipbuilding companies should form what I would loosely call a consortium and bid as one for a future construction programme for the re-fleeting of the Royal Navy. The discussions are mainly taking place between Vosper Thorneycroft and BAE Systems, but I know that DML Appledore is also involved.
What are the main reasons behind the precipitation of the discussions? First, there is the over-reliance of many yards on MOD orders and, secondly, the abundance of new naval orders in the pipeline. I welcome that, but the Under-Secretary will have heard my intervention on the Minister of State earlier when he spoke about the programme, and the budgetary constraints are being evened out more than is apparent as we speak. What it would mean is that the MOD would effectively be the sole customer and the new consortium company the sole supplier. That is not a satisfactory state of affairs for the taxpayer or for the shipbuilding industry in the medium or long term when, as they surely will, the MOD orders dry up. I hope to hear what the Under-Secretary believes the medium and long-term solutions will be in respect of these matters.
Some of us are seriously concerned that important contracts are subject to undue influence by senior Ministers, and that the contracting process is unnecessarily complex and costly. When the Minister sums up, I hope that he will endeavour to allay our fears on these matters.
5.10 pm
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