Select Committee on Defence Minutes of Evidence

Examination of Witness (Questions 84-100)


31 JANUARY 2006

  Q84 Chairman: Good morning. Welcome. Thank you for coming to give evidence to us. The Committee tends not to allow opening statements but the Committee is going to think me completely pathetic because I am going to ask you to say a few words about the capacity in which you are giving evidence to us, if you would.

  Lord Levene of Portsoken: As I think everybody will know, I was Chief of Defence Procurement for six years from 1985-91. This is the first time that I have given any evidence to your House on this subject since 1991. My main interests now are well outside of the defence industry. However, I am chairman of General Dynamics in the UK and I am also now the President of the DMA who have just given evidence to you but I have to say that "president" is entirely an honorific title. I am not speaking on behalf of either of those organisations. I was very grateful for the invitation to speak to this Committee and I thought you might be interested in hearing about how we got to where we are now, which I am either praised or blamed for being to some extent the author of the situation. What happened then; how did we get into that position, what we achieved and what we did not achieve and, if it would be of interest to the Committee, how I feel that impacts on the present day situation. I am not speaking on behalf of the industry in any way this morning.

  Q85 Chairman: You are specifically not speaking as president of the DMA and you are specifically not speaking as Chairman of General Dynamics UK.

  Lord Levene of Portsoken: Correct.

  Q86  Chairman: Let us start with the blame. This is all your fault. What do you make of it?

  Lord Levene of Portsoken: I understand that. I have read a number of items that have been written on this subject, in particular in evidence to your Committee a year or so ago from an expert who said that I was the author of the era of confrontation. It was also known as the era of competition. One needs to look at what was achieved. With your permission, I would like to quote from the Major Project statement of October 1991, which now seems quite a long time ago, but that was just after I concluded my term as Chief of Defence Procurement. I think Members of your Committee will recognise the terminologies used but perhaps may find the facts quoted quite surprising. The conclusion of that major project statement in 1991 read as follows: "The Department"—that is the Ministry of Defence—"has undertaken a review of a total of 37 projects each valued in excess of £100 million which have been started in the last five years. The cost of those projects to date was just under 1% less than the Department estimated when the orders were first placed. 28 of the 37 projects were expected to be completed on time. One was ahead of schedule. Of the rest, only three had delays that were expected to exceed one year. The delays would not result in additional costs falling on the Department." Out of 37 projects, 29 were being delivered on time. Only two of them were more than a year ahead of schedule and none of the extra cost involved in those was falling on the Department or indeed on HMG. That was the result of six years of very hard work. At that time the Public Accounts Committee thought that was a good result. If you want to call that blame, I accept the full blame for it.

  Q87  Mr Hancock: What was wrong with that foundation? If it was so good when you left in 1991, why did it go so horrendously wrong over the next 10-12 years? If the foundation was so good, what caused the problems?

  Lord Levene of Portsoken: Different people have different ideas. There were different ministers involved under two administrations. There were different people in industry. The environment in which the industry and the Ministry of Defence were working had changed. 1991 was effectively just about the end of the Cold War. Demand dropped off. There were significant mergers within the industry and competition was reduced, but there were those who believed that competition, which had achieved a result which everybody would like to   see, was changed into and designated as confrontation. As a businessman, which is what I spent most of my time doing before I was in the Ministry of Defence, I do not regard competition as confrontation. I regard competition as essentially what business is about. You have buyers and you have sellers. If any of us goes to buy a house or a car, you do not walk in and say, "How much is it? Fine. Let me take out my cheque book and write you a cheque." Yes, we did have confrontation but if you look at that as a result that is what you achieve. If you look at the major commercial organisations in this country today, they work on the basis of competition and everybody recognises that. For whatever reason, it was felt that was confrontational to the industry and people did not like being confronted and challenged. Towards the end of my period as the Chief of Defence Procurement, the then Chief Executive, who has now just retired as the chairman, of the largest defence company in the UK then—which is the same company essentially as the largest one today, who we had a lot of tussles with but who I think we ended up on perfectly good terms with—said to me, "Whatever else may have happened, the fact that you made us compete made us much more competitive. We won a lot more business overseas and it smartened up our business." Quite how that has changed since then must be directed at the people who decided on the change. I would be the first to agree that many other circumstances have changed between then and now but I do not believe that the basic philosophy of business, which is that you have different interests between buyers and sellers, has changed. The notion which in a perfect world Candide would appreciate, where everything is in the best of all possible worlds and the buyers and sellers all live together in one happy environment and they are all working on the same side of the table, would be wonderful. That is not how business works. I do not think there was a conscious shift to say, "Let us abandon it all and do something completely different." The world has changed. I know it is something which you and your colleagues on this Committee consider a lot. I leave it to you to decide which was the better result. If you then said to me, "Could you go back and do exactly the same thing all over again today?" I think it would be difficult and you would have to do it in a different way. It might help you to know that when I was first brought into that post—some of you may remember there was a lot of controversy about that at the time—I was given a very clear charter by the then Prime Minister after whom this room is named and the then Defence Secretary. That charter said fundamentally, "Your job is, one, to buy the best possible equipment for British Armed Forces on the best possible terms and, two, if you can buy that equipment in the UK that is excellent but, if you cannot, so be it." That was the basis on which we worked. I remember going to a meeting of the industry which I had just left, being on the other side of the table as it were, which was the source of the controversy at the time, and telling them that. They said, "You will never get away with it." I do not think it is a question of getting away with it. That is what we did and it ended up as a good result.

  Q88  Chairman: The result is, is it not, that much of British defence industry is now resident in the United States and that we do buy a huge amount of our equipment from the United States which will in the end result in our defence procurement being over a barrel to United States manufacturers and supplies?

  Lord Levene of Portsoken: You said much of British industry now resides in the United States. It is true that British industry has a lot of interests in the USA. The British defence industry has to reside in this country. The scenario which you are portraying is no different from the position we were in then. Some of you may remember the infamous project which I walked into, the Nimrod AEW, where we were buying in the UK. We had got to the stage where we had written off £500 million. "We cannot stop now. We have written off £600 million. We cannot stop now. We have written off £700 million. We cannot stop now." I then walked in and we had to decide that that project unfortunately was not going to work. We were forced to buy in the United States. It is a very difficult issue. You also have to weigh that against the political interests of closer ties with Europe. We did a lot of work on that. You may find it interesting that, as the Chief of Defence Procurement, I also had the title of the National Armaments Director. The National Armaments Director is an international title, recognised by all the NATO countries as being the individual responsible for defence procurement. We did a lot of work with our European colleagues to try and see to what extent we could collaborate in Europe, not in order to be at odds with the United States but to have a rather more even division as to where the work was done. I remember my French opposite number when I first started. We made quite a lot of progress. My French opposite number made a calculation. If you had a collaborative project, the cost of that project to the users was a function of the square root of the number of participants. If you had four participants, it would cost double. If you had nine, it would cost treble. We measured that and he was right. There are reasons why you might want to do that but it is a difficult issue. The more problems you have in a project, the more difficult it is to keep it on the road. I remember being responsible for signing the original contract for what was then known as the Eurofighter, now Typhoon, which you are all very familiar with. We tied up that contract very tightly in terms of price and conditions. I remember after I had left reading that the German Government were very wary about going ahead with that. There had been a change in government and a change in policy. They eventually, reluctantly, agreed to continue on the basis that you could have a value engineered version of it which would save a lot of money. I remember remarking to a number of people at the time that the result of that would be that it would cost us a lot more, which of course is precisely what happened. We have to look at what is available. We have to look at what technologies are available. We came to the conclusion even 15 or 17 years ago that if we were really to compete with the United States no one European country could do that on its own, simply because of the costs involved. European collaboration would help to make a balance and you would not be in the sort of position you describe, where we are dependent on one country. I would not like to use the phrase "holding us over a barrel" but once you are dependent on one supplier you do not have a great deal of choice.

  Q89  Linda Gilroy: I am interested in what you are saying. What store would you set by the reliance that we are seeing in some of the things happening in procurement now on gain sharing and leaning to deliver much better value for money being able to counteract the sort of monopoly tendency that you have just described?

  Lord Levene of Portsoken: We did get value for money. We did get projects, almost without exception, delivered on time and on cost. I recall very well when the terminology and the paper on smart procurement was produced, which was going to achieve a lot of this. I was asked at that time what I thought of smart procurement. I said I had not been able to understand what it was about. I had been asked to speak at a number of conferences on the subject and I found myself not qualified to do so because I did not really understand it.

  Q90  Linda Gilroy: You did not really answer my question. We have been to look at front line capability recently. Our concerns there have tended to be in the other direction, in the short term certainly, although we appreciate the long term potential for monopoly to then kick in and perhaps make it much more difficult to get value for money. What we saw there was an enthusiasm for introducing the leaning process combined with game sharing, which a lot of emphasis was put on. I am really looking for your observations on what you think that can deliver.

  Lord Levene of Portsoken: You will be familiar with the best being the enemy of the good. Of course we want to go into leading edge technology because it is exciting and it will produce a lot of new capability, provided that it works. I recall very well in about 1991 when all of a sudden it was like playing in some sort of contest. We finally had much more visibility of what the Russians had been doing on the other side, which we had not had beforehand. We even had the opportunity to talk to them which we would have been totally forbidden from doing beforehand. They said, "Overall, you had more advanced, more sophisticated equipment than we did. We had far more of it and what we did have was older but we knew that it would work." I do not think there is a perfect solution to that.

  Q91  Linda Gilroy: That was a different era, the Cold War era. One of the things we have been hearing from the DMA this morning is some question marks raised as to whether this does make the necessary leap for us into the sort of threats that we are facing in the preparation of providing equipment for that. I would not want to go back into the experience of the Cold War era because I think that is different. Would you agree?

  Lord Levene of Portsoken: Up to a point but it depends what you regard as the threat. The Ministry of Defence spends a lot of time looking at the threat. Is the threat today from highly sophisticated opposition or is it less sophisticated? If it is highly sophisticated, you clearly need state of the art, cutting edge equipment to deal with it.

  Q92  Linda Gilroy: The Strategic Defence Review and the additional chapter have looked at that in some considerable detail and, to a large extent, this flows from that. However, given the sort of rationalisation that is expected to flow from the Defence Industrial Strategy, I take it from what you are saying that it may become more difficult to retain such competition as there is in procurement in the UK?

  Lord Levene of Portsoken: Absolutely. The competition has reduced enormously, not through anybody's fault but because the requirements reduced after the Cold War. The notion of what type of equipment we would need reduced. There has been more consolidation within the industry. You could say that you may well have only national champions in each country. Therefore, you either say, "I will give the work to my national champion because that is what I want to do to help the industry develop" or, "I would like to have a further choice" and then you have absolutely no option than to go outside of the country. The first place one looks, thus has it always been because of the volume and size of the industry, is in the United States. Can you work together with them or do you just have to go and buy it off the shelf? That is a function of when you start looking at it and what sort of volume you want compared with the sort of volume they are looking at. As the industry consolidates—and it still continues to do so—and as the power of the US industry gets larger—I have no difficulty with buying in the United States except as you very rightly point out you end up with only one supplier and we all know what happens in that situation—if we cannot justify the cost of developing new equipment in this country on our own, we either join with the United States or we join with another partner. Almost without exception, the other partner will be one or more of the European countries.

  Q93  John Smith: You said in your day that there was one major, prime company in this country and it still is today but there is a difference. You also said that we are to a great extent dependent on one country. To what extent are we now dependent on one company? It is estimated that over 50% of the defence budget measured by value was allocated to BAE Systems in the last year alone. This document is moving away from competition and towards what they call long term partnering. BAE Systems is developing a stranglehold on procurement because it is the main partner by far and away to any other companies out there, be they American or anybody else. To what extent do you share my concern that the government is in danger of conflating the interests of one private company with the interests of this country? What are your views, given your experience, of this notion of long term partnering, not with a monopoly supplier but with a sole monopoly supplier? In other words, there is nobody else you can turn to.

  Lord Levene of Portsoken: If I may say so, you have effectively answered your own question. I would for various reasons not want to start making comments about one specific company. Perhaps I can talk more about the generality but I do not think there is an enormous difference. When I started we had something called a preferred source policy. For those who remember it, it is probably not a million miles away from what is specified in this document. I grew up in the defence industry. I spent 21 years in the defence industry before I went to the Ministry of Defence. The original company I worked for employed 12 people. I was not one of those who came originally from a large company. When I left and went to the Ministry, we had about 5,000 people but we were certainly not one of the giants. We were a medium sized company. If by virtue of the way in which the market has developed, the way in which the industry has consolidated, you are in that position then it becomes very difficult. You can compare it to the United States. Certainly they have more very large suppliers. If you get down to a situation of major equipment, the choice gets smaller and smaller. It is difficult to think of an area, except one that immediately springs to mind, armoured vehicles, where they are really consolidated. I do not think one should apportion blame in this. The difference between the luxury of the situation that existed for the procurement executive during the time I was there and today is that there was more demand. We did not have a bigger industry but we had many different owners of that industry and they did compete. One of the things I did deliberately with the full agreement of ministers at that time was to make people compete where they had been a sole source supplier before. We did it by encouraging others who were close enough to it to come in and try to compete. As the market has developed and as the industry has developed today, that is more and more difficult. That is not to say that the largest company or companies that we have have anything other than the best interests of the customer at heart but at the end of the day they also have a responsibility to the shareholders and their workforce. We only ever had, and still today only have, one supplier of aircraft engines. That was an interesting situation because they had us in the same position. We could buy aircraft engines abroad, which we did occasionally. The ethos there was tempered by the fact that, at that time, the predominance of business in that company was in the commercial airline industry. We all read about the battles between Airbus and Boeing. You cannot find a more competitive industry than the civil aircraft industry. You had a company there built on fighting hard by competition. Although the military division was separate, nevertheless it was part of the same company. I think you are led inevitably into that position by the position we have today where there are so few major contractors. I remember when there used to be produced every year a report in the major project statement which would list all the major contractors. It used to be a badge of achievement if you got into that list and there were those who had over £500 million of business in the year and those who had over £100  million. There was quite a long list of substantial companies, many of them household names, most of which have now disappeared from the scene and have been consolidated into a very small number of companies.

  Q94  Chairman: Including GEC of course?

  Lord Levene of Portsoken: Especially.

  Q95  Mr Hancock: I am very grateful that you have come to give evidence. I remember being here at the time when you were appointed. It was not only controversial in industry; it was very controversial in this place. It was the transition which you brought about in those six years which was interesting and the problems you found within the MoD that you were brought into unravel and turn around. I am interested to see what you think of this current policy document which the government has produced. Is it a step forward, in your opinion, or does it take you back to where you came in, because I suspect that there are implications in this report that take you back to your beginnings in the MoD and that some of the faults you had to sort out will re-emerge.

  Lord Levene of Portsoken: I think most of them have already emerged. I do not think the policy takes us   backwards. I think the policy document acknowledges what the present situation is today and endeavours to make the best of it. One thing that I have some fundamental difficulty with is the notion that partnering can be as effective as competition. You have to look at what your aim is. Is your aim to make the industry as competitive as possible because that is good for the economy and it may help in that respect; or do you go back to the original charter that I was given? This is very much a question for government and politicians: what is the real purpose of the defence equipment budget? It is obvious. It is to buy defence equipment. It also has another purpose running very closely behind it. I do not know what the figure is today but we always proudly claimed at that time that we were the largest single customer of British industry. It was a very powerful tool for government to direct work where it wanted it to go, either for political, economic or any other reasons. There is a fundamental clash here. It does not matter what colour government you are talking about. There is a fundamental clash which is very difficult to get away from. We faced the problem at the same time of value for money versus maintenance of jobs, keeping people happy, keeping the economy going. Which way do you jump? There were numerous occasions during the time I was there when one or other secretary of state would have to issue a direction to the Chief of Defence Procurement to proceed along a certain path which he did not regard as best value for money. The secretary of state at the time would acknowledge that and say, "Yes, but there are wider issues that come in that have persuaded us to take that decision." It has happened before and it has happened again. It is very easy to sit here and say that we are looking at the defence procurement budget. We want to get best value for money. What shall we do? If I asked you to put on your other hat as a constituency MP and say, "This is going to get best value for money but it means that all these people in my constituency are going to be out of a job" what are you then going to do? That is not a new phenomenon; it does happen.

  Q96  Chairman: Is your conclusion that this document moves away from best value for money but towards the maintenance of a defence industrial estate as being the primary objective of defence procurement?

  Lord Levene of Portsoken: The document tries as well as it can—and I think it has been very carefully put together—to steer a middle course and to achieve as much as it can in both directions. None of that has changed. It is a very difficult thing to do and I think it is a good attempt. We will never have a perfect solution.

  Q97  Linda Gilroy: As a constituency MP not only with some large defence industry interests but also with a lot of constituents who serve in the armed services, my prime concern is to make sure that the armed services have equipment which is on time and on cost and value for money in the sense of having as much of it as possible, because if you overspend on one you do not have the money for the rest. Is the DIS too focused on the UK market to give us the quality of competition that we need to achieve that end and should we be thinking of defence acquisition on a European scale?

  Lord Levene of Portsoken: Indeed we should. I spent half my life in that job trying to do that. You will know today that there is a publication which comes out very regularly called The Defence Contracts Bulletin which makes all the opportunities in the Ministry of Defence openly available to anybody who wants to bid. I originated that bulletin because no such document existed before. If you wanted to know if there was a contract up for bid, you needed to know the right people. I am not suggesting anything untoward but if you were not in the know there was nobody there to tell you. We tried very hard, with some success, to get all our European partners to do the same thing. They did. I do not know how many of them still do. We had a difficulty. I think this government has achieved it as well as any and it is often voiced as a criticism in some areas but this country has always been more open to making its defence requirements open to the widest possible bidding base than virtually any other. We all know of areas where other countries through one means or another usually manage to end up with a domestic supplier. The government does all it possibly can to promote the notion that there is a wider market out there.

  Q98  Mr Jenkins: I liked the analogy when you said that national champions for each country were doing the defence procurement. I remember this scenario before. We used to have flag carrying airlines and every state had to have an airline. The budget airlines took a lot of their market. I do not think it was mischance that it started in this country with the airlines. We want to make sure that we do not wrap ourselves into a flag carrying airline and stop the creation of the budget airlines in the defence industry. That is the problem we have at the moment because, as this strategy says, industry has to change and shift its behaviours, organisation and business processes. I think that is like asking a leopard to change its spots. It is very difficult. With your experience, do you think there is anyone out there to lead the restructuring and reorganising so that the defence industry comes around to this way of thinking? Secondly, do you think the MoD has the capability of changing its own operational approach in its own philosophy to work these partnerships through?

  Lord Levene of Portsoken: If I may say so, that is a very good question. There are certainly people out there in the industry who could do this, if that is the intention of the Ministry of Defence to have these other very valid considerations taken into account. If I can give you an analogy in the area in which I spend most of my time in the financial services industry, we coined the buzzword in the financial services industry "Wimbledonisation". The City of London is now reckoned to be the leading international financial centre of the world. If you look at virtually all of the major institutions in the City of London, the vast majority of them are not British owned. They are not American owned either. They are international organisations. They have shareholders all over the world. We are tremendously successful in the City but nobody starts painting flags on the buildings, as you were talking about with the flag carriers. We are a long way from an ideal world. I remember speaking on the subject on many occasions, probably 10 or 12 years ago, saying, "What we need are transnational players." You would have an American company teamed with a British company, an American company teamed with a German company, a French company teamed with a British company and an American company. If you could do that, you could have sufficient market, if you look through the western alliance, with sufficient players in order to do that. The trouble is that everybody cheats. We tried to do this. I remember with one missile programme I said to my European colleagues—it was a NATO programme—"We too often set up these paper companies, the ABCDE Consortia and what happens then? The cost tends to go up. There is internal tension between the various partners in that business because they are all trying to pull in one direction. Why do we not have competition between major companies in each country? Whichever one wins we would task with subcontracting whatever proportion needed to go out to those countries." They talked about it and said, "Yes, that is a very good idea." We decided to do it and we succeeded on one programme which I thought was brilliant. We got the whole thing set up and one company, which was a British company, won the competition. What happened? One of the partners pulled out and the whole thing fell to pieces. It is not easy. If I were asked to do the same job now that I did in 1985, it is much more difficult. This is a pretty fair attempt to get there but without anything like the latitude we had at that time.

  Q99  Chairman: May I suggest that the transnational companies that you were hoping could be set up were, at least from the point of view of this country's perspective, made impossible by the merger of British Aerospace and GEC?

  Lord Levene of Portsoken: I would prefer not to comment on that.

  Q100  Robert Key: Do you think that this Defence Industry Strategy says enough about research and technology?

  Lord Levene of Portsoken: It has made a good effort towards it. Some of the best new technology we have today outside of the defence industry is created by British companies. They put their own money at risk and do very well. We were looking at this very issue. As an aside, nobody has talked today about cost plus. When I arrived it was an obsession. We got rid of it and fortunately it has gone away but at that time it was a huge chunk of our business. The Ministry of Defence and the DPA have done very well to keep that horrible concept away from us. We used to examine companies' profits and what they were doing. I remember very shortly after I had arrived I was told that one of our regular suppliers would not give us any information on their profits. I said that was outrageous and hauled them in. I hauled them in and I said, "Everybody else has given this information. We are going to insist on it. Why do you not provide it?" He said, "Ask the people sitting round your table. Every product that you buy from us has been developed by us at our cost and our risk and we tell you the price that we will sell it at. You either buy it or you do not buy it. You have made no contribution whatsoever towards the cost and if it goes wrong it is our fault. You then buy things effectively off the shelf." I looked round and said, "Is that true?" and they said, "Yes." I said, "We have nothing to argue about." One has to ask the question whether the industry should rely on the government to fund this development or should do it itself. The problem as between the defence industry and other industries is that there are not loads of customers out there. If you say you are going to purchase a missile system because it seems like a good idea, unless you have a customer you cannot pay for it. The Ministry of Defence has to say, "Our defence equipment budget is limited. How much of this are we going to contribute to research into new products or new technologies as opposed to buying hardware to keep the armed forces equipped with the best possible equipment that they need?" If you can buy that from something that has already been funded in the past, do you want to spend your money on that, which is sorely needed, at the expense of not funding the new equipment? That is a constant pressure. I do not think there is a right or wrong answer to that. The degree to which it is funded can and should vary over the period according to what the demands are.

  Chairman: Unless there are any other questions, we should draw this to a close. The invitation to come to talk to this Committee for the first time for many years must have come as a surprise to you, but we are extremely grateful to you for giving us a fascinating and hugely well informed historical perspective and also an industrial perspective on some very difficult questions. Thank you very much.

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