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John Smith (Vale of Glamorgan) (Lab): I welcome this opportunity to speak in this very important debate. I should like to start by congratulating the Government on the publication of the defence industrial strategy. It was published on time, and due credit has already been paid to the noble Lord Drayson for the role that he played in that. We have had an excellent debate so far on the implications of the strategy, and I want to focus on one important area.

I believe that the strategy represents a welcome dose of realism. The British defence market is one of the most open markets in the world. We have had a policy of opening our markets for more than a decade, and that is quite right. Unfortunately, our major competitor countries have not reciprocated. The French Government control their key assets and dominate their market through state-owned, nationalised companies,
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or through national companies in which the Government have a golden share and a direct state interest. They also retain the traditional arsenals, and control all the armaments and ammunitions through Government Departments; they are not even companies. France has a traditional, state-regulated system.

The United States, on the other hand, claims to have an open and competitive system—indeed, it has federal laws that demand competition. The problem is that that competition is limited to taking place between domestic suppliers. As we know from bitter experience, it is incredibly difficult to break into that market other than through acquisition, as BAE Systems succeeded in doing.

The defence industrial strategy seems to offer an alternative route. However, I am not convinced that the strategy will deliver what we need. Gaps have already been referred to, and I shall not repeat those points other than to lay down the marker that there is no coverage in the document of the role of small and medium-sized companies. There is also very little coverage of second-tier competition in the supply chain. It is clear that we are going to move further and further towards longer-term partnering agreements, but what role will the smaller companies play in the line of supply to the prime contractors? The danger is that they will move out of the industry as there is nothing in it for them, and they will take their innovation and enterprise with them. I do not think that that problem has been addressed. We wait with interest to see what the Government's position is on research and development, because that subject is also missing from the defence industrial strategy.

My concern is to compare the strategy, for which we have waited for more than three years, with the original remit of the defence industrial policy. There has been a clear shift in Government thinking in that regard. We have met the challenge in regard to recognising strategic capabilities and defending them, just as the French and the Americans and just about everyone else have done. That is important because we need those capabilities for economic reasons and for defence reasons.

More importantly, through this document we have told the industry what our expectations are to be over the next 20 to 30 years, which gives it the opportunity to restructure. In answer to the question, "Who will do the restructuring?", the industry will have to do it to meet the challenges presented by the change in the market that is clearly declared in the document. Those are good things.

My concern is that, in the original document, emphasis was placed on obtaining long-term value for money, encouraging competition wherever possible, and avoiding the creation of monopolies. Those objectives are in the policy—read it. I am not sure that this strategy will achieve those objectives. The policy states that we will require

and that we demand

Some of the partnership arrangements will last up to 25 years with a single company, and there is a danger that we will not be able to meet those criteria.
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Clearly, the strategy contains a shift away from encouraging competition wherever possible, but I happen to think that such competition is good for our defence industries, rather than dependence on a small number of prime companies. I know that this might be unpopular in the Chamber, but I feel that I should relay my fear to the rest of the House about the danger of encouraging one sole monopoly supplier. That is the inherent risk in the strategy. It could be argued that the defence industrial strategy was written by BAE Systems for BAE Systems.

I am not here to knock BAE Systems. I think that it is a great country—[Interruption] That was a natural Freudian slip. It is a great company, and we should do everything to encourage its success. Removing the pressures of commercial competition, however, will not protect it. We should consider recent history and past defence procurement policies, which did not do BAE Systems any favours. My fear is that this defence industrial policy will not do it any favour either.

Members might be surprised to hear that it is estimated that more than 50 per cent. of the MOD's large projects last year, measured by value of the contracts, went to one company—BAE Systems. It now has a sole monopoly on support for our main aircraft platforms, as I mentioned earlier in an intervention. What I mean by that is not that we have one supplier, which is not unusual in a contracted industry—it cannot be avoided—but that we have no alternative capability, which is dangerous.

Mr. Hendrick: Is it not the case that BAE Systems is, as it describes itself, a systems integrator, and that work goes to thousands of companies, even though BAE Systems gets the contract? Is my hon. Friend suggesting that there should be another national champion, or that the work should go to a foreign company?

John Smith: I think that the Chairman of the Defence Committee addressed one of the possible solutions—to encourage more transnational competition within the domestic market. I do not think that we should replace BAE Systems as a national champion, but we have a duty to ensure that it is an efficient, effective company that can deliver what we want to time and to price. My worry is that over a long period, we might not be able to achieve that.

I have a little experience of running a partnership, which was very interesting and an important learning curve. We learned three main lessons. There was a lot of discussion about working together, trust and shared objectives. In our organisation, however, we drew three conclusions. First, it is virtually impossible to incentivise a sole monopoly supplier. A contractual system must be developed that keeps that supplier on its feet—competitive, hungry and able to deliver. Secondly, there is only one thing worse than a large, bureaucratic, inefficient, public monopoly—a large, bureaucratic, inefficient, private monopoly. The Government should be wary of that lesson. Thirdly, if one wants a partnership really to succeed, one must find a formula that allows the private sector to do what it does best—to compete, innovate and be efficient, without interference—and the public partners to do what they can do best, equally without interference. I feel that the proposals are too much of a fudge.
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The Conservative and Liberal Democrat Front-Bench spokesmen both referred to some of the recommendations on addressing that matter. We need more transparency—there is no doubt of that—and we need more supervision of long-term partnering contracts. BAE Systems has air support and land support—indeed, an almost complete monopoly on land systems. It is now moving into other areas. We want to stimulate competition, and if we cannot do that we want to monitor the position very carefully. We must have more transparency, and more public scrutiny.

A major defence procurement project is on the stocks now, probably the largest defence project of all in terms of value. Someone once said to me that it was the biggest public-sector project since the pharaohs build the pyramids. We shall wait and see. I am talking about the bid for the defence training rationalisation programme. The Government must ensure that the evaluation process for the 25-year partnership is conducted robustly, fairly, openly and on a level playing field.

We should not be asking for special favours. This is a huge project, and we want the right team to implement it. The way to ensure that we get the right bid is to ensure that there is proper scrutiny of the evaluation process now. There should be only one consideration in the choice of bidder: which will provide the best product for the future training needs of our military, which is the best price for the future training of our military, and which provides the best location?

The Ministry of Defence wants a training facility that is second to none in the world and, for the first time ever, offers tri-service training—training for Army, Navy and Air Force—in an environment that can offer modern training techniques, a modern, adaptive training culture, and the flexibility to be able to change the training requirements of the three services over the next 25 years. I believe that the bid by Metrix Ltd. at St. Athan meets those requirements, but I am not making a special plea. I am asking the Government, when considering contracts that are so important for the future needs of our military for the best possible training, to do so robustly, fairly, openly and on a level playing field.

4.2 pm

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