Examination of Witnesses (Questions 159-179)
PROFESSOR KEITH
HARTLEY, PROFESSOR
KEITH HAYWARD
AND PROFESSOR
RON MATTHEWS
7 FEBRUARY 2006
Q159 Mr Crausby: Good morning and welcome
to this second session this morning of the Defence Select Committee.
Could I firstly ask you to briefly introduce yourselves?
Professor Hartley: Age before
beauty, I think, in this case. Keith Hartley, I am a defence economist,
I am Director of the Centre for Defence Economics at the University
of York.
Professor Hayward: I am Keith
Hayward, defence and aerospace analyst, currently Head of Research
at the Royal Aeronautical Society, but I should say for the record
that today I am commenting of my own volition.
Professor Matthews: Ron Matthews,
I am at the UK Defence Academy with Cranfield University. I am
the academic leader of the Masters in Defence Administration programme.
Q160 Mr Crausby: Thanks for that.
Could I begin the questioning by asking each of you to tell us
briefly your overall views on the Defence Industrial Strategy,
in particular whether it delivers what you expected it to and,
if not, in what areas it falls short of your expectations?
Professor Hartley: Briefly, Chairman,
I have got three concerns about the policy. I am concerned about
the shift from competition towards partnering, which effectively
starts to create domestic monopolies which have protected and
guaranteed markets. My worry about monopoly traditionally is that
it is associated with higher prices, it is associated with inefficiencies,
monopoly profits and a poor record in innovation. That is one
worry I have got. My second worry is about the reference in the
White Paper to wider factors which will be considered "where
relevant", according to the White Paper. We do need from
the MoD much greater clarity about these wider factors: what are
they? How important are they? When will they be considered? What
is the economic logic of including some of these? If we are concerned
with employment, defence exports and so on, are they the proper
concern of the defence ministries or, more properly, the concern
of the DTI? I am also worried that these wider factors might well
give ministers opportunities for intervening to distort procurement
decisions and choices on a case by case basis. I would much prefer—and
I think this is what the Strategy is trying to do—outlining
some very general principles rather than distorting resource allocation
by ad hoc interventions. My third and final point is about the
cost of the policy. Being an economist, policies are not cheap,
they are not free; this policy will involve some costs and it
does raise questions about MoD's willing to pay. How much extra
is it willing to pay to keep these capabilities in being, an extra
five, 10, 20% or what, bearing in mind that the willingness to
pay comes from a limited defence budget. That is all I can say
at this moment, thanks.
Professor Hayward: Thank you,
Chairman. In general I thought the Defence Industrial Strategy
was certainly better than I had expected and certainly better
than I had feared in terms of the quality of its analysis; it
certainly painted a reasonably accurate description of the predicament
and problems faced by a medium range state and a medium range
defence industrial base facing a very dynamic and uncertain environment.
On the other hand I share some of the concerns that Professor
Hartley has, particularly about the problems of maintaining these
capabilities in the absence of specific programmes and projects.
There is a lot of reference throughout the Defence Industrial
Strategy to the creation of what I would describe as virtual
design teams or virtual project teams that would in some sense
create a hinge or a bridge between one generation of programmes
and another set of requirements. These are not going to be cheap;
clearly, they are cheaper than building a specific programme and
certainly if you do not go down the route of building a physical
demonstrator for some of these technologies—and in many
cases you do not have to go down that very expensive route—nevertheless
to do this across a range of technological capabilities will require
a commitment of resources extending over a fairly long period
of time. I certainly share Professor Hartley's concern where will
the money be available, particularly if at some future date, as
we generally expect, there will be a very severe challenge to
public expenditure. There are also, in a sense, some open-ended
issues that are still to be resolved. There is talk about retaining
these capabilities, but exactly how it is going to be done is
going to be left for future analysis. There are certainly clear
problems faced in precision weapons systems for example; the document
refers to how important they are but there seems to be a very
vague, "we are not quite sure what we are going to do over
the next two or three years to keep a UK-located capability in
being". Certainly, the strong inference is that we might
have to rely upon external sources which, almost inevitably, will
be the United States. That is my third and final issue here: the
reliance on external sources without adequate changes in the nature
of that technology transfer that we have tried to obtain with
the Americans continuously for six or seven years. We have found
already that working with the United States, though in some respects
less troublesome than working with our European allies, has difficulties
at the core end of technology issues. One of the great benefits
of working with the Europeans has always been that we have had
an egalitarian approach to technology transfer but, clearly, working
with the Europeans brings its own difficulties in getting programmes
started and keeping them under control to cost and time. Working
with the Americans, without guarantees of technology transfer,
will lead us increasingly into dependence on that technology,
and given the fact that much of the UK defence industrial base
is now embedded in the US defence market, affords temptations
for those companies to export our technology and keep it in the
United States, maximising benefit to shareholders and, certainly
in terms of repatriating profits, very, very convenient but not
necessarily guaranteeing UK onshore technology or technological
autonomy.
Professor Matthews: Chairman,
I find this an impressive document. Whilst there are some weaknesses
associated with the Strategy, I think it is an important step
forward from the former 2002 Defence Industrial Policy.
Firstly, it recognises that there are revealed costs of competition,
and I do not mean that just in terms of the acquisition, the competitive
costs of working up bids from the standpoint of the defence contractors,
and also the scrutiny costs in terms of Ministry of Defence time
and effort, I mean it in terms of the inverse relationship between
the objective of value for money and within that cost reduction,
and the progressive erosion of the sovereign UK defence industrial
base. There are some serious policy issues with that and I think
the strategy is important for providing greater direction and
also a framework in which to identify and perhaps protect the
critical technologies and strategic industries of the United Kingdom;
it is also a recognition of the broader economy. At the UK Defence
Academy Joint Doctrine and Concept Centre we are currently working
on a revision of the British defence doctrine, and there the concept
of comprehensive frameworks is being examined. Defence is one
element of the comprehensive framework, but there is a recognition
also of the importance of the defence industry and the broader
economy. I think the acknowledgement of the DIS in terms of IPR
and the importance of sustainability of the UK defence industrial
base are well put. I have perhaps two or three concerns which
may be identified as weaknesses. First of all, there is only a
cursory examination of the importance of the UK industrial participation
policy, but that policy has an important role to play in providing
skilled jobs capacity in the UK industrial base which has not
been highlighted sufficiently, nor have the weaknesses or the
potential weaknesses of that particular policy. I am very happy
to come back on that one if required. There is also an important
area that needs to be explored which is the dual use technology
area; whilst it has been highlighted in the DIS I do not think
enough has been emphasised in terms of the important joined-up
Government policy approaches between the key stakeholders and,
principally, the Department of Trade and Industry and the Ministry
of Defence in establishing an integrated technology and industrial
policy across the UK. Thirdly, I have concerns over R&D, defence
R&D. Whilst the report talks about the 2014 aim of raising
civil R&D to 2.5% as a percentage of national income, it says
really nothing about defence R&D. Without, it seems to me,
a recognition of the importance of perhaps raising defence R&D
I cannot see easily how we are going to increase our IPR and establish
a more intellectual property basis in the UK defence sector.
Mr Crausby: Thank you for that. Brian
Jenkins.
Q161 Mr Jenkins: The thing that worries
me is that the document states that industry will need to reshape
itself, and it is like asking individual companies to throw themselves
on their swords and go out of business. If we take exports as
a given set amount and the industrial base going up and down with
British procurement, there are difficulties—we know that—and
this is what we are trying to overcome, but do we have enough
information within this Strategy to allow industry out there to
reshape itself in the next decade?
Professor Hayward: If I can come
on to that, there is a fortunate window of opportunity here in
the sense that the past commitments and past procurements are
now, in a sense, bearing fruit and given a fair wind, particularly
with a programme like the JSF, UK defence industrial "manufacturing"
is going to have pretty well full order books for at least a generation.
While in a sense a relatively small share of a programme like
the JSF on the face of it does not look as good as a third share
of the Tornado, the units that are going to be produced will fill
factories in the North West and elsewhere in this country for
several years, and the same should be said about the naval shipbuilding
programme and other elements, so in that sense we have a breathing
space here to effect the kind of changes in structure and indeed
in industrial culture that the DIS is actually quite articulate
over. That being said, there are always uncertainties and always
the possibility of things coming with what the Americans call
left field to create industrial crises in individual sectors.
Undoubtedly, more work will have to be done on trying to picture
or at least give an indication of the kind of future shape for
UK defence industrial activities.
Q162 Mr Jenkins: Looking at one sector,
say the shipbuilding sector, where we have the carriers in the
programme, where we have got the destroyers in the programme,
but we have got a definite cut-off date when they are both completed,
we see nothing in front of that. Apart from that area, which part
of the industry do you think is going to face the major restructuring?
Professor Hayward: It is going
to be quite comprehensive. Again, the DIS argues to refocus a
business approach to support and lifecycle, and in that sense
you are dealing here with some very different kinds of commercial
opportunity and probably very different kinds of defence industrial
players. In a sense, once you get into maintenance there will
clearly be bits and pieces that will have to be produced to keep
an aircraft or other piece of kit operational but, broadly speaking,
you are into service delivery, and it is turning the UK defence
industrial base from primarily a manufacturing activity to service
delivery that is going to be one of the biggest challenges that
the industry will face.
Q163 Mr Jenkins: I understand that
one of the things which we are now looking at is that although
we have platforms that will last a long time, it is not the platforms
that are important, it is what is carried on the platform—it
is the software, the new equipment—and these are not going
to be maintained for 20 years, they are going to be replaced within
the 20 years as the platform moves on, and so we have a new developing
industry. My concern is that innovative and very small and medium
size companies which now may be at the cutting edge of that type
of technology are not going to be allowed to compete and get their
nose in the frame because the prime contractor will look at making
sure they are in a firm base, set in soil, and they will continue
to use their providers of these services rather than go out into
the wider world. The danger, therefore, of losing small and medium
enterprises in the defence family will be greater unless we take
some positive action to stop it happening.
Professor Hartley: You have raised
a lot of questions, let me try to answer some of them. Certainly,
your worry about losing small to medium sized firms is important,
and the Strategy does recognise the role of supply chains but
I think both MoD and DGI would be the first to admit they know
very, very little about the sheer complexity and extent of supply
chains. They are probably reasonably good at the first tier level;
they can make a stab at that and a guess at it—but not as
good as perhaps they should be—but they know very little
about the range of suppliers at the second and third level and
how important some of these suppliers might be towards providing
so-called key defence industrial capabilities. If I could quickly
answer some of your earlier questions: reshaping—all sectors
are going to have to reshape and all are at risk, air, land and
sea systems, the Strategy makes that very clear, and in some cases
quite drastic cuts in business—fixed wing aircraft, possibly
helicopters in the medium term. In the case of maritime, for the
first time ever there is a commitment to buy some of our warships
from overseas—that is the only sector which traditionally
has been protected, air systems and land systems we have always
been willing to buy from abroad. That is quite a radical change.
We have two problems in terms of reshaping. The Strategy says
we are not going to micro-manage industry and reshaping and then,
almost in the next breath, it has views about reorganising into
a single entity the submarine industry, some take as a model perhaps
the KIA (?) alliance as a way in which industry might go forward,
and expressing a view as a major customer it will really have
views about what is going to emerge in terms of industrial restructuring.
I tend to think that there are things that Governments are good
at doing, and the MoD is good in this document at laying out its
future demand requirements, but I do not think they are very good
at judging what might be the appropriate industrial structure.
I recollect almost 20 years ago a whole Cabinet falling into disarray
about the future of a helicopter company; we are talking here
about really big issues, not just one company, so I do actually
have concerns where Governments actively intervene in determining
what they regard as the ideal industrial structure. If they have
such views I would like to see them specified with far more detail
than here.
Q164 Linda Gilroy: On the supply
chain, are you are aware of any good practice or even best practice
of identifying and managing the complexity that you describe?
That is a question to anybody.
Professor Hayward: You just reminded
me of an old persona. It is difficult because there is a huge
hinterland of defence industrial activity. The United States,
in its much more extensive and much more elaborate analysis of
defence industrial requirements, looking out to 2020, has had
a crack at identifying companies—relatively low down in
the supply chain—that possess specific technologies, but
even that has not really identified the complexity of the food
chain that actually builds the large, complex systems that inhabit
today's defence world. It is proving extremely difficult, I remember
doing this exercise for my old employer, the SBAC, trying to trace
supply chains in companies, and it was extremely difficult because
even some of the companies did not know in detail who supplied
them in any systematic or comprehensive manner.
Professor Hartley: Some companies
do not even know that they are a key part of the UK defence industrial
capability. Ball bearing manufacturers might not know whether
their ball bearings are going into main battle tanks, earth-moving
equipment or heavy lorries.
Professor Matthews: Could I just
pick up on some of the comments that Keith was making earlier
in regard to the supply chain? I had the pleasure of working with
Keith seven or eight years ago on a DTI-funded project, looking
at the contribution of the armoured personnel carrier Warrior
supply chain to the broader economy. It was great fun and very
illuminating, because what we discovered was that very quickly
as you moved from the prime down into the supply chain, maybe
sometimes at the third tier level, you are into entirely civil
producers. If you move into the fourth or fifth level you have
manufacturers of what will ultimately be defence systems who do
not even know that ultimately their output will become a defence
product. What we found really of some concern was that the MoD
at that time—I am not sure whether it has improved—had
completely no visibility much below the second sub-prime, and
it meant that in terms of encouraging competition, for instance,
you had the opposite impact where the cost pressures and the risk
were being pushed down from the prime to the suppliers in the
supply chain; they were having to engage in R&D which they
feared would be nugatory if they did not win the contract, and
if they did not win the contract, which would be important for
them but costly, what we were finding was they were prepared to
exit the supply chain and move almost entirely into the civil
sector where they also had a customer base. The other point that
we found was that these suppliers are highly skilled and innovative,
much more innovative in many respects than the primes that simply
integrate the systems together, but they were in a precarious
position because they were facing severe competitive pressure
for supply to contracts like the Challenger 2 main battle tank—and
indeed the Warrior—from American sub-contractors that had
the scale to beat them on price, and their problem was they had
no exposure to MoD support or policy.
Professor Hayward: If I may make
one final point on this, it will get worse in the sense that the
kind of new technologies required for network-centric warfare,
all the autonomous systems that both air, land and sea may be
developing, and indeed promised in the Defence Industrial
Strategy, will require a technology base and a supplier base
which actually is even more extended and perhaps attenuated than
it currently is. Indeed, one of the great challenges—and
the DIS states it but does not give us a clue as to how they are
going to achieve it—is actually to try and capture this
new supply base, this new technology base, to integrate them more
clearly into the weapons and the systems of the future. If you
do not really know where you are now, trying to do it for the
future with novel technology is really compounding the felony.
Q165 Linda Gilroy: just to return
to my question, can you identify any practice—never mind
good practice or best practice—where either prime contractors
or main contractors, main suppliers, have got good quality links
with their supply chain?
Professor Hayward: That is a slightly
different question, if I might say so. When it comes to doing
the business there has been sufficient development in what we
collectively know as lean manufacturing and supply chain management
for companies like BAE Systems—Rolls Royce particularly,
driven by their commercial experience—to actually generate
and deliver very efficiently a team of suppliers. If that answers
the question, there is plenty of good practice at industrial level.
Q166 Linda Gilroy: Does that not
help us to understand what needs to be done in the more strategic
context?
Professor Hayward: It helps you
to manage existing programmes, it does not necessarily give you
a guide to what you need for the future.
Mr Crausby: We need to make some progress;
Dai Havard on defence acquisition.
Q167 Mr Havard: It is about acquisition
but it is really in a sense about organisation. I notice from
your CVs that you have previously advised both this Committee,
some of you, and also the DTI about various things in the future,
so I really just want to raise the questions that I raised a little
earlier on about organisational capacity, within the MoD first
of all, in order to do the job that is set out in here. Given
that the MoD has traditionally not been well-known for its agility,
transparency and visibility, all these things, what do they need
to do to change to help make this work?
Professor Hartley: I am not an
expert on organisation, but what I would do is go back to basic
principles. As I mentioned in the introductions, I do have concerns
about how far the MoD ought to get involved in these wider economic
industrial factors—concern with jobs, technology, exports
and so on. It seems to me that some of these are more properly
the concern of other Government departments like the DTI and the
DTI does have a defence and aerospace division which is suppose
to be concerned with these sorts of links between defence decisions
and the wider impact on the UK economy.
Professor Hayward: I am not so
sanguine about the DTI's competence to be able to pursue these
issues and to understand particularly what is going on in the
defence industrial base because it has lost an awful lot of capability
over the years to do this kind of analytical work. The Americans
of course have a whole department in the Pentagon addressing industrial
policy questions, and it too requires the industrial policy group—it
is usually about a dozen or so officials, with funding to bring
in consultants where necessary—to present an annual report
to Congress on the state and status of the US defence industrial
base, and they have also put a lot of money into doing a five-part
study of the future requirements for the US defence industrial
base into 2020. If the MoD is going to be serious, therefore,
about long term management and delivering a Defence Industrial
Strategy, it will require a significant commitment of official
resources to the monitoring and continual production of studies
like this. To treat this as a one-off—we have done this
and we can go home now—I think would be a totally reprehensible
and sad affair.
Q168 Mr Havard: Do you have any observations,
Professor Matthews?
Professor Matthews: That is a
difficult question for a defence economist, but organisational
structures, in my experience, have improved dramatically over
the last decade. At the Defence Academy there is substantial investment
taking place into leadership programmes, there is an emphasis
on change programmes, proliferation of change programmes, and
also a recognition of the importance of cultural change as well.
My understanding is that these investments are beginning to work
through, to some extent improving the efficiency of the acquisition
process.
Q169 Mr Havard: One of the things
that is interesting to us is that some of our Committee went to
visit the DPA the other day, because of course they are central
to this as well. There is always the suggestion that one of the
things it has never been good at, perhaps never been allowed to
be good at, is project management, and things like the de-risking
of the contracts means that they do not necessarily have, for
example, contractual language when you are trying to set up these
different relationships. So there are skills in how you do acquisition
that maybe are not embedded in the processes of either the Ministry
of Defence, the DPA its agency or, indeed, within the DTI, and
your comment that they cannot even give visibility to the supply
chain. I am interested in how those things are joined up and you
talk about the USDA, but as I understand it the French take a
particularly US sort of approach in the sense that they have something
that looks at where the French are in relation to the world as
opposed to a broader base. Have you got any observations about
the way in which the stovepipe problem that was talked about can
be dissipated?
Professor Hayward: It is a whole
area in and of itself, the problems of what you might call procurement
and project management, and I think again the United States for
all its other faults—and it can be said that some of their
procurement programmes have gone horribly wrong over the years—has
certainly a greater commitment to training and professionalisation
of their project managers. Indeed, there is an acquisitions university
that the Defence Department runs to train both its civilian and
its military procurement officers. I have heard hints that this
is indeed where the DPA is going next, to try to improve the professional
ability of its staff and its IPTs to run programmes, but there
is clearly something more fundamental here about the nature of
procurement. Whilst you still have programmes that stretch out
10 years or even longer, it is very difficult to actually instil
the kind of commercial disciplines that large manufacturing companies
have in managing their projects.
Professor Hartley: You talked
about the relationship between MoD and DTI, I would actually like
to focus on the need for a change of culture within MoD and the
Defence Procurement Agency. Look at what they are now committed
to doing—historically, for the past 25 years they have been
committed to competition policy; they are good at it and they
actually appraise competition policy, they are now identifying
some of its problems. What I find disappointing in the Strategy
document is that there is no similar critical analysis of partnering,
because suddenly the DPA are now going to have to move from a
culture of competition to one of partnering, to an increased use
of non-competitive contracting, to an increased use of the profit
formula for non-competitive contracts, and to a greater use of
target cost incentive fee contracts which, at the moment, are
only a small part of the total value of procurement. That is going
to in fact be quite a major change in DPA culture; it is going
to have to be negotiated with specialist firms who, quite frankly,
know their production possibilities far better, with all due respect,
than MoD. BAe will be good at safeguarding their own interest,
they will know how they can perform and MoD are going to have
to cope with that sort of very powerful, very influential, highly
informed producer firm.
Mr Crausby: I am going to bring Colin
Breed in, probably appropriately at this time, on planning arrangements.
Q170 Mr Breed: That goes to the heart
of what many of your concerns and our concerns are on the basis
of the distinct possibility of a monopoly supplier. If that was
to happen in any way, or even a partial monopoly, how is the Government
going to ensure that it does get value for money? You could say
it is through some sort of contractual, legalistic arrangement,
but you and I know that you can always get round those. How do
you actually get value for money when you have only got really
one supplier?
Professor Hartley: There are two
or three possibilities, but whether they will be used or not is
dubious in relation to what the Strategy is all about. One possibility,
the ultimate sanction, is that you threaten to buy from abroad,
but that of course will then destroy the very trust which is essential
to the partnering arrangement. Another possibility—and I
am not saying it is a perfect one, there are no perfect solutions
given the way we are setting up the problem—might be to
treat some of your large, specialist defence contractors the way
we treat the privatised utilities and regard them as regulated
firms, and see whether there might be lessons from regulating
the BTs of this world that could be applied to the large firms
in the defence industry.
Q171 Mr Breed: We have been trying
to get a regulator of supermarkets for a long time so I do not
think that is very likely.
Professor Hartley: We do not need
one, you have got competition there. That is interesting—the
role of the regulatory agents in this country has always been
eventually to move towards competition and to put themselves out
of business.
Q172 Mr Breed: It is more to do with
complex monopolies and the strange thing is that that actual phrase
could well be part of what the defence industry is moving into.
They are complex monopolies where they are inter-dependent upon
each other and they have become, collectively, a monopoly arrangement,
which means that some people of course are not going to be in
the party, are they? What about those particular companies which,
quite frankly, are not going to be getting the bulk of this work?
How is the Defence Industrial Strategy going to treat them?
Hard luck, is it?
Professor Matthews: That is part
of the rationalisation process talked about in the DIS, but if
I might just comment again on Keith's condemnation of the manner
in which the MoD is inexperienced at dealing with monopolies,
I think it is fair to say that in the ordinance sector there has
been a framework partnering agreement in place for about seven
years now. My understanding is that it has worked reasonably well,
save for the fact that the ordinance company was worried four
or five years in about the longevity of the arrangement—it
was finding it difficult to continue with investment because of
the uncertainty that the contract would continue into the future.
There is a basis, therefore, for thinking that the MoD knows something
about managing monopoly situations, and in the final analysis
if we buy into the DIS and we recognise it is important to have
indigenous defence industrial capability, I think that there will
be a cost and the cost will be a loss of competitiveness in the
marketplace.
Professor Hartley: Could I just
follow that with a comment? It is interesting, because in the
Defence Industrial Strategy at page 99, paragraph B6.34,
Ron referred correctly to the framework partnering agreement and
yet this is the one point where the Strategy says "The Framework
Partnering Agreement does not adequately incentivise BAE Systems
to reduce its cost base . . .", so there is a long-standing
agreement where it has already admitted publicly here, so what
price the other ones, that there are problems in incentivising
BAE.
Q173 John Smith: I wonder if Professor
Hartley could just expand a little bit on the notion of treating
BAE Systems like a privatised utility. Clearly, they are going
to absolutely dominate the future market, and it is not a question,
I believe, of being able to go overseas in some instances because
the capability simply will not exist for supporting certainly
some of the air systems. I just wonder if you could expand on
how this would work, and give an opinion on the suggestion that
has been put forward that there may be a role for the National
Audit Office to oversee on a more day to day basis some of these
long term partnering arrangements. Do you think that is a good
idea or just another tier of bureaucracy?
Professor Hartley: It sounds a
useful idea. The obvious body to take a role in this affair of
course is the Competition Commission which is specifically concerned
with monopolies, mergers and competition, so it might well be
that the proper route might be not so much the National Audit
Office but, as I say, the Competition Commission. In terms of
what you might do by looking at the experience from privatised
utilities and regulating those, what I have not done is converted
the RPI minus X rule into an equivalent one for the defence sector,
but we do know in the regulated utilities sector that they do
actually try to base profit rewards and try to regulate profits
in relation to calculating the costs of capital. That is an area
that I do not think the Review Board for Government Contracts
has gone much into; it has looked at it and then moved sharply
away to what is the current arrangement of rewarding profits on
the basis of cost of production and capital employed. There is
an area there that I think both the Competition Commission and
the Audit Office ought to have a look at, which is the extent
to which the profit formula on non-competitive contracts first
of all provides efficiency incentives and whether or not the rewards
are too generous, given that these are rewards for firms that
are domestic monopolies in highly protected markets with guaranteed
work.
Mr Crausby: I am going to move on now
to appropriate sovereignty. Mark Lancaster.
Q174 Mr Lancaster: Thank you, Chairman.
Professors, all three of you indirectly in your opening remarks
referred to this, but only Professor Hartley and Professor Taylor—who
cannot be with us—referred to it directly in their submissions.
Professor Hartley, could I just start, please, by getting you
to define what you think is meant by the term? It is not meant
to be a test, but it is a very woolly expression, is it not?
Professor Hartley: It is, and
it always will be, but what I do actually have to acknowledge
is that in the Strategy they do try to define it a bit more clearly.
They talk about independence, security of supply and re-supply,
but what of course they do not say and the point I would make
is how much are we willing to pay for this? What is our willingness
to pay, does it involve an extra five or 10% or what? Throughout
most of the document they very nicely try to focus on defence
criteria, and then suddenly they move into these wider factors
and you are not quite certain what the relative balance will be
between the wider factors and these defence criteria, and the
weight to be attached to these wider factors is not really specified.
They do attempt to assess, as far as you can see in any published
document, what are called key industrial capabilities, however
vague that notion might still be, and why we need them.
Professor Matthews: I am very
comfortable with the concept of appropriate sovereignty. In an
ideal world, market forces would operate, I guess, and the notion
would not be relevant, but we operate in a world where second-best
approaches can sometimes be appropriate. It seems to me that the
competitive model that we have employed over the last two decades
has worked well for us, but at the margins what has now been perhaps
belatedly discovered is that we are the only player in the game,
and whilst we are opening up trade, increasing competition and
allowing foreign defence industrial players to access our market,
the worry is that other countries have not followed suit. The
code of competition procurement in Europe, pushed forward by the
EDA, is a voluntary code; France talks about the notion of economic
patriotism for the civil sector and competitive autonomy for defence,
and in France the Government has identified some 11 strategic
industries which will be protected. The same applies in Germany
where it is moving to protect its defence industrial base, so
I think it is almost inevitable that we will have to reconsider
our position and start to think in terms of sustainability by
what is, in effect, some degree of protection.
Professor Hayward: I have scratched
my head about appropriate sovereignty and I even asked a DTI minister
at a public function what was meant by it, and again there was
not exactly a crystal clear response. What we had clearly was
an unsatisfactory state of affairs prior to this concept, in the
sense that in the old days only six technologies were regarded
as essential for UK eyes only—three of those were nuclear
and the rest were crypto. Now at least we are trying to move into
a broader range of core capabilities and core technologies, but
of course everybody in the defence industry has a good idea which
technologies are clear, core and critical and it is usually the
ones that they are producing or ones that they will depend upon
for their future business. In that sense, the concept of appropriate
sovereignty, I suggest, may well be deliberately ambiguous in
order that the MoD retains a degree of manoeuvrability in defining
in the future what its core capabilities and its onshore capabilities
must be. To some extent it may be protecting itself against pressure
and respecting the loudest voice from the defence industrial sector.
Q175 Mr Lancaster: Picking up from
that then, if it is ambiguous, Professor Hartley, you said that
whilst the MoD has made some effort to define, it fell short of
actually giving a price for appropriate sovereignty.
Professor Hartley: Yes.
Q176 Mr Lancaster: Could I be quite
cheeky then and perhaps press you to think what the price should
be and give some examples?
Professor Hartley: In terms of
examples it might well be that you take as a benchmark, as a starting
point, the common external tariff used by the European Community
as an indicator of the degree of protection for industry in general.
Then, of course, Article 296 allows you to do whatever you want,
you can pay whatever price you like under that article, so I would
begin to question Article 296 at the European level—and
I think it is being questioned. Ultimately, the key test will
be how much the MoD is willing to sacrifice from elsewhere in
its defence budget, because it is a limited budget and if it pays
more for protecting its UK defence industrial base the cost of
that comes from the UK defence budget. My own view is that I would
start by taking the common external tariff as a rough indicator
of the degree of protection to offer to the UK defence industry.
Mr Lancaster: Thank you.
Q177 Linda Gilroy: On research and
technology QinetiQ's memorandum tells us that the DIS fails to
address the implications; the Royal Aeronautical Society's memorandum
says that "MoD has recently begun to address some years of
relative neglect", and you specifically mentioned, Professor
Matthews, in your opening remarks that this was an area that you
felt was unclear in DIS. Clearly your answer is there, does it
mean the coverage that DIS gives to research and technology issues
is inadequate; if so, what specific issues should we have expected
and is there a strong case for increasing Government money that
goes into research and development?
Professor Matthews: Yes. My background
at the Academy is not so much R&T but I do work with colleagues
at the research acquisition organisation who come and give lectures
to my students. Whereas in other countries—Japan for instance—there
is a targeted aim of raising defence-related research and development
as a percentage of the defence budget to 5%, we have no such policy
aims in this country as far as I am aware. If you look at the
trajectory of defence R&T it is flat, if not declining, over
the long term and this is compounded—and I am coming back
to another point I made initially—by the nature of our technology
transfer relationship with the United States in particular. It
seems to me of grave concern that whilst we are somewhat ambivalent
about the importance of defence R&T, we emphasise off-the-shelf
purchases through primarily acquisition of major weapons platforms
from the United States, and then through the industrial participation
policy we expect 100% work placement and technology transfer on
the back of those purchases to come into the UK's defence industrial
base to compensate the defence industrial base for those purchases.
Whilst that seems to be working and the targeted offsets or IP
are being achieved, my concern is that with the flatness of our
indigenous defence R&T which provides the basis for creating
national IPR, what we are doing is becoming a sub-contractor to
the United States where we have no evidence at this moment in
time that the nature of that technology transfer is sustaining
the high-tech areas of our defence industrial base.
Professor Hayward: I would fully
concur with that because we have to face a future where our defence
industrial commitment will be collaborative. In a sense, historically,
our turning point was in the 1960s when we began to get into these
European collaborative ventures and there is no going back, the
UK is now in an international, globalised defence industrial environment.
It is qualified by the existence of the barriers that both Professors
Matthews and Hartley referred to—in that sense we do not
see BAE Systems or any other company like that behaving like a
defence aerospace Ford in the sense of being able to move its
resources, both physical and conceptual, across frontiers, investing
wherever it sees fit on the basis of competitive and comparative
advantahge, I just do not think that world will ever emerge. However,
what we have had in the UK is a considerably advanced technology
base, as often as not born from a mix of some international technology
demonstration activity, some national commitments to basic R&T
but, more importantly, to play as an egalitarian partner and an
equal partner in the large raft of international collaborative
programmes that we have undertaken, usually with our European
neighbours. Now as we move into the next generation of weapons
technologies we are, in a sense, facing a difficulty. In the memorandum
from the Royal Aeronautical Society that you referred to we did
note that things had improved in co-ordinating some of the resources
that the UK was making available for R&T, but we are still
concerned, and most observers of the UK defence industrial base
would reflect the same concern, that we are not spending in absolute
terms enough on research and technology acquisition. If we are
going down the route of programmes where the technology transfer
barriers are particularly fierce, where we are not playing an
egalitarian, equal role in development with perhaps our American
partners, we will have the risk, in the absence of an effective
UK commitment to technology acquisition, of a tendency to atrophy
our onshore capabilities.
Professor Hartley: Chairman, my
apologies, I did not answer properly Mr Lancaster's question.
He asked me a direct question, how much extra would I be willing
to pay, and I think as a guideline an extra five or 10%; I would
be very critical above 10%.
Mr Crausby: Brian Jenkins, and then we
will come on to core skills.
Q178 Mr Jenkins: It is on core skills
actually, I am going to try and develop this argument because
I have been listening very carefully about research and design,
and I have similar concerns. The Royal Aeronautical Society memorandum
emphasises that "the DIS must deliver on its commitment to
maintain core skills and to protect the critical design and development
capabilities embodied in the individuals and teams . . ."
How is this achievable in this modern world? Are we going to ring-fence
them?
Professor Hayward: I must admit
it is inevitably easier to write or say than it is to do, but
I think there is a commitment in the DIS (so-called) to establish
these virtual design teams, that you will keep the capability
together. What is not clear, as you point out, is exactly how
it is going to be done. I seize upon those particular programmes
that the DIS seems to be promising, and I make no bones about
it, the primary focus that we have adopted of course is the Unmanned
Aerial Vehicle, the UAV technologies, which do represent not only
a key potential platform, not just for aerial systems but increasingly
also land and sea too, an area of core technology which will be
a major issue and a major requirement over the next 10 or 20 years.
The real issue will be keeping the capabilities to design and
develop a complete UAV system in the UK—not necessarily
to the point of deploying one, not necessarily to the point of
paying huge amounts of money to develop a deliverable, deployable
system, but we will have to invest in the concept technologies,
also bringing into this not just the prime contractor but the
suppliers for the systems, for the mission packages and all the
rest of it, which will be required to give us a leverage in future
collaborative programmes. That is the only way I suspect we can
in the end maintain these core skills and capabilities; the trouble
is that everybody in the defence sector is clamouring for that
kind of position, and I think there are choices to be made about
where we do in the end focus our resources.
Professor Hartley: Oh yes, they
are all going to be clamouring.
Mr Crausby: Thank you, Brian. On the
question of international co-operation, John Smith.
Q179 John Smith: Thank you, Mr Chairman.
Do you think the Defence Industrial Strategy is focused
enough on the international implications of this document?
Professor Matthews: It is anticipated
that around 40% of future defence procurement will be through
international arms collaboration, so it is an important area and
the DIS highlights the importance of, in particular, the European
procurement institutions in this regard. We have a good track
record in our collaborative programmes—I am sure that Keith
Hartley will talk about the cost premium involved in those—however,
if you look at the Eurofighter, that would not have been produced
without the collaborative effort. Maybe you can argue we should
not be purchasing it at the moment because this is an area that
has changed, but the important attribute of that particular European
collaborative venture is the fact that almost in its entirety
the systems are European, there is very, very little American
technology in that weapons system. My doubt about certain developments
and procurement agencies in Europe over recent times is that whilst
they are much lauded, there is very little research to establish
whether, for instance, OCCAR actually works; there are some serious
change initiatives that have been introduced there in terms of
work share where that will be shared out over several programmes'
lifetimes across different participating countries, but there
is very little evidence at this point to establish whether it
is working effectively.
Professor Hayward: I would reinforce
that point wholeheartedly. Like both Professor Hartley and Professor
Matthews I have been looking at the state of the European defence
marketplace for the best part of 20 or 30 years. Where we are
now is where we perhaps should have been at least 20 years ago;
the current developments are all very satisfying but they are
far too little and perhaps too late and, as a consequence, if
you look at what is emerging in Europe as a set of procurement
opportunities or even a set of technological opportunities, they
are relatively few and far between. A large part of the UK defence
industrial base has already made its judgment quite clear, by
acquiring US-based assets; virtually every one of the major players
in the UK-owned defence industrial base is now a significant actor
in the US defence market. They huff and puff about the technology
transfer problems, but that has not stopped them continuing to
invest in the US market, buying up subsidiaries, buying into core
technologies, getting themselves well-placed in what is still
the biggest single integrated defence market in the world. That,
to my mind, is where the money has gone. You could say it is the
old joke follow the money; in this case it is follow the investment
patterns, partly because of course the European structure is still
unable to accept free movement of capital in its defence marketplace.
I do not think British companies would necessarily have chosen
to put all of their eggs in the American basket, I think there
was plenty of interest in getting into the French or the German
industrial base, but they are simply prevented from doing so by
either implicit or explicit political barriers.
Professor Hartley: Two points,
Chairman. In relation to collaborative programmes, their efficiency
can be improved but the model in terms of a successful collaborative
programme has got to be Airbus—and there are probably very
good reasons as to why Airbus and perhaps MBDA might have been
successful. Secondly, in terms of Europe, what was lacking in
the Strategy, which we might then see in Strategy versions 2,
3 and 4—because I think this will be evolving, this will
not be the only document—is a vision of how the UK sees
itself in a future European single market for defence equipment.
It is hinted at, but we do not directly address it. The capacities
we are talking about and the need to retain them could be quite
radically different if we view this as a European single market
for defence equipment rather than taking a national perspective.
Professor Hayward: If I could
just add, UK defence industrial players could actually do very
well in that context—
Professor Hartley: I think they
could, yes.
Professor Hayward: Because over
the years they actually have sharpened their act.
|
