Examination of Witnesses (Questions 100-109)
12 MAY 2004
SIR KEVIN
TEBBIT KCB CMG AND
MR TREVOR
WOOLLEY
Q100 Chairman: Last week we had Sir Dick
Evans in conciliatory mood. There has been a lot of megaphone
diplomacy on the MoD side as well as BAE Systems side. The BAE
position has been dismissed as "Oh well, we shall just have
to put pressure on the Ministry of Defence to get better terms".
It is part of your responsibility to maintain the British defence
industrial base. Do you have any concerns about the future of
BAE Systems and what you might call the threats by them largely
to pull out of the United Kingdom because they cannot make any
money in this country and they are making it elsewhere? They have
made mistakes and I do not think the MoD is blameless. Are you
treating this seriously? It would be quite appalling if, because
of their shareholders' pressure or because of any attitudes within
the Ministry of Defence or DPA, if we were to see our one remaining
large procurer of weapons systems, employer of 45,000 people,
seeing it has a better future centred in the United States than
being centred here? Are you taking it seriously, Sir Kevin?
Sir Kevin Tebbit: This is a serious
point. May I take it in bits? My first duty is to ensure the armed
forces are equipped with the equipment they need, when they need
it and at a price we can afford. That is my first responsibility
as permanent secretary. We also have a defence industrial policy,
which is geared to ensuring that where there is a strategic requirement
the UK needs to have in the UK that that is maintained. There
is a wider interest in having a healthy British defence industry,
but we do define that slightly more broadly than you have, as
being companies which create wealth in the UK, create technology
in the UK as well as employment. They do not necessarily have
to be British owned. I am not making a big point here, but it
is an important qualification. For example, a little while ago
we released BAE Systems from the obligations to ensure that the
majority of their shareholders were British. They are an international
company and we have probably gone further than any other country
in promoting international competition and competitive forces,
which is one of the reasons why we have very good armed forces,
because we have been more ready to look at competition than others.
That said, clearly where we possibly can we want to see a vigorous
British defence industry. The important thing is that they should
be operating actively in the UK. Part of me says I wish I could
do both, but if I have to choose, the emphasis must be on equipping
British armed forces to the very best that we can. Private sector
companies have to make their own judgments about where they wish
to be. Equally, they need to do that with an understanding of
what their market is going to be like. We have a duty to try to
show British industry generally what our requirements are going
to be over a 10- or 15-year period so that they can plan accordingly.
That is the bit of the obligation that we will be meeting. We
cannot obviously be held hostage or be obliged to continue to
pay if we feel that it is not the most effective way of securing
our objectives. In terms of the issues you have seen in the press,
as you know, we are now looking for our carrier contract and I
am very much hoping that will have BAE Systems as well as Thales
as part of it. We shall see what occurs.
Q101 Chairman: It is my irritation, I
have said a thousand times, that this openness of the British
market is largely unreciprocated, which is a matter of grave concern
to me. Why should we be so nice to other countries when they make
it virtually impossible for us to bid for contracts in theirs?
It is a generosity of spirit which I find quite baffling and they
must find so funny. You used the word "hostage" and
that is part of the language I read too much about; BAE holding
us hostage or whatever. Evans last week was trying to be nice
and to say all appears to be hunky-dory with the Ministry of Defence,
which frankly I do not believe. When you have an obligation to
provide equipment for our armed forces, one of the concerns is
that if so much of it is coming from abroad for urgent operational
requirements are other countries going to be so keen, because
we do things usually at a rush. The last war was a classic example
of doing things in a typical British way, rushing and getting
through things very, very quickly, whereas in a more rational
process it would take time. My only concern is if we rely too
much on foreign countries, and I am not denying the importance
of it, then when it comes to urgent operational requirements,
let us say vis-a"-vis the United States, are they
going to say we are nineteenth in the queue? What if some country
we are reliant on says they do not like us fighting the war in
Iraq and if those companies are largely French controlled or German
controlled or whatever. I do not want to disparage them. May I
respectfully suggest that screwing a minimum price out of British
companies is not as simple as you say. Your obligation is to provide
equipment for the armed forces. I should have thought an important
corollary of that is having a British defence manufacturer with
whom you are working very closely and are assisting in every way,
rather than trying to screw down the price so other countries,
who may not have the same procedures that we have in the relationship
between ourselves and defence manufacturers, no brown enveloping,
would find it much easier to win contracts than a British company.
I am merely saying: is it not within your responsibility to get
both seriously good equipment for our armed forces and maintain
and sustain the British defence industrial base rather than having
policies which go a long way to sustaining somebody else's defence
industrial base?
Sir Kevin Tebbit: We do have a
defence industrial policy which is about developing the defence
industrial base in the UK, not necessarily insisting on British
ownership. As long as the companies are in the UK with the technology
being created in the UK and the jobs in the UK, that is one caveat
I would make. On the idea that we had simply been screwing down
the price and damaging companies, I would simply ask you to remember
that you are referring to contracts which were competed for freely
and openly. We simply invite bidders. When a competitive process
is under way it behoves the government to select, not necessarily
the lowest bidder but the person with the best bid. You cannot
expect us to say "We quite like your bid but we really think
you ought to have £200 million more because you are good
chaps". That would be absurd. We are talking about contracts
which are freely entered into on the basis of competitive forces.
We have absolutely no wish whatsoever to weaken or see any lessening
of the vigour of British defence industries. Our policies are
designed to strengthen those. All I am saying is that private
sector companies have to make their own choices as well. We cannot
override those choices.
Q102 Chairman: It is clearly not a free
choice for companies in a bidding process. If you are driving
down price and companies are in a very competitive environment,
they might put in a bid which might be seen at that time as incredibly
low in order to sustain employment in this country. I am not remotely
going down the argument, the line that any old bid at any price
which is ridiculously high should be awarded to that company because
they are British. I would not do that. When you are looking at
the totality of the bid and the consequences of jobs, a largely
British company—I know you say it is international; it is
very convenient to say that but it is identified as a company
which is the largest British company in the defence field . .
. I am just putting to you that there are consequences of an open
market defence policy. It might seem smart to you, but it does
not seem smart to everybody else. I do not want to see, as a result
maybe of BAE's fault or even the fault of the Ministry of Defence,
their shareholders saying they are better off clearing off elsewhere.
Then to put that down simply as posturing or holding to hostage
may not be seen in retrospect to have been the right analysis.
I am merely floating those ideas. I am no shareholder of BAE Systems.
I am not a consultant to BAE Systems. I merely want to see the
best for the MoD and the best for British industry. At this time
what might be good for one does not appear to be completely beneficial
to the other.
Sir Kevin Tebbit: My comments
were very general; I was not speaking about any particular company
and I would not want my remarks to be taken in that context. The
real issues for the future are that the international defence
market is going to be smaller. The days when we built large numbers
of platforms are obviously limited. Post Cold War the defence
industries all over are facing challenge and restructuring issues.
Manned aircraft: where is the next generation beyond JSF coming
from? Ask the question and very few people will have clear answers
about that. There are big restructuring issues which face the
industry as a whole and they are the ones which are the real challenge.
There is also a serious asymmetry between defence expenditure
in Europe and in the United States when you look at the size of
the US defence market. It is not surprising that British companies
want to get footholds in the United States and be successful there.
This is surely a natural response to market forces. With the US
defence budget larger than the total defence spending of the rest
of the world it is inevitably going to be a powerful market. These
are factors we have to take into account as well, in addition
to the British defence industrial policy. We have to shape that
in the context of these global trends. Those are the real issues
and challenges we are going to face rather than looking at a purely
national market or industry.
Q103 Rachel Squire: May I ask fairly
briefly about the defence change programme, the modernisation
in a number of areas such as logistics, estates and manning and
so on? May I ask you to explain what the overarching objective
of the defence change programme is and what progress has been
made in delivering the expected improvements?
Sir Kevin Tebbit: In simple terms
it is all about better delivery of public sector objectives, getting
better value for money, using the best techniques to become more
efficient in what we do and to integrate new technology into the
MoD effectively, which has been a bit of a challenge for the public
sector generally with things like IT programmes. It is a single
coherent programme which joins up the most important of the various
initiatives, which would otherwise anyway be under way in defence,
to achieve those objectives. When we looked at it, at the end
of 2001, we had an awful lot of change programmes coming out of
the defence review from 1998, but they were not perhaps as focused
on the key areas as they should have been; we had too much activity
across too wide an area. This was an attempt to focus on the really
important programmes, particularly in logistics and in the information
infrastructure, although we probably have 11 or 12 now in that
overall change programme. We sought also to link ministers more
directly with programme delivery as well, they take a more active
interest and sponsor some of these major projects, to make sure
that we pin down responsibility for delivery to individuals, to
make sure that they have better benefits established before we
fund them, can track the progress of projects better, be more
accountable for them, those sorts of things. It is the changes
which would happen anyway, delivered by better project management
essentially, with closer supervision from the top. In terms of
what the main benefits are, or the main issues are, the biggest
one is in the defence logistics area where we are committed to
achieving 20% savings in output costs for our logistics, better
contracting and better procurement. Last year the gains were something
in the region of £300 million, but that is an area we are
looking to quite seriously for a lot of the overall efficiencies
we are talking about through Gershon, the 2.5%. A lot of that
is coming from the DLO. The other one, the defence information
infrastructure, is bringing together into one sort of ring main,
I expect you could call it, about 300 different IT systems which
we have throughout defence, grown up over the years, 2,000 locations
around the world. The DII is trying to provide this overall coherent
infrastructure for IT which will also interface with military
applications in the field as well as office applications. That
is absolutely critical because nearly all of the other initiatives
will hang off the information infrastructure one way or another.
They are the two main ones.
Q104 Rachel Squire: Moving on to my second
question, I perhaps ought to declare a constituency interest because
I happen to have the munitions depot at Crombie in my constituency.
It has been subject to at least one review every year for the
12 years I have been a member of parliament and is currently awaiting
the outcome of one of the latest. That has led me to question,
when I have then moved on from my local concerns, the broader
issue and I have found that I understand that McKinsey's have
been responsible behind something like at least 900 different
reviews in defence logistics. That is a statistic I saw somewhere.
Just from a local perspective, I have then looked at how many
reviews, studies, are being carried out. This then led me to question
just how much the Ministry of Defence does spend each year on
review and frankly whether they actually save more from the outcomes
of those reviews than they actually spend on procuring the external
consultants to undertake such reviews.
Sir Kevin Tebbit: It is something
on which I keep a careful eye because nobody wants to spend more
than they have to on external consultancy. It has been a problem
across government and something the people have looked at quite
carefully. Equally, I could not hope to keep in house all of the
skills and techniques necessary to help us to deliver our change
and rationalisation programmes. It makes sense to buy in skills
from consultants when we need them; I am not talking about one
particular consultant. The important thing is only to use them
when we need them and to grow our own internal capacity based
on experience in past reviews, which is what we do. We have an
internal directorate general of management organisation which
provides an in-house capacity as well as using external consultants.
It is inevitable that we use external consultants if we want good
quality challenge in what we are doing. I do not recognise the
figure of 900 reviews involving McKinsey; that seems to be rather
high. We certainly use them for what is currently a thing called
the end-to-end review of logistics, which is that previously we
have tended to look at logistics as a sort of separate world,
not linked up enough to industry on the one end which produces
the equipment which goes into the logistics supply chain, or enough
to the frontline and what the frontline really wants and really
needs. The end to a logistics study is looking at the whole piece
to decide what we should do in house, what we should look to industry
to do, where it should be done, how close to the front line, the
role of in-house logistics capacity, Defence Aviation Repair Agency
(DARA) for example, or the Army equivalent Army Base Repair Organisation
(ABRO), whether we should be using more of them, or whether we
should be using British industry more, whether we should in fact
be putting it closer to the front line or in base repair organisations,
whether we should go for modifications of equipment rather than
repairing the existing stuff. That is what the end to end work
is doing and it is throwing up serious areas of overlap, duplication
and areas for efficiency.
Q105 Rachel Squire: May I ask you to
be a little more specific about how the output from the reviews
undertaken is evaluated and whether the expected improvements/savings
from such reviews are achieved?
Sir Kevin Tebbit: We track them
very carefully and have very clear progress from the logistics
organisation. Mr Woolley has got away with not saying very much
lately, but he has taken a close interest in making sure that
the gains claimed, particularly for the logistics organisation,
are actually there and built into the figures they give in their
budget. Could you possibly say a word as proof of what I am saying?
Q106 Rachel Squire: I am happy to hear
about logistics but could you also comment on the other areas?
Sir Kevin Tebbit: It is a good
illustration; that is my point.
Mr Woolley: The key thing from
my perspective is that where we undertake a study which shows
that by doing things differently we will save cost, that cost
is incorporated into the budget of the organisation concerned
so that it is actually scored as a budgetary saving, at any rate
a budgetary saving to offset against any other costs which might
otherwise have to be incurred by that organisation. It is absolutely
essential that we have a benefits tracking system and certainly,
as a result of the so-called end to end review of defence logistics
and indeed in terms of the other change programmes which come
under the defence change programme umbrella, we will have in place
a clear articulation of where it is we expect the savings to be
realised and a system in place to ensure that we check that those
savings really have been realised in order that the budgets we
place on these organisations are coherent with the reorganisation
or the different method of doing things which have emerged out
of doing these reviews. The question of identifying specific savings,
of having a plan to achieve them and of ensuring that those savings
have been achieved against the plan, is an integral part of our
planning and monitoring process.
Q107 Rachel Squire: When you are assessing
value for money, cost savings, do you take into account the commitment
that MoD civilian staff have given to providing the crucial area
of logistics to the forces when they need it?
Sir Kevin Tebbit: Absolutely right.
I might say again that some of the unsung heroes of Operation
Telic were the civil servants who worked day and night around
the clock to get those urgent operational requirements met. After
the operation people like me went round to places like RAF Wyton
to do so and to see the teams who got Storm Shadow fielded. It
was not just Storm Shadow, although that was the most remarkable
story actually, a system which was really not yet fielded operationally
and they worked on it almost physically and got it out. Some of
the contractors did similar work as well, but there is no doubt
whatsoever that the civil servants who work in defence, firstly
tend to be under-appreciated and secondly it is one of my key
objectives to make sure their work is recognised. I have to say
that Geoff Hoon, the Secretary of State for Defence is good now
at always remembering that there are four elements which deliver
defence outputs: the three services and the civil service. He
does mention that properly. This is not about not recognising
the work of civil servants, it is just a question of making sure
that we have the best optimised system for delivering logistics
and we will always expect there to be a very strong civilian element.
What I am not sure of is the precise balance as between whether
they will be working in companies, or whether they will be working
inside the Ministry of Defence.
Q108 Chairman: Thank you very much. Perhaps
you could send us a lit of consultants, the titles of the work
they are doing and the cost. We are not opposing it, we are quite
interested.
Sir Kevin Tebbit: We do publish
a list each year. It is part of our public transparent policy
and I shall be happy to send it to you.
Q109 Chairman: Obviously transparency
has not reached my office.
Sir Kevin Tebbit: I shall be happy
to send you last year's list.
Chairman: If you would not mind. Thank
you both very much for coming in, it has been very helpful. Thank
you.
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