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 thenwhich 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 withsaid 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 postsome
of you may remember there was a lot of controversy about that
at the timeI 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
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
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
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 consolidatesand
it still continues to do soand as the power of the US industry
gets largerI 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 situationif
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
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 canand I think it has been
very carefully put togetherto 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
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 colleaguesit
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
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.