Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 300-316)


28 FEBRUARY 2006

  Q300 Chairman: Research and technology. The Defence Industrial Strategy accepts that more work needs to be done on this. What more work will be done and when will it be done by?

  Lord Drayson: It will be done by the end of this year. The specific work which we are doing is to recognise that already the UK spends a lot of money (£2.3 billion a year) on defence research—we are the second biggest spender on defence research—but we recognise that we can improve the performance of the value which we get from the defence research which we undertake and we will be publishing this year our Technology Strategy, which, as set out in the DIS, builds upon the work which we have already done. That is being led by Roy Anderson, the CSA within the MoD, and I think the important thing with research is for us to recognise the real linkage between delivery of defence capability and the research. We need to improve the performance in bringing through the outputs of research to making a difference to defence capability. In terms of my experience in managing research within industry, the key thing is that you are really intelligent about the investments that you make and you make sure that the innovation process is sufficiently fast moving and entrepreneurial such that it does get through to make a real difference to the front-line, to the defence capability, and we think there are some improvements which we can make on that. We are going to be publishing our Technology Strategy this year to address these issues and to look at the balance of where we are making our research spending. We are also opening up more research spending to competition as a way of encouraging that process.

  Q301 Chairman: All the witnesses we have had this morning and earlier have talked about a decline in defence research and technology. John Chisholm this morning talked about a 50% reduction and on page 39 of your Defence Industrial Strategy you talk about the highly significant correlation between equipment capability and R&T investment. What should the Government be spending in research and technology?

  Lord Drayson: I like us to make decisions based upon data, and this study which you allude to on page 39 was funded by the Ministry of Defence, carried out for us, to really get a handle on how does research spend have an impact on defence capability, and it is now clear for us. What we have said in the DIS is that what we are going to be prioritising this year is more emphasis on excellence. What I learnt in terms of managing research is being very clear where you do research which is really world-class.

  Q302 Chairman: Can I bring you back to the decline that we have had. Do you think we should have a higher level of spending on defence and research?

  Lord Drayson: That is one of the things which we are going to be addressing this year, and so I think we need to see the result of the Technology Strategy that come out of it. What we see is that there is a real correlation between how much we spend and the defence capability which we get. I think there is an important correlation also in terms of the effectiveness of what it is we spend. My belief is, first, you fix your effectiveness. Before you start thinking about whether you are going to spend more money, you make sure that the money you are spending you are spending wisely, and that is something we are focused on as our number one priority. Secondly, we need to look at the balance of the defence budget in terms of investment on research and investment on equipment acquisition, and we need to ask ourselves the question of whether we have got that right. Our current policy is that we will be increasing our defence research spending in line with inflation. Up to now it has broadly been kept at the same level. We have increased that by saying that we are going to increase it in line with inflation. We need to look at whether we have got that balance right. This year the emphasis is on making sure that the way in which we spend the current research pounds is as effective as we can make it, and that is the priority that the CSA has.

  Q303 Mr Hancock: You talked about effectiveness. It was suggested earlier that maybe one way of making the R&T spend perhaps go further or be more effective is to integrate it into some form of reinvention of demonstrator projects as part of the derisking activity of overall projects. Is that part of the thinking?

  Lord Drayson: Yes, that is part of it, making sure that we use opportunities to build prototypes and we learn from doing that. In certain areas the pace of change of technology and research is very directly correlated to the military capability which we need right now. There is in some areas a real urgency. We are looking at areas to speed up this process. Some really innovative things have happened in the way in which we have restructured the defence research. The split of the Defence science and technology laboratories with QinetiQ was a response to the increasing importance of civilian research technologies into Defence. That has really worked well. We have now got a world-class business in QinetiQ. We have still got the DST labs doing the work which we need to do on the most secret projects, but we are focused within the MoD on making sure that there are not areas for us to go further in getting more bang out of the money we spend on research today.

  Mr Gould: I wanted to say that the correlation as shown in the diagram is quite interesting because it flattens out quite dramatically at the top. It is not a problem for us at the moment but it does indicate that effectiveness really does matter in research, because you can spend a lot on research and actually not get very much benefit at a later stage. There are quite a few demonstrator programmes that do still go on in the research programme related to specific projects that are coming through in the future.

  Q304 John Smith: What about the development of centres of excellence in military research and technology. Is there any early thinking on that?

  Lord Drayson: They definitely work. That is a model which has been used very successfully in the pharmaceutical industry. Centres of excellence are definitely working for us. It is an example of a new approach to the management of R&D which is giving benefits, but we cannot stop there. There is more that we can do to improve the effectiveness of our research and the speed at which it is brought through to deliver military capability. That is the focus that we have got.

  Q305 Mr Hancock: I am interested in the concept, which you emphasised quite a lot when you were last giving evidence, of proper risk analysis going on and how that is going to be funded. I sense that we will be spending a lot more on that to get it right and not so much on the research and development, because we are not developing new technology so much because you are not going to be putting the money up front into it. We heard from John Chisholm today that he expects you to be the main funders of that research. I was hoping he would say that the commercial world would be inclined to invest more in the research side, but he declined that and felt it was still the role of the MoD. Does it not lead you then to look for off-the-shelf solutions from outside the UK rather than to spend a lot of money on the risk evaluation of a product and a lot of money on research and development; so you simply buy a tried and tested product that might not have the full capability but is as near as you can get to what you want?

  Lord Drayson: If the product which we want is available off the shelf, then we must use it. I think that is the lowest risk way of delivering the capability that we need. We need to recognise that increasingly there is much more interplay between defence research and civilian research than there ever was 10, 15 years ago, and we need to be more intelligent about exploiting that for our benefit. An example of us doing that in the DIS was our announcement about the UAV's project. There is an example, I think, where there is an absolute overlap. There are going to be real opportunities for unmanned vehicles in the civilian area and definitely for us in the military area. We have given clarity to industry of what our defence capabilities are, and we want to encourage people to come into that, see that as a commercial opportunity, so that young engineers, businessmen looking at start-ups say, "Right, there is a real potential market opportunity here meeting the defence needs." It is about us then encouraging the way in which that is done, and I have seen really good examples of entrepreneurial, smart thinking in terms of research, particularly in response to the UAVs, and so I think this is an area which we are building on quite effectively.

  Mr Gibson: We are actually increasing our funding of civil aerospace R&D. There was a report by the Aerospace Innovation Growth Team in June 2003 which asked us to increase the level of funding to £75 million a year[5], and we are largely achieving that and we are doing it in a lot of innovative ways. The Minister mentioned UAVs. We are funding a UAV project on a commercial side, the DTI is putting in about £5 million a year and the Regional Development Agencies are putting in about £11 million a year, matched in both cases by industry. We would be delighted if there were spillovers from that civil project into the defence side. To the extent that we are increasing our government funding on the civil side and that there are spillovers to defence, we see as entirely positive.

  Q306 Mr Hancock: I was just going to ask a question on the performance measures you were going to implement to judge how you were successful or otherwise on the DIS in both organisations?

  Lord Drayson: From the MoD's point of view.

  Q307 Mr Hancock: I know what you said you wanted to achieve, Minister, but I would be interested to see if the MoD had set themselves some targets for a change in their mentality?

  Mr Gould: Our ultimate measure will be our success in providing equipment capability into the Armed Forces. If we see improvement in the way in which projects are planned, conducted, executed and the speed with which the capability is introduced into the system and then put on to the battlefield and used, or hopefully not used, but used in a deterrent sense by the Armed Forces, then that is the ultimate measure of success and every single project that we undertake is measured in great detail in those terms.

  Chairman: Moving on to partnering arrangements.

  Q308 Mr Borrow: Fairly briefly, because we have touched on the issue about partnering arrangements earlier. One of the issues that has been raised with us, and we have had evidence in previous hearing about it, is a suggestion that because BAE Systems, in particular, have such a dominant role in the partnership arrangements under the DIS there is a risk that they could become a monopoly supplier. Would that be in the long-term interests of the MoD or are there are dangers in that in terms of getting value for money in view of the lack of competition in that area? I understand the dilemma, but can you explore that a little bit?

  Lord Drayson: I think, first of all, that it is excellent that we have in BAE a global player within the defence industry, one that really can go toe to toe against the best in the world and win. That is very importantly positive for the UK defence interest. Secondly, I think we need to look at the data. The reality is that 5% of the MoD's defence contracts per year go to BAE. That is the fact.

  Q309 John Smith: Is that by value?

  Lord Drayson: Yes, by value. Direct defence contracts to BAE from the MoD, if you look at the last two years, 5%. If you look at BAE's customers, the MoD represents 28% of their turnover. I recognise people's concern about this, but I would say the boot is on the other foot a bit. We are a very important customer to BAE, but we need to recognise that in a number of important areas for us BAE is the design authority—if you look at the number of our armoured vehicles, for example—and, therefore, what the DIS does is face up to the reality, which is that we are in a mutual dependence with BAE in some very important areas for us and we need to manage that with the appropriate management tools to get value for money for the British taxpayer. It is about tough partnership. It is about BAE delivering improved performance in return for longer term business with us. I think that the way in which we are moving with BAE is very positive for the British interest and the defence taxpayer value for money point of view.

  Q310 John Smith: But how, Minister, do you incentivise a sole monopoly supplier to maintain best practice and continue to be efficient if there is no alternative capability in the long-term? How do you do it?

  Lord Drayson: Firstly, you only enter into those types of arrangements if those are the realities of the market you are operating in. If you have got a market which allows you to have a competition, then competition is the right tool. In certain circumstances where you do have de facto a monopoly supplier, you need to manage it to respond to that. The way in which you do that is to enter into longer term contracts where the payments to the company are linked to improvements in performance. What you do is make a direct correlation between their profit and their improved performance over time through a sustained relationship and you make the metrics of the relationship really clear. You build the contract around that. What you have to have within the MoD are people with the skills to be able to write and manage those types of long-term relationships. I know from my own personal experience industry is used to these types of relationship. For example, many companies partner their IT systems because they recognise they are not the world's experts in IT, and they enter into a recognition of long-term relationships with companies to do that. For the MoD to make a success, we need to get really competent and professional, actually excellent, in the way in which we manage these types of long-term partnerships. An important pilot for us, if you like, the first one we are doing, is with Augusta Westland on certain types of helicopter. That is another example of where we have this de facto relationship on a whole fleet of helicopters which we are already using. It is very important for us to manage that long-term relationship with Augusta Westland on the maintenance and sustainment of that fleet.

  Q311 John Smith: A leading defence industrialist earlier today told us that he thought competition had been a disaster for the UK defence industry. Do you share that view?

  Lord Drayson: No, I do not think it has been a disaster. The way I look upon it is that the defence industry is not homogenous. The different sectors within the defence industry exhibit very different market characteristics. Therefore the MoD needs to be sophisticated. It needs to use competition, where competition is the right tool, to get the best value for money for the taxpayer and, where competition is not the right tool (and we have seen some instances where it has been used in a way which has not produced a good outcome), that we do not use it. For example, on Carrier, because we need a number of different companies coming together to build these enormous carriers we needed to form an alliance, and we need to make sure that the way in which that alliance is formed fits the realities of the market. I do not think it has been a disaster but I think we have got more intelligent at picking up the right tool for the job and using it in the particular circumstances of the particular project in the particular sector.

  Q312 Robert Key: How does the Government see the European Defence Agency developing?

  Lord Drayson: It should learn to walk before it runs. It needs to show that it can really add value. We think that there are some ways in which it is beginning to show that, but our view is that it should start small, have some successes and then grow.

  Q313 Robert Key: Are there other implications for the wider international defence industry here that you can have? We have been told by some of our witnesses, for example, that they feel not enough attention has been given to the international dimension of the Defence Industrial Strategy?

  Lord Drayson: The feedback that I have had from our international partners has been very positive about that. They have found it useful to have clarity, whether it is in the direction of the United States or the direction of Europe. One positive example of the EDA is the way in which the code of conduct has been established for other nations, which is aiming to encourage other nations to be as open as we are in some of their defence procurements. We have set out principles pretty clearly in the DIS as to the way in which we want to do business with our international partners—clarity and sovereignty, and so forth. We think that is a positive start.

  Q314 Mr Havard: We did have some questions, one of which is a bit mischievous, about how you might get more money from the Treasury, but if you can spend the money you have got more effectively that is a good start. I was interested in what you have said about how you are going to deal with these things. Quite clearly the Strategy as we have it is the overview. There are clearly a number of strategies within different working groups and different things that you have spoken about already. You have talked about the technology review coming towards the end of the year. I think you have talked about some work being done about process that might report in June. I cannot remember whether you have set a date for the Maritime Industrial Strategy, and so on. Can you give us an idea, because you have been described by some as having gone through the model like a whirlwind so far—that is what has been said about you. What is the pace at which we are going to see these sector analyses and programmes so that we can have an idea of what is coming when and how we can also judge what we need to do in terms of how we can continue to scrutinise the process?

  Lord Drayson: I have two sides of A4, Mr Havard, which is my check-list of the to-do list of things which we had promised within the DIS would be achieved, and I am very happy to be held accountable for us achieving those. We have identified within the Ministry of Defence specific people with accountability for delivering them to me. I have set out a ministerial direction to the MoD that decisions must be taken consistent with the DIS, and if we are looking at taking a decision which is not consistent with the DIS, I want to know about it. I think that we have set out our target dates—we mention May—for having clarity about the changes that we need to make in terms of our acquisition processes, we have set about a technology strategy which we are doing this year, I want to see the maritime industrial strategies implemented in 2006. It is very important for some of the big projects which we have got. We have got a clear to-do list which I am monitoring very closely indeed.

  Chairman: Two sides of A4. We like that.

  Q315 Mr Havard: Is it possible we could have visibility of this? [6]

  Lord Drayson: You are very welcome to have both sides.

  Q316 Mr Havard: It is quite clear you have got a momentum, and the tempo is important in terms of war fighting and in terms of rugby and so I am looking to learn lessons for other purposes!

  Lord Drayson: I would be happy, Chairman, to share the list.

  Chairman: Thank you very much. That would be extremely helpful. You have come in before one o'clock, which is another significant achievement. Thank you very much indeed, to all three of you, for your evidence and to the Committee for your questions.

5   Note by Witness: The figure is, in fact, £70 million, not £75 million. Back

6   Note: See Ev 118-120


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