Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 1-19)

5 MAY 2004


  Q1 Chairman: Welcome, gentlemen. There is nothing like a procurement session to draw a large audience! Thank you very much for coming. Sir Richard, as the doyen of the defence manufacturers and as this is probably your final appearance before us, we afford you the privilege of introducing your colleagues and maybe making a few introductory remarks.

  Sir Richard Evans: Simon Frost has I think been here before; he represents our SME group and who of course are of huge importance to the supply chain; on my left is John Howe of Thales and Nick Prest from Alvis. I think it is fair to say that we have all been engaged in the DIC for a period of time. I will make one or two opening remarks. First of all, we are genuinely quite grateful for the opportunity to put an industry perspective on the development of defence industrial policy and of course its implication for the defence procurement system which is so important to all of us. We know that you have many questions that you want to ask on a number of aspects in this complex area but, if I may, I would like to draw attention to one fundamental aspect of the policy before we get too absorbed with the detail. As the DIC's written evidence described, industry made a comprehensive input to the original policy that was announced in October 2002 and it was an input to a debate within Government started by MoD ministers and it was about a policy of the Government which affects a range of the departments, not just the MoD. Thus, the policy was launched jointly by the Secretaries of State for Defence and Trade and Industry and subsequently of course managed by a group of departments chaired by the Cabinet Office. Sometimes it seems in discussions today as though industry asked for a defence industrial policy when in fact we were engaged in the debate by government. What I really want to point out at the start of this hearing is that the Defence Industrial Policy is not a policy for industry's sake but it is actually, we believe, very much in the national interest. It is about the sovereignty of the UK and it is about our economic future. Our impression is that it arose because ministers themselves felt that the procurement processes brought wider strategic and industrial issues into the equation far too late in the procurement cycle and not in a terribly joined-up way. Industry has always agreed with this viewpoint but it is something that Government have decided to try and change and we very much want to help and be part of that change process. We are very happy to take any questions that you want to put to us and, if we are not able to give you specific answers, we will certainly follow questions up and give you answers in due course.

  Q2 Chairman: I am sure that we have a lot of quite contentious questions to ask of you. Gentlemen, the Defence Industrial Policy was launched some 18 months ago. In which areas do you think the policy has made some progress? In which areas do you think the ideas in the policy have not made much progress?

  Sir Richard Evans: In fairness, I should re-emphasise that this policy was published only 18 months ago. I think it is a perfectly reasonable question in hindsight for many of us to ask as to why we did not address these issues some years earlier but hindsight is a pretty exact science. I think by definition there is a great deal of expectation that came about when this paper was published that we quite seriously could and would not change things in the period of time over which this had been running. The things that the Defence Industrial Policy paper have done today is that it has given an opportunity for the Government and particularly through the MoD to actually enumerate what are essentially a set of strategic objectives that need to be brought into account in the process of decision taking and, indeed prior to decision taking, in the process of making recommendations for decisions, but I think, in fairness, both we and the MoD would say that the actual examples today of great success in this area are pretty patchy. As of today, I would not want to give you any real examples of where I think we could say that things have been decided differently because of this policy. Now, of course, we are all travelling in hope. We very much actually want this policy to succeed, but it is a big culture change programme and it is not just a policy, this is about getting people to behave and think very differently from the way in which they behaved and thought previously. If this policy is going to be effective, we really should not be having situations where secretaries of state are issuing ministerial directives to their departments in order to turn over recommendations that have been made. Frankly, if we get to that point—and I am obviously here referring to the selection of Hawk, the RAF advanced trainer programme or re-equipment programme—then this policy will have failed. My personal view of this—and I think it is shared by some of my colleagues here—is that it is a good start but it is absolutely not going to make progress until people implement it through the procurement process and, right now, there is insufficient evidence to say whether or not that is being done effectively across the board.

  Mr Prest: I would like to echo Dick Evans' point that this is a work in progress. We do not see the Defence Industry Policy as a single blueprint which is then stuck on the wall and followed. I think it comprises a clear recognition by Government that the defence industry is important and a clear understanding in Government of the linkages between its decisions and what happens in the defence industry, that is a clear understanding in Government of the data, the shape of the industry and the direct impact of particular decisions. Then I think it comprises a series of policies or of behaviours to be followed in a number of different areas, which might be in the area of acquisition, which might be in the area of research and technology or which might be in the area of how future capability requirements are articulated but, in all those areas, pursuing the set of policies which have defence industry effects in mind in order that, consistent with meeting the military's requirements on a value-for-money basis, then the money is spent in ways which produce the results for the Defence Industry Policy or where there is any conflict between value-for-money and meeting the objectives and the consequent effects on industry, that that trade-off is clearly and explicitly recognised and Government can make informed decisions about it. As Dick said, it is a process, it is a series of behaviours and it will take a while to unfold.

  Mr Howe: I think there is one positive thing which is that I am sure there is actually more dialogue between industry and Government on these sorts of issues than there was a few years ago, but I guess there is still some way to go in one particular area which is clarity about what kinds of industrial capabilities and indeed what kinds of technologies are judged to be of crucial strategic importance in the long term. What kind of industry does the UK think it is important to have in the future? What kind of capabilities is it important to retain for strategic reasons? That is an area where I think we need to go on working to achieve more clarity in order that we understand clearly what the rules are in that respect when competitions are judged.

  Mr Frost: The view I would have from slightly lower down the supply chain is really very similar. It is a long-term industry. We need to plan strategy for our businesses. No little pressure around in our industrial environment, as you might imagine, and sector. We see customers, the Armed Services of the UK and other countries, with a very rapidly changing threat which they have to assess and working together in a joint industrial policy would be extremely helpful to our own strategic planning. We do not need support for products that people do not want to buy. We want to be able to develop the right products. That can only come out of a joint policy, a joint strategy and common understanding of the requirements both for our Government and the international defence industry.

The Committee suspended from 4.00 p.m. to 4.23 p.m. for a division in the House

  Q3 Chairman: Sir Richard, in an article you wrote in December, you said, "There is much work still to be done to ensure it" ie the Defence Industrial Policy "becomes a cohesive, effective and systematic strategy for the sustainment and development of key industrial capabilities in the UK." Perhaps you and others could comment on whether there is sufficient momentum in Government and industry that this work is undertaken.

  Sir Richard Evans: Perhaps I could go back to the previous point about what are the benefits coming of the policy paper as written. In the paper we have circulated, you will find in the annexure to the paper basically a list of actions that are running that are designed to address some of these issues and these issues that are fundamental are about having a joint view on what the priorities are in the context of investment and spending, how these establish some form of matrix to assess the value of what those are and indeed what they should be, and of course how we deal with the consequences of that because I think it is very clear to all of us on the industrial side at the moment that the budget allocations that are made today are not sufficient to sustain the existing levels of capability that we have and already it is becoming increasingly apparent to us that the gap in technology levels between the UK and the Americans is growing very, very rapidly. That clearly says to us that we have to address the issue and prioritise the requirement and we cannot do that until there is a completely integrated dialogue starting with the user, which is the military themselves, but working through the whole of the scientific community and with the industrial community. I think that all of us on the industrial side recognise that the results of that are going to be pretty damn painful. It is, by definition, going to require us to actually downsize substantially UK capabilities to meet affordability and, if you look at the work streams that are beginning to emerge out of the Defence Industrial Policy paper, these work streams are very much designed to address some of these particular issues. It is then clearly a matter for industry to decide where it is going to invest its future money, but we need to have some clear indications as to what the long-term requirements are particularly in terms of where we are going to invest R&T for the future and we need that a lot more quickly identifying than appears to be the case at the moment.

  Q4 Mr Hancock: We were told last year that the defence industry would be going through a process of ongoing restructure and then re-organisation. Presumably that is still the case and, if so, where do you envisage this going over the foreseeable future?

  Sir Richard Evans: I think we can only say to you that, although there has been a huge amount of consolidation that has taken place already, it is not going to stop where it is. Even in America, I suspect that there is another round of consolidation to take place. I think that here in the UK, from a UK Limited point of view, our interest is to ensure that, where consolidation takes place and particularly where consolidation entails downsizing, giving up skill sets and people having to move out of the industry, particularly in those areas, we clearly do it in a planned way understanding that actually what we are doing in terms of maintaining a skilled capability is directed to what it is the military of this country actually want for the future. With the best will in the world, we cannot ourselves look into a crystal ball and do that uniquely on our own. We can only do that in conjunction with the end customer. That is why, not just in the context of the Defence Industrial Policy but also in some of the principles of Smart Acquisition, it is so important that the military and industry come together much, much earlier than they have ever done historically to actually try and identify what those key requirements are. If we do not do that, what will actually happen is that, by default, industry will simply downsize, it will consolidate, and we are going to wake up one morning and we will literally find key skills missing. A great example of this is the sad history of the Astute Submarines where, at the time no doubt for very understandable reasons, the Ministry of Defence, having elected to close down the Royal Naval Architects Office—it was done in a very orderly fashion—then we let a contract for a new requirement by way of a nuclear submarine and, lo and behold, the only people who had ever designed and actually passed into production a nuclear submarine were not there any more. I am really saying that, in the context of the work that we need to do, we really have to prevent that happening again and, recognising that budgets are not infinite and we have to concentrate those budgets on things that are really important, there is no point in either side doing that independently, we have to do it together, we have to share the objectives and we then have to jointly find how we resource those objectives.

  Q5 Mr Hancock: Does that then lead you to believe that the real predator in this would be the United States defence industries who will look to develop British businesses as opportunities for them to take over and to take you out of the market and so depriving us of the very asset you were talking about?

  Sir Richard Evans: It is and I do not think we should have any illusions. The great threat to the technological base here in foreign terms is coming from the Americans because they are investing such huge amounts of money into R&T and it is why a lot of our companies are actually investing shareholders' funds today, not here in the UK but actually in America buying American assets. If this process continues without the actions that we have described or outlined or provided for in this industrial policy paper, if we actually do not do that, the UK is simply going to become the American metal basher. There will be no intellectual capability here in the UK in terms of the very high value-added content of programmes that this country has built up over so many years and that is why the JSF decision was such a massive disappointment for us. That decision—and we should have no illusions—took us out in the UK from the manned military business and we will live to regret it, I can assure you.

  Q6 Mr Hancock: So, BAE Systems will resist selling part of their operation to the Americans and the marine division will stay in British hands?

  Sir Richard Evans: No, we certainly will not. If in fact we are not able to deploy shareholders' funds in this country in support of the current investments that we have here and they are not producing a satisfactory return, the existing management of BAE Systems will have to take that money to somewhere else where it can get that return and, if the management does not do it, the shareholders will put a new bunch of managers in who will do it.

  Q7 Mr Hancock: So, BAE Systems are not too interested in the national interest then.

  Sir Richard Evans: Of course we are interested in the national interest. We are interested in the national interest for two reasons. One is that we have a huge number of highly skilled people whom we want to protect and we believe that they are an important national asset and actually it requires two to make it work. I do not want to start running some of these assets down if we are going to find ourselves having a requirement for them in due course. We have to have a sensibly planned load in our businesses. Businesses cannot work on feast and famine. We have to have a steady forward-projected workload that makes sense.

  Q8 Mr Hancock: Effectively, what you are saying is that the future of BAE Systems marine division is dependent on the MoD buying from them rather than them trying to get other work from elsewhere.

  Sir Richard Evans: No, absolutely not at all. It is primarily dependent upon the MoD in the context of the R&T investments that are required in order to sustain future developments in that part of the business. This is a business that, for 70 years, has been completely neglected in the context of investment. When we were buying GEC Marconi, some of you may recall that there was a huge problem with a company called Kvaerner who owned one of the yards in the Clyde and I was called in to Number 10 to give a view on how we may manage the consequences of this because there was a serious danger of this yard being closed and I made the position perfectly clear then. There was at that time and there still is too much naval shipbuilding capacity in this country. We had not invested a single damn penny in any of these facilities for 70 years and the reason for that was perfectly simple. It was for political reasons. The way in which shipbuilding was handed out was that a ship went to this yard or it went to that yard or to another yard in order to deal with political expediencies. There was no long-term planning and therefore no investment committee of any board in the country was likely to be willing to invest in the facilities, which is exactly what happened. I made my position perfectly clear at the time and it was that, if the Government wished us to be, might I use the word, the champion of the naval shipbuilding business in this country, to do that we need to have a partnership with HMG and that partnership requires HMG to prepare to commit long term to us for its requirements and, on that basis, I then have a case to take to my board for investment in that business. We are now piling investment into that business. Frankly, if you had gone to any of these yards when we acquired them, you would have been appalled and I personally felt completely disgraced by setting foot in these facilities. How on earth people could have been expected to work and produce high quality workmanship out of them was just unimaginable. If you go round some of these facilities today—and we have not finished it by any means—you will see a very different picture. I want there to be a long-term position in naval shipbuilding for us in the UK and, if we get this business right—and I am talking naval shipbuilding and not commercial shipbuilding—there is no reason at all why we cannot go back out and rebuild an export business that this country once had and then lost. There is no reason why we cannot do that but to do it requires stability, it needs long-term commitment of investment and it requires a partnership to do it and, without that, actually, the business will not survive. At the same time, we have to face up to taking more capacity out of the market here in the UK.

  Q9 Mr Hancock: Are you fairly pessimistic about the future of the UK defence industries?

  Sir Richard Evans: Yes, I am because, at the present time, the R&T tap has virtually dried up. Decisions were taken 15/20 years ago in the expediency of meeting budget requirements under which the traditional sources of R&T funding in defence became very, very much depleted. It was at a time when the Americans were very much increasing their levels of R&T. I am not suggesting that the UK should be attempting to compete with the Americans in terms of expenditure and defence, but what I am saying is that we should together, as UK Limited, identify those areas that are strategically important for us in the long term and together concentrate our joint resources into making sure that we stay in the premier league in those areas. It is like a pregnancy test; there is no half-pregnancy; we are either there and successful or we are dying.

  Q10 Mr Hancock: I think that you need to give your colleagues a chance to defend their position rather than just BAE Systems.

  Sir Richard Evans: You asked me about the shipyards.

  Q11 Mr Hancock: I will come back to your point of view in a minute as I would like to hear from the others.

  Mr Howe: I think an important point about the defence industry is that it is now increasingly international and if companies like the one I work for are going to invest in the UK, as my company has very substantially in the last ten years, then we need to be sure that there are conditions for doing good business here and a joined-up view of what the national priorities are for industrial capability and what the national priorities are for research and technology investment. These are conditions that are important and should be met as a result of this Defence Industrial Policy.

  Q12 Mr Hancock: Are you getting a clear message?

  Mr Howe: We are working on it. It is a very important part of the dialogue that we have under the Defence Industrial Policy that we shall get that clarity.

  Mr Frost: Can I come back to the general consolidation subject. There are two effects lower down the supply chain. The first one is your traditional customers cease to be in the same company because, as companies get more globally orientated and larger, you often end up supplying to a subdivision of those companies or indeed to a third party who is doing the integration on a national scale. That is a huge change for very, very many UK defence companies. So, they have to learn how to handle and how to liaise with new customers and learn what drives them and those new customers are not always UK businesses, they can often be foreign-based businesses. That is one factor. The other factor is that, at the supply chain level, we all need to be bigger and healthier to satisfy that need. So, there is a lot of consolidation needed lower down the industry. In the case of one of the companies that I am involved with, we sold to United Technologies, the Americans, and that turned out to be a interesting process where a lot of new culture had to be learned and in fact it did turn out to be a two-way street: they bought us because we had flight control technology which in fact they did not, particularly relating to helicopters, and at the same time it gave us some access—and this is a company with 400 people in the south west of England—to programmes that we did not realistically have a chance of bidding on before that. However, that technology came out of the base that had been developed over the years working primarily on UK programmes. So, there is not a difference of opinion here, it just has slightly different consequences running down the supply chain.

  Mr Prest: Picking up on the point of consolidation, I think you need to look at it from a couple of different points of view. Consolidation from one dimension means changes of ownership that are going on within the international defence industry and I echo John Howe's point that this is now an international industry. As Alvis, we bought businesses in Sweden and in South Africa as extensions of our base business here in the UK. We have been welcomed as investors in those countries and we have been able to operate the businesses in those markets in ways which have satisfied local customers. There is now a further development in that General Dynamics has made an offer for Alvis and, if that goes through, it would result in Alvis becoming a subsidiary of General Dynamics. The reason that these developments are taking place is because companies believe that a bigger international spread in their business will give them access to the wider range of market and will enable them to draw on a wider range of sources of research and technology both in terms of the expertise of their employees and sources of government funding coming internationally into the defence business and, as a general process, I think we have to regard that as (a) inevitable and (b) healthy and, in the longer run, this is better for both customers and employees of companies to be organised on an efficient basis. The other aspect of consolidation that has been referred to has been reductions in capacity and that has been another driver of consolidation in the industry. In my particular sector, which is the production of armoured vehicles, ten years ago there were four armoured vehicle factories in the UK and there is now one and a bit, and that has been a direct result of major reductions in the market, both nationally and internationally. I make that point simply to say that, in the end, the sustainment of these businesses depends on there being a viable market and, in the context of UK businesses, the domestic market is extremely important, not just for its own volumes but also as a source of R&D and as an anchor customer and a reference point around which exports can be built and that remains the fundamental point and is as true in my industry as it is in the marine industry.

  Q13 Mr Hancock: Having heard all that you say, I think one question to you, Sir Richard, is, do you think that your organisation has become too dependent on the MoD and the MoD has become too dependent on you and, because of that, the rest of the defence industry in the UK which had survived that consolidation are having a pretty tough time?

  Sir Richard Evans: Certainly the facts do not fit the argument. It is not very long ago since we were virtually 90 per cent dependent upon the UK Government and MoD business. Today, the MoD business accounts for something of the order of 20 per cent of our sales. So, the actual dependency in the UK has changed quite dramatically and that has changed for many of the reasons that have been outlined here, that we have to obviously go where the markets are and where we can grow our sort of business. My concern about this issue is that I think that if we just leave this completely to market forces without actually giving any thought to future potential requirements which are national interest issues, what we will see is continuing decline in mine and other companies' interests in the UK markets and I think that would be a sad day for the UK.

  Q14 Mr Hancock: Do you think that the MoD are actually equipping themselves for the change that is going to be needed to take account of consolidations you have talked about in the way that your reliance on the MoD is diminishing but their reliance on you, sadly, is still as great? So, what do you think they need to do to reflect the changes in the restructuring that takes place?

  Mr Prest: MoD has many, many talented people in it. But I think it has, in recent years in the area of procurement and defence research, been driven to a considerable extent by events, by budgetary constraints and, in some cases, by shorter-term considerations. I think it has found it harder to take a strategic and holistic view and perhaps a longer-term view, in some cases, of how its interests might best be served and I think we should be clear about that. I do not think anyone here around this table is sitting here saying that defence is an industry which should be subsidised. That is absolutely not the question. The question is that the nation as a whole needs to have a clear understanding of actually what it wants the defence industry for and then to follow policies to that effect. Nobody here is advancing a policy of inventing defence equipment programmes in order to maintain jobs that would otherwise disappear. Certainly speaking for myself, I am not. So, it is a question of coming to the issues that we have discussed. The MoD has to have a clear understanding of international trends that are taking place and a very clear understanding of what it can afford. That may seem a statement of the obvious but I do not think it is as obvious as all that. Some of the problems in the equipment programme come from there being insufficient realisation of risks and costs involved in some of these programmes, a realistic view of what is affordable, a long-term capability plan that is transparent and reasonably consistent that industry, as well as the MoD, can then plan around and a clear view, particularly where a research and development investment is being made or where procurement decisions are being made, as to whether it is a matter of importance that the industrial capability with relevance in respect to those areas needs to be maintained in the UK. There has not been much of that mindset; I would not say it has been absent but I do not think there has been sufficient of that mindset in the MoD in recent years.

  Mr Howe: I would make a very similar list of points. I think three points stand out and I have made two of them already. Firstly, as Nick Prest has just said, clarity about what MoD want really at two levels, both by way of strategic industrial capability in the UK but also in terms of what they want by way of particular programmes. Secondly, clarity about research and technology priorities, as I said earlier, so that both the MoD and companies put their money in the right areas and complement each other. Thirdly, very much to emphasise the point about realism. I think if one looks at the way Smart Procurement has been working and what it has to contribute—I suspect that we might get on to the subject more later in the afternoon—a considerable inventory of improvements to the procurement process is there, but if there is one error, if you like, which has led consistently to setbacks, disappointment and difficulties in procurement, it is because the whole community—industry, the MoD and, if I may say, at the political level and the press—has conspired to be optimistic about the cost of military capability and has conspired to neglect the degree of risk that is involved in major defence projects where one is actually buying equipment that does not yet exist and it is what McKinsey's I think called a conspiracy of optimism in their work on Smart Procurement. I think we still suffer from it. The figures still show that there is insufficient investment by the customer in risk reduction in the early stages of projects before they reach their main stage of approval and that fact, I think, has led us into a lot of the difficulties that individual projects have run into. So, those are three points: clarity about what the MoD want industrially, clarity about research and technology priorities and realism about risks and costs combined with a willingness to invest sufficiently upfront in the technology.

  Mr Frost: I would like to add just a couple of points to that. The first one really relates to a fear culture that I think perhaps media attention and other top level issues that we see engenders at the working level, quite understandably—these are intelligent people—in projects where often a solution to a problem is on the table but is perhaps slightly unconventional, needs a change of plan and the inevitable result is that nobody wishes to perhaps stick their neck out quite far enough to say, "Here is a way out of this particular mess that we are in." One thing is to perhaps at the working level in MoD encourage slightly more proactive thinking with industry. The other point that I would like to make comes back almost to consolidation and that is, in a rapidly changing industry, to ensure that the players in the MoD understand the current capabilities, access to technology and resources of the whole of the industry, not just concentrating on two or three major companies but 100-or-so key companies with great capabilities both to actually offer technological solutions but also to solve the current problems on existing programmes. So, a broader understanding of the structure of the UK industry to date.

  Q15 Mike Gapes: The Government's Defence Industrial Policy says that open and fair competition remains the bedrock of our procurement policy. However, BAE Systems commissioned a report that was published in January which highlighted concerns that foreign competitors often enjoy a competitive advantage over BAE Systems since they are not required to face international competition for their market and indeed can often be heavily subsidised by their domestic taxpayers. I would be interested in your comments on that and is this concern that BAE Systems have had shared more widely across the UK defence industry?

  Sir Richard Evans: The comment that I would give you is that I think that is largely true. It is an issue that is contained in the Defence Industrial Policy paper and clearly one of the objectives that has been identified in this paper is to concentrate a lot of effort into trying to open markets up. Everybody accepts that, in defence terms, the UK is the only genuine open market in the world today but, regrettably, in virtually all other markets, there is nothing like the same sort of reciprocal arrangement. For UK contractors to compete in America or to compete in many multi-European countries is exceedingly difficult and I think the object of the exercise—as I say, it is spelt out pretty clearly in this paper—is that it is in everybody's interest that all the markets are as open as possible and that is how we generate real competition and get the benefits from it.

  Q16 Mike Gapes: Are you fighting with one hand tied behind your back?

  Sir Richard Evans: There are obvious difficulties in this area. Clearly, in the context of competitions that are being run here in the UK on an open basis—and it is right that they should be—clearly, if the whole of the non-recurring and investment cost has already been borne by another party, maybe the American Government, the French Government, the Italian Government or whoever else, and indeed the UK contractor is required to provide for that element in the cost, the UK contractor is at a serious disadvantage. I do not think that is a problem for any of us. That is really, for me, an issue of the UK deciding what it wants. There are always going to be areas where—and I suspect increasingly so—the right thing for the UK to do is to buy off the shelf. I just want to make sure that in other areas we would—and certainly in my company I would think that is the wrong thing to do—have a proper debate about it and, if we ultimately do decide to do it, we do it for the right reasons and then, if we do do that, we actually get the maximum amount of gain out of the decision for the UK. I am sorry to keep coming back to it, but I think JSF is a classic example. It is no good when you have signed up and paid your cheque over then trying to go back to negotiate the release of technology. It is absolutely not the way to do it and I absolutely subscribe to the fact that there are cases where it is absolutely proper to buy off the shelf, but I would also like other governments to share that view.

  Q17 Mike Gapes: Can I go back to my question. Do you think that the MoD recognise the concerns that you have expressed and as the report that you commissioned expressed sufficiently when it evaluates the tenders from different manufacturers?

  Sir Richard Evans: It is patchy. There are some areas in the procurement process that are better than others. In the main, these questions are not specifically MoD questions, they are the procurement organisations' questions. We are all in one hell of a big learning period. This is a big culture change for all of us, both the guys at the MoD and the DPA and the guys in the industry as well, but I would just like to be sure. We have to go through this process of shifting our ground and changing the way in which people behave and attitudes, but the problem with it is that it takes a lot of time to do it and, in the meantime, the world does not actually stop. Decisions have to be taken, selections have to be made and contracts have to be placed and I just want to make sure that, when we do that, the UK gets the best deal out of it.

  Q18 Mike Gapes: Mr Prest, in an earlier answer, said that defence is not an industry which should be subsidised. Yet, on the other hand, we are in a situation where you are saying in your own report that other countries often have heavily subsidised industries and they are your competitors. If we are in this situation, I presume that there are two ways forward. One is that other countries cease to be subsidised in any way and the other is that we move away from the approach we have taken up to now and it seems to me and I put it to you that we do not have either of those. We are in, as you yourself said, a transition. How long do you think that transition will be and are we doing enough and is this country collectively doing enough to get open markets in other countries and, if we are not, what should we be doing to make that possible?

  Sir Richard Evans: The transition period, I regret to say, is a lot longer than most people think. Making change on this scale is a huge challenge. Inherently, all of us actually hate change and would like to continue doing things in the way we have done in the past. So, it requires a lot of time, a lot of leadership and therefore a lot of example to be given in order to bring about a change throughout the whole of the organisation on both sides of the table. In the meantime, we certainly should be doing a lot of the things that we are doing at the moment and in some areas may be doing more often. We definitely should not be looking to close our markets up. We should be trying to get a level playing field as widely as we possibly can in order that we are broadly pretty much in the same situation. The fact of the matter is that the guys who have really deep pockets, that is the Americans, are always going to have a substantial advantage on the technology front. It is the case that there are even today areas where we can still beat the Americans, where we are better than the Americans at certain things that we do. Those are things that we need to build on.

  Q19 Mike Gapes: I accept that the Americans might be a problem because of technological reasons but we are talking here about open markets. We have European partners and in fact some of the companies here have European associations which are very deep. I would be interested to know what we should be doing to open up the markets in those other countries.

  Sir Richard Evans: I think John needs to come in on this since we are referring specifically to John's ownership. There are a catalogue of issues that are being undertaken at the moment, not least some of the things that are going on in Brussels in the context of the European procurement process.

  Mr Howe: Just the Thales view on this. First of all, as far as the French market is concerned, I would not argue that it is as open as the British market is, though it has been opening and the French part of Thales would argue that now they do have to win their business in competition which is much stiffer than it would have been a few years ago. Secondly, I do not think that, in the case of Thales, we enjoy any advantage in the United Kingdom derived from market conditions in France. The work that is done on major UK projects by my company and the bids we put forward for new projects are almost wholly based on work done in the UK and UK facilities and costs reflecting these conditions. So, we think of ourselves as a UK company competing in the UK market in that sense. Certainly as far as the French market is concerned, I am sure that the top men in the company would have no hesitation in saying that anything that can be done to encourage all European markets, French or other, to open up would be wholly in the interests of our company.

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