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Dr. Julian Lewis (New Forest, East) (Con): Unpersoned.

John Reid: From a sedentary position, the hon. Member for New Forest, East (Dr. Lewis) says
 
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"unpersoned". I think that everyone knows that we are talking about the development of what was previously referred to as a drone—no offence is meant to anyone in the Chamber. [Laughter.]

That is a serious investment in unmanned aerial vehicles, which is vital for the future, and it is also essential in assisting the sustainability of the required capabilities to support our new manned aircraft. Again, that involves a period of fairly dramatic transformation, and clarity and forward ability to manage that transition will maximise benefits to industry, the armed forces and, I hope, the taxpayer.

The armoured fighting vehicle fleet remains key to our land forces. Therefore, we must retain a capability to maintain and upgrade both our current and future equipment. We intend to work with BAE Systems Land Systems—the supplier of 95 per cent. of our current inventory—through a partnering agreement that will incentivise it as the systems engineer for the current fleet, contracting for capability provision, and bring advanced land systems technology into the UK. I am pleased to announce the signature today of an agreement articulating the principles under which such partnering will be taken forward.

Looking to the future, we need industry to develop the complex system of systems that will make up the future rapid effect system—FRES. The most likely solution will be a team in which national and international companies co-operate to deliver the FRES platforms, led by a systems integrator based in the UK.

A high concentration of knowledge relating to the existing fleet, but a healthy international competitive environment, also characterises the helicopter industry. As was announced last spring, we are working with AgustaWestland to promote a more open, predictable but demanding partnered relationship, providing better value for money while reducing the company's reliance on our investment to sustain the design engineering skill base. We are also undertaking a detailed capability and value for money assessment of the AgustaWestland future Lynx product, in relation to meeting both our battlefield reconnaissance and surface combatant maritime helicopter requirements. As we have long made clear, however, we will continue to look to the vibrant and competitive global marketplace to satisfy our future helicopter requirements.

The Government have made a major investment over the past 10 years—through such projects as Storm Shadow and Brimstone—in guided weapons. We attach considerable importance to sustaining capabilities for the design of new weapons, including upgrades, and support through life. However, the scale of our investment in that area, which has been massive in the recent past, is likely to reduce by 40 per cent. over the next five years. That is likely to lead to overcapacity and an inevitable requirement for rationalisation. That might require us to temper international competition in the short term. We will need to consider whether there are approaches that we might take, together with our allies, to maintain critical skills while continuing to show a welcoming face to those other companies that have established a UK presence in this field.

In the general munitions sector we regard assured access to ammunition as vital, but that is not to say that each and every component needs to be sourced onshore.
 
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Eighty per cent. of our requirements are currently met through a long-term partnering agreement with BAE Systems, the remainder being supplied via competition from a range of suppliers both in the UK and elsewhere.

The command, control, communications, intelligence, reconnaissance, counter-terrorism and chemical, biological and radiological protection sectors—all of which are covered in the defence industrial strategy—are growing markets both here and in the United States. That reflects the growing importance of network-enabled capabilities, as well as the sad reality of the terrorist threat that we face. The UK has a number of very successful, highly innovative companies operating in these areas, whose profitability and dynamism are manifest. We intend to continue to look to the market to sustain our requirements.

Value for money remains the bedrock of our commercial policy. Competition will remain a major element of that, but it will not be used when other tools, such as partnering, would deliver a better outcome, or where it would impinge on our operational sovereignty. The defence industrial strategy does not signal a move in the direction of protectionism. The UK operates the most open defence market in the world, and is at the heart of efforts to encourage other nations, in Europe and further afield, to follow suit.

This is a challenging agenda, requiring real change in the shape of the industrial base. That change will be required in industry, but also in our own practice, and it must involve our sharpness as custodians of taxpayers' money. All that will not be without pain, but only if we collectively face up to the need for change will we be able to provide our servicemen and women with the equipment that they deserve.

Delivering the defence industrial strategy will require sustained effort on both sides, and real leadership on both sides as well. Lord Drayson—who has done so much to produce the strategy—and I are determined to provide that over the coming months, and we look to industry to respond in like fashion. The rewards on offer are substantial. Sustaining the key technologies and capabilities required to maintain the operational edge of our armed forces and preserve national security is first and foremost in our thoughts. We also expect to enhance value for money for the taxpayer through improved acquisition performance, and to achieve better returns, health and sustainability for industry in return for such improved performance. For the nation as a whole, we mean to sustain a high-value, innovative and technology-driven industry that will provide quality skills and quality jobs for the future.

On that basis, I commend the defence industrial strategy to the House.

Dr. Liam Fox (Woodspring) (Con): I am grateful to the Secretary of State for his statement, and for making copies available to the Opposition in advance. As he will appreciate, however, it was a long statement and the document is extremely complex. The House might benefit from more time in which to consider the implications, and from a longer debate at some stage.

The document has been much trailed. It contains a number of points that we welcome, and many that we have called on the Government to adopt in recent years.
 
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We welcome the new tone of partnership between Government and industry. More than a year ago we called for

"a mature partnership with industry, with both sides working together from a project's inception through to the completion of its service life." —[Official Report, 4 November 2004; Vol. 426, c. 488.]

If Ministers have genuinely embraced the idea, the House should welcome that. We also welcome the identification of key capabilities that Ministers consider it essential to retain in the interests of our national sovereignty, although we shall have to study some of the detail.

The Treasury, however, holds the key to much of what is in the document. Has the Treasury agreed to fund the defence industrial strategy fully in the 2007 comprehensive spending review, and what discussions has the Secretary of State had with the Chancellor to that end? If the defence budget is squeezed in the spending round, the document becomes simply a wish list. Implementation is everything.

Has the Treasury made an assessment of the effect of spending on defence-related research and development and equipment on Britain's overall economic competitiveness, and will the Secretary of State make such information available to the House? Where onshore capability is maintained for reasons of strategic assurance, it is vital that value for money is guaranteed, especially when sole sourcing is involved. What measures will be established to ensure that, when the economic forces of competition are absent, taxpayers' money is best protected?

I have a number of specific sectoral questions. The document states:

"In a change to the stated Defence Industrial Policy, there is no absolute sovereign requirement to construct all our warship hulls on shore".

Does the Secretary of State expect to buy hulls from abroad? What assessment have the Government made of the impact on the shipbuilding industry and employment therein?

Individual helicopter programmes have been amalgamated in the overarching future rotorcraft capability process, and the overall budgets have been reduced by £1.4 billion on the basis that the Financial Reporting Council will identify synergies and savings. I think we have all heard that from Departments in the past. The most pressing requirements identified by recent reports from the National Audit Office and the Public Accounts Committee are caused by shortfalls in the helicopter lift capability that is essential to our activity in Iraq, Afghanistan and elsewhere. However, more than two thirds of the £3 billion FRC budget is about to be spent on two programmes, the Merlin Mk1 upgrade and Future Lynx programmes, most of which are unrelated to those requirements. Furthermore, £1.2 billion is scheduled to be spent on purchasing, without competition, 80 Future Lynx helicopters for the Army and Navy.

An Army purchase is required to spread the non-recurring costs, but it is unlikely that such a route would have been followed if operational requirements had been the main driver. That approach seems to be at odds
 
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with the avowed aim of the strategy to put the cost-effective acquisition of capability at centre stage. Perhaps the Secretary of State will deal with the apparent discrepancy.

The future aircraft carrier project was unveiled in the strategic defence review in 1998, with the first carrier due to enter service 14 years later in 2012. More than seven years down the line, we still have no firm order placed and no in-service date declared. Yesterday we had what is now described as a two-stage incremental approach to main gate. We will have another long wait before costs and timings are revealed.

Will the Secretary of State confirm that both carriers will miss what the Government used to say were the target in-service dates of 2012 and 2015? Is it not true that the industry expects no first carrier before 2014, and no second carrier before 2016 at the earliest? Where does that leave the existing fleet of three small carriers, one of which has been paid off prematurely while the other two are due for disposal well before the likely in-service dates of their successors? Above all, where does it leave the capability of the Royal Navy, which has already sacrificed so many of its other warships for the sake of the promised future carriers?

The statement made a passing reference to maintaining onshore the ability to design and build submarines, but no mention was made of the all-important issue of replacing the Trident fleet. Making the decision about embracing Trident is a step that the Government embrace about as much as Dracula would embrace a crucifix. Building a new fleet of missile submarines will have a massive impact on our defence industrial plans, and the time scale cannot be less than 12 to 15 years. That is why the Government pledged in the last Parliament to make the decision in this one.

Will the Government now face up to what is a vital issue? Why is the Secretary of State so afraid to do so? Of whom or of which is he more scared, the Chancellor, the Prime Minister in waiting, or the dissent of many of his Back Benchers? When will he begin in earnest the debate about the future of the nuclear deterrent on which people on both sides of the argument are willing, indeed eager, to begin?

Let me assure him in one respect. If the Government take the right decision, they will be able to count on the support of the Conservatives to ensure that the country remains protected indefinitely against nuclear blackmail. The generosity of the Opposition to the Government at this time is unbounded.

Overall, this may be a rather pessimistic strategy document. The argument seems to be that when the current tranche of orders is completed, surplus capacity will have to be dealt with. I wonder what assumptions are made in this assessment of the outlook for British defence exports and what measures the Government could put in place to ensure that some of the surplus capacity is used to expand our defence exports overseas, especially in the aerospace industry.

At first glance, there are a number of positive elements in the strategy document, but there are also a number of anxieties that will be felt across the country. The Secretary of State may be able to address some of them, but the Chancellor remains the key to preventing it from
 
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being a strategy of defence industrial decline. Sovereignty comes at a price; will the Chancellor and the Government be willing to pay it?

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