House of COMMONS









Tuesday 31 January 2006





Evidence heard in Public Questions 1 - 100





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Oral Evidence

Taken before the Defence Committee

on Tuesday 31 January 2006

Members present

Mr James Arbuthnot, in the Chair

Mr David Crausby

Linda Gilroy

Mr Mike Hancock

Mr Dai Havard

Mr Brian Jenkins

Mr Kevan Jones

Robert Key

John Smith

Mr Desmond Swayne



Memorandum submitted by Defence Manufacturers' Association


Examination of Witnesses


Witnesses: Mr Guy Griffiths, CEO, MBDA and DMA Council (Team Leader), Mr Roger Medwell, MD NP Aerospace, Dr David Price, CEO Chemring plc and Mr Chris Cundy, Commercial Director, VT Group, Defence Manufacturers' Association, gave evidence.

Q1 Chairman: Good morning. Thank you very much indeed for coming to give evidence about the Defence Industrial Strategy. We are starting with the Defence Manufacturers' Association and I wonder if you could begin by introducing yourselves and saying very, very briefly what you do. You are most welcome to the Committee.

Mr Griffiths: Thank you, Chairman. My name is Guy Griffiths and I am Chief Operating Officer of MBDA Missile Systems and also a Council member of the Defence Manufacturers' Association. DMA, as I am sure you will be aware, is a trade organisation with over 600 defence companies as members, spanning all sectors of the defence industry in the United Kingdom and indeed all tiers of the supply chain. We have chosen four representatives from the DMA today who we hope will provide you with a cross-section of views from various sectors and, as I say, from various tiers within the defence sector to give you perhaps slightly different perspectives on how the DIS has been received.

Dr Price: Dr David Price, I am the Chief Executive of Chemring Counter Measures, a public limited company in aerospace and defence, with a 300 million market cap. We are a world leader in expendable decoys and essentially operate in energetic material, both directly to the Armed Forces but also to prime contractors, so we operate in both tiers.

Mr Medwell: Roger Medwell, MD NP Aerospace in Coventry. We are specialists in the manufacture of composites and technical modellings for the NLAW programme, helmets for the British Army, body armour and also composite armoured vehicles such as the armoured snatch sys (?) in Iraq.

Mr Cundy: Chris Cundy, Commercial Director for VT Group, which is a plc with a turnover of over 800 million, both in the commercial building industry and in related support to a number of government agencies.

Q2 Chairman: Thank you very much. If we can begin with a few generalities. Work on the Defence Industrial Strategy started in August 2005 and the Minister said that "we need something that pulls everything together rapidly". Did you agree with that and why was it necessary to do it all so urgently? Who would like to begin?

Mr Griffiths: If I may start with that, Chairman. I think, first of all, whilst the timescales that were set for the exercise were extremely ambitious, I would observe that industry nonetheless was very supportive of the expeditious way in which the Minister and his team approached it. Why is that the case? Well, I think in a number of sectors we do see as a matter of some imperative guidance in terms of the UK's acquisition plans as driving some key decisions in terms of industrial rationalisation, restructuring and investment, and certainly talking of some of the sectors - and maybe we will get into some specific sectors later if you wish - some of those decisions are quite urgent. I would also observe, I think, that in these exercises it is sometimes easy to let the best be the enemy of the good, and I think probably in the timescales that were allowed for the exercise we have been able to derive collectively quite a lot of useful input in a very short time. So I think on balance we support it. I think if there is one area where the DMA probably would observe that some quality has been sacrificed in the short timescales allowed for the exercise, it was in the degree of consultation that was afforded not to the big, prime contractors particularly because I think they were heavily engaged in the exercise, but perhaps some of the smaller and medium-sized companies did not feel necessarily they had had their voices heard to the extent that would have been wished if more time had been allowed.

Q3 Chairman: We will come on to the involvement and reaction of small and medium-sized companies during the course of the morning, but in general do you believe that industry was involved then in the drawing up of the DIS?

Mr Griffiths: I think, Chairman, I would go further than that and I would observe that the degree of engagement, notwithstanding what I have said about the small and medium-sized companies, was unprecedented. If I speak by way of example as far as my own company was concerned, the Minister personally spent half a day with me and my team rehearsing the issues as they affected our particular sector and really was determined to understand what the technology issues were, what the capability issues were militarily, and I believe I was not alone in terms of that dialogue which was going on with other companies. If I look at the degree of engagement, I genuinely do think that over the course of the last six to eight months the degree of openness and transparency in both directions was unprecedented.

Q4 Chairman: Do you think that your views were reflected or does industry think that its views were reflected in the overall result?

Mr Griffiths: I think again it is difficult to generalise because from one sector to another there may be differences of emphasis there, but certainly I think in the context of the DIS document overall the overriding themes which emerged from it are ones which generally do reflect the views being expressed by industry during that consultation process.

Dr Price: Again it comes back to one of the main themes to which Guy has referred. I think the area where there is the main concern is when you are looking at second and third tier SMEs where the engagement was significantly less and obviously where there is quite a significant degree of capability and innovation for the technology going forward, where it is certainly much more unclear in terms of the degree with which it reflects industry's position.

Q5 Chairman: What was the cause of that? Why do second and third tier companies feel left out?

Dr Price: It is not so much left out but more to do with in the time available it is quite difficult and particularly since a lot of second and third tier companies, of course, have their primary relationship with prime contractors, and then when you are looking at a lot of the strategic argument, it is about the way in which the very large primes, whether it is Agusta Westland, MBDA obviously, or British Aerospace in the different sectors how their strategy going forward is quite an important point from the MoD point of view. A lot of their supply chain where an industrial strategy would have to flow down in terms of the partnership is not very well brought out and I suspect - and perhaps you would like to comment, Roger, as a small company - there was comparatively little engagement across what is a very large number of companies, so it is quite a difficult task to do.

Mr Medwell: The review does not really go into how SMEs are going to be involved and what protection they have. Clearly we are going to be interfacing with known primes and we have been doing projects, as opposed to the DPA for instance, and the question for SMEs is will they be treated as fairly with the primes as we are with the MoD. It is obviously a concern because it is going to be quite a new relationship for us on a number of programmes.

Mr Cundy: I think I would corroborate what my colleagues have said, particularly in our sector which is the maritime sector. With the Maritime Industry Strategy there has been extensive consultation.

Q6 Chairman: We will come on to the small and medium enterprise issues in more detail in a few minutes. The Secretary of State said that the DIS communicates for the first time to industry and the City those skills, technologies and industrial capabilities that are assessed as being required onshore. Do you think the DIS does that?

Mr Griffiths: I think it does articulate sector-by-sector what is required. I think there may be one or two gaps which we would want to clarify as an industry during the implementation period going forward. I think, however, it is less clear (and maybe that is understandable given that we are moving into an implementation phase) as to the precise mechanics by which some of those key capabilities will be retained within the affordability limits that we know apply to this sector at the moment.

Q7 Chairman: What are those gaps?

Mr Griffiths: They may not be gaps in terms of complete sectors but I think when one actually looks at the composition of the nine or ten sectors which are referenced in section B of the White Paper, there is no specific reference, as far as we can observe, to such things as guns, logistics vehicles and personal equipment for soldiers. One might expect that some of those perhaps would be encompassed within the generality of some of the sector headings within section B, but I think there is a strength of feeling - and again perhaps this is reflected amongst the SME community in particular - that there are some particular niche military capabilities which those companies judge they have particular expertise and strength to bring to bear which are not referenced within the document. I think clarity is sought as to whether those are encompassed within the sector headings and recognised as particular capabilities.

Q8 Mr Hancock: Can I ask how you would envisage that they would be able to put that point of view across about those gaps in the various things that you have talked about and how those companies (who might not in any instance be seen as a prime contractor in any of this) would be able to influence that if they have not - to choose Mr Price's words - really played a part in the formation of the policy? How are they going to feel welcome in this new world?

Mr Medwell: I guess this has to be a top-down process. We have to as SMEs engage with the primes. They have to almost take the position with regard to the SMEs that the MoD are going to be bringing these programmes together, so clearly we know there will be a restructuring of our base depending who will be seen as partner companies.

Q9 Mr Hancock: That could be very painful for a lot of small companies.

Mr Medwell: It could be painful.

Q10 Mr Hancock: You would have nowhere to go when you are being pushed into extinction.

Mr Medwell: We are interested in what safeguards are going to be put in place for the SMEs. One of my worries is that work could be put overseas without any control. Will there be offsets as there were on the NLAW programme, which I know you were directly involved on?

Q11 Mr Hancock: Do you not think there is a failure in the policy not to recognise that? When the Secretary of State suggested that some of the change is going to be painful, he goes on to say that no change could be even worse. For medium and small companies they are going to be under a real pressure, are they not, to cut costs because the threat of being able to go overseas by the prime contractor is always being going to be there hovering over them. There is a failure in this policy to recognise the importance of these small companies to the British defence industry, is there not?

Mr Medwell: There is no detail with regard to the SMEs. It has not gone down to that level.

Q12 Mr Hancock: There is no mention of them really. There is no policy in here which gives them any real say at all. This is a charter for the big boys.

Dr Price: I think from our point of view one of the issues looking forward to how the Defence Industrial Strategy is going to be implemented is the prime contractors' relationship and the industrial strategy with its supply chain will become quite an important element because if the prime contractors do not essentially follow a common industrial strategy with that of the MoD you are going to have huge shadows essentially blocking the light of transparency and coherent strategy going forward.

Q13 Mr Hancock: How can you control that?

Dr Price: One of the ways you can do it is through a proper partnership approach. If you look at commercial industry, it goes down through the supply chain, and certainly I know from my previous experience on the maritime sector that a lot of effort has gone prior to the industrial strategy into trying to work up how partnerships would start to involve the second and third tier suppliers. That is not specifically identified as a process in the Defence Industrial Strategy.

Q14 Mr Hancock: But there is nothing in the policy which suggests that the prime contractor will have those responsibilities to make sure.

Dr Price: Not explicitly.

Q15 Mr Hancock: --- That the rest of the industry is in some way protected or engaged even; the choices are all down to them. Once the decision is made to give them the job it is then down to them to deliver in any way they see fit, so this policy does nothing except protect them?

Dr Price: It is clearly a risk.

Mr Griffiths: It is a risk and one of the observations in the written evidence submitted by the DMA is that there do need to be established some appropriate safeguards by the MoD to make sure that those industry champions, the prime contractors who have been identified in this document, are subjected to some measure of control to make sure there is no abuse of that privileged position they have been given.

Chairman: I am going to bring in Linda Gilroy and then we will come back to you.

Q16 Linda Gilroy: There was an article in Jane's Defence Weekly in early January which was looking at this issue and one managing director of a small and medium enterprise was quoted as saying: "Bit by bit we are giving up and gravitating towards other sectors, like the oil industry". So the safeguards you are saying which need to be there if we are going to protect or at least give a level playing field to employment through SMEs in this country are important. What sort of safeguards should we be urging should be considered? Do you have any views on that?

Mr Medwell: We have certainly got to ensure that the supply base in the United Kingdom is given a fair opportunity to bid for the work, and I think if the British taxpayer is paying for it then if price is equal and service is equal the contract should come to a UK company. We have done this on overseas bids. NLAW was a classic where Saab won the contract with 100 per cent offset for the small SMEs, and that has been a fantastic success and supported the SMEs in this country. Whatever happens, I would like that sort of approach to be taken that was so successful with the NLAW programme.

Mr Cundy: I would just reiterate what my colleagues have said. As a tier one supplier on certain contracts we are a prime contractor in that respect. About half of a typical shipbuilding contract will be subcontracted and we obviously need to build those relationships to work with companies.

Q17 Linda Gilroy: Is there a programme of spreading good practice in that of which you are aware?

Mr Griffiths: There is a Code of Practice for dealing with supply chain relationships of the type that my colleagues have described, which was developed in collaboration between the MoD and UK industry and has now been adopted by the European Defence Agency for application across Europe. I think that Code of Practice does provide a useful framework. I am bound to say within the DMA we have from time to time tested the penetration of that Code of Practice through various tiers in the supply chain, and I have got to say the application of it beyond about tier two has proved to be fairly patchy. I think one of the things we would want to do as an industrial group with the MoD is look collectively at how we might enforce application of that Code of Practice more systematically.

Q18 Mr Hancock: I think, Mr Medwell, you gave a very good example of where the system can work and that was the Saab contract. How could that be incorporated into a policy which says "here is an example of good practice where all of the work really did remain in the United Kingdom" and this is what your organisation would like to see to be the pattern for the future? Do you not think in this policy there was something missing there not to state those sorts of examples as being what the Government would want to see in the best interests of the nation to continue to be the norm rather than the unique example?

Mr Medwell: Just taking that as an example, they certainly made everyone aware in the industry in the UK of the opportunities. We then made ourselves acquainted and told them of our capability. We had our capability assessed by Saab and indeed Thales. We got onto the tender list and we were declared the prime for the mouldings element, so they did a "down select". I think that is all we ask, that they do go out to British industry, the SMEs, and give them the opportunity to be aware of the programme and to qualify for the programme.

Q19 Mr Hancock: Can I just then ask on a point that the Secretary of State made when he suggested that there are things in this policy that industry would not want to hear. I am at a loss to find those in the document. Do any of you four see anything in there that you are worried about which you thought the Secretary of State was unfair about or that the policy had actually uncovered some sort of mystery failure on your part that had not been addressed in the past? For him to say specifically this should be a "gritty and relevant document" and there will be things in here that the industry will not want to hear, have any of you been made nervous by the reading of this document, that things have been uncovered that you have been up to that had to stop?

Mr Griffiths: Your question implies some measure of surprise. I would not necessarily cite this example as being one that falls into this category. Certainly in my sector, the complex munitions sector, there is a statement in it which says that if one looks ahead over the course of the next five to ten years, the level of planned expenditure in this sector shows a reduction of approximately 40 per cent compared to what has preceded it in the last five to ten years. I am bound to say when we observe the degree of rearmament that has gone on for the British Armed Forces over that period that is not a great surprise for us. Is it a source of some disappointment? Clearly it is; it is not a surprise but nor is it palatable and it does demand some really close work with the MoD to see how that level of funding reduction can be accommodated in a way that does not destroy important industrial capability. So that is one example.

Q20 Mr Jones: Could I just pick you up in terms of the supply chain. I agree that NLAW is a great example of how not just small defence companies got involved but some engineering companies who I know in my constituency who have never been involved in defence work before. I think the important thing about the NLAW procurement was the fact that the people in the supply chain had to compete for it; they did not get stuck on a tender list to agree an offset. I know NDI played a key role in that. Do you not think there is a danger that if we do not stipulate that these supply chains have got to be looked at that the supply defence contract will go abroad for the work? I give a great example in the North East of the ALSLs from Swan Hunter's, where rumour has it that 75 per cent of the work on that supply chain has come from Holland. Unless we actually stipulate it clearly, do you think there is a danger that more Swan Hunters could happen where it looks great in the headlines in that we are providing a ship built in the North East but the parts of it where the value is, ie, all the bits and pieces that go in, are being procured offshore?

Mr Cundy: In terms of shipbuilding I think the strategy is pretty clear that over the next ten years we have got good visibility in terms of programmes. The Type 45 and the Carrier programmes will need the whole of UK industry. However, within that we need to be competitive. Certainly from a VT point of view we are keen to compete on overseas and UK programmes. We need to be competitive within those programmes. All we would like to do is to be given a fair level playing field in that competition.

Dr Price: The policy is quite explicit with respect to the research and technology which identified quite clearly that the SMEs in the lower tiers are a source of innovation and ways have to be found of involving them early on in the process. I would say specifically on the point that you raised that sometimes it is quite difficult to decide what is the UK industrial interest when you have a UK prime with a supply chain that is foreign competing against a foreign prime with a UK supply chain. NLAW, I suspect, was a good example of that. Therefore it is always very difficult to take specific instances and make broad generalities, but I would have expected the Industrial Strategy to have more detail of how outside of technology the supply chain of SMEs might be better thought of in terms of a policy to maintain industrial practice.

Q21 Mr Jones: I agree with you but the issue is surely not wanting to go down the route of the American system where everything has got to be procured in the US. There is an issue here that we have opened up our markets most widely in the world, in this sector here, and if we are spending a huge sum of public money there should at least be some of that filtering down to the SME and small sector. For example, in the ALSL something like half a billion pounds has been spent already and rising, you would have expected some of that to come into the supply chain of the UK.

Dr Price: It is also true that if you look at very efficient supply chains, whether it is the automotive industry or civil aerospace, that one of the key things of long-term planning is about involving local SMEs in a partnership going forward, and therefore to some extent best practice would favour local SMEs with strong technology that is developed over a period of time. So you would hope that following best practice that we would see the same thing.

Mr Jones: I do not think we need to hope; we need to see it written into the structure, that is the problem.

Chairman: John, were you going to ask about this point or were you going to go slightly to a different point?

John Smith: On the same subject, Chairman, it appears to me that not only is the strategy focused on the primes and not on the supply chains and the smaller companies but there are certain inherent dangers with some of those large primes. The one that comes to mind is BAE Systems who quite clearly now are equally split between the UK and North America in terms of its interests, and some systems, like land systems, are in fact driven by North America and not the UK market. Is there not an inherent danger there that they will not draw on the UK supply change but will go elsewhere, and quite clearly that could be applied to other companies? So is this not only a document that favours big business, it could have been written by BAE Systems and they would have been quite happy with the outcome? You do not have to answer the last bit!

Q22 Chairman: I would be nice if you did.

Mr Griffiths: I think your question bears down on what we were touching on earlier and that is whilst industry champions like BAE and a number of the sector chapters have been identified as the leader or the partner of choice for the MoD, there is a concern amongst some of the SMEs and some of the not-so-small companies that their route to access the MoD's market now is purely channelled through those particular industry champions, and whilst there may be some logic to that it comes back to the observation we made earlier that there have to be policies and safeguards to make sure that that position is not abused and that a wider aspiration, for example to attract innovation from some of these other players in the industry who perhaps have real innovation to offer, is still leveraged. There have to be those safeguards.

Q23 Mr Havard: This question about the strategy saying things that maybe industry did not want to hear; is there something that you want to say to the Government that it might not want to hear in the sense that when the document was launched it had all the smiley faces on the inside cover, and the Secretary of State made the point at the time that the man from the Treasury was smiling, which is a novelty, and they were all on there, Trade and Industry, Treasury, it was all joined-up government, but in my discussions, admittedly not with the current Secretary of State but previously, the question about what is the responsibility of the MoD in order to promote awareness and capacity for SMEs to be involved in these sorts of processes and how does that fit with the responsibilities of the DTI was a question where if you are not very careful you get the answer from the MoD it is the DTI's responsibility and from DTI it is the MoD's responsibility. It is somebody's responsibility; it is supposed to be a joined-up responsibility. So what does industry want from the respective government departments to make that trick happen?

Mr Griffiths: I think there are a number of points which arise from that. First of all, there is a question of affordability, I think, and perhaps this bears on Mr Hancock's comment earlier on that maybe there is not as much bad news in this document as was heralded when it was first unveiled. There is a question as we go through the aspirational statements that are made in each sector as to whether or not when one adds them all up in spending terms they represent an increase over and above the level of planned expenditure that has been advertised to us so far. So I think that question remains unanswered.

Q24 Mr Havard: Does the aggregate of a set of spasms equal a strategy?

Mr Griffiths: The second point is if one looks at the document it is stated to be an Industrial Strategy for defence, not for the wider government, and I think one of the questions we would ask is are we going to have one industrial strategy for defence and a second industrial strategy for the economy as a whole. I think looking at it from a corporate point of view, we need one.

Q25 Linda Gilroy: Continuing on that point, the DIS states that the current levels of work for naval shipbuilding will not last forever and with the Future Carrier and MARS there are some capacity issues which the Marine Industrial Strategy is going to tackle, so in about ten years it would not be affordable to sustain the sort of capacity we need for that period. How is a company such as the VT Group, if I can ask Mr Cundy specifically, preparing for such a future and are we likely to see mergers of UK naval shipbuilding companies and on what sort of timescale and with what impact on jobs?

Mr Cundy: That is quite a wide-ranging question, but if we take the industrial group at the moment, we have had very extensive discussions with Government and the Ministry on the Maritime Industry Strategy. If we looked at the sectors within the report, the maritime industry is probably as far advanced as any in terms of the strategy there. Looking at the long-term capabilities we want to protect for the strategic interest, obviously the design and support of ships long term is a key ability that we need to retain within the industry. There is a particular challenge to both industry and the Ministry to produce the carriers within the next ten years. There will be an increase in employment, certainly at a blue collar level, over the next three years as the carriers come in, but longer term that base - and I think the report highlights the Type 45 and the Carrier - are abnormal workloads within the industry. We need to size the industry for the long-term capacity needed for warships, and commercial ships if we can be competitive. From a VT point of view, we believe with our investment in Portsmouth we are as competitive as anyone in the export market on warship building for the smaller warships. In terms of the strategy going forward we would see the UK being very competitive in the warship-building market and there will be lots of opportunities within the next ten years for people outside of the core warship building yards, ourselves and BAE, to be involved.

Q26 Linda Gilroy: Are you saying you are looking to the export market to sustain something beyond that immediate period?

Mr Cundy: I think exports will enable us to retain capability particularly in the design area where there are peaks and troughs in terms of class of ships. As we go into support of ships there tends to be a lower design input. We need a long-term strategy for retaining that design, and export will be part of that strategy. That said, the export market tends to be for the smaller perhaps faster ships and that is a limited market which represents maybe only ten to 20 per cent of the total warship building in the UK.

Q27 Mr Hancock: If I can develop that a bit further. The Industrial Strategy makes it quite clear that plans will be needed from your organisations to ensure that the UK can keep the required key skills. Paul Lester wrote a very helpful letter to the Committee where he re-emphasised that point. I quote from his letter which says: "Under the arrangements outlined in the DIS, the MoD will not be able to retain in-house all the necessary skills to handle itself the procurement of offshore investors under the true life capability ..." etc. He goes on to say that industry needs to have a greater role in that. Do you see that as being a prerequisite for a company like yours that it would only be able to hold those skills if they were given that sort of commitment?

Mr Cundy: I think that is true. In terms of the markets that we are looking at, design skills are obviously key to our business in terms of the export market and the UK market. In terms of design capability, we should retain those within the UK. There may be ships which could be built more efficiently offshore, but if we are looking at supporting those through life (which needs to be done in the UK) we need to keep the capability and the input up-front in terms of the design to manage that programme through life.

Q28 Mr Hancock: The policy itself, whilst recognising there will be a problem in retaining the skills, does not really offer any solution to the problem. It passes that back to you to say you tell us what the solution is. Do you think what you are going to say in response to that, which is not only a commitment to build but a through life commitment to maintain and look after the product, is the only way that industry can satisfy what government are requiring in the way of retaining of skills?

Mr Cundy: As a group we believe that is the most efficient way.

Q29 Mr Hancock: Would your colleagues share that view?

Mr Griffiths: With one exception - the export point - which we touched on earlier on. The industrial model for many of the indigenous UK businesses contrasts with what one sees with the indigenous US businesses. The US business model in the defence sector is one where because of the levels of US defence spend they can build and sustain a business entirely on domestic order intake which they secure from the government. In the UK, frankly, in a number of sectors that simply is not realistic as we look forward and we have to look to secure export business in order to sustain industrial capability in the UK. I think one area where we would have looked for stronger emphasis within the White Paper is on the actions that need to be taken jointly between MoD, industry and indeed wider government to support the export ability of British defence product.

Q30 Mr Hancock: Just one final point, do you think the current thinking in the Defence Procurement Agency supports that view?

Dr Price: Maritime, if we go back to it, is a good example. The German maritime industry has made a great deal of effort to ensure that it has very, very exportable designs as part of its overall process and, consequently, although there is a section on defence exports in the Industrial Strategy, the implication is of dependency. A good example I would give for my company, Chemring Countermeasures in Salisbury, is that it is 80 per cent exports but the skill base is maintained for the UK essentially by our success in exporting, and I would say that there are a lot of small companies supporting the UK industry which have that same business model.

Q31 Chairman: So specifically in answer to Mr Hancock's question?

Dr Price: No, I do not at the moment see the importance of the export to the maintenance of skill being within the DPA's policies.

Mr Griffiths: I think it is a very difficult balance being struck here because on the one hand, arguably, there should be no compromise in terms of the quality of military capability that is being delivered industrially to arm our Servicemen and women. I do not think what we are saying here is that should be traded in some way for exportability. Nonetheless, there are instances probably we could identify where specifications have been derived in a way that does not render a product readily exportable in the same way as perhaps one would see in some other countries.

Chairman: Are you going to change the subject slightly because Brian Jenkins would like to come in?

Mr Jenkins: I want to go back a little bit to where I was going to come in earlier on.

Chairman: We will come back to you. Kevan Jones?

Q32 Mr Jones: Can I ask particularly on shipbuilding, in the White Paper it states that surface ships and complex vessels will be continue to be built in the UK, but the MoD might look to outsource some of the "lower-end manufacturing" offshore. What is your view of what this so-called lower-end manufacturing is?

Mr Cundy: I think in terms of lower-end manufacturing we need to go back to what needs to be done over the next six months to define what the long-term programmes are within the industry. Obviously with the Carrier and Type 45 there is work for most of the industry in the short term. It needs to be sized longer term for requirements beyond the year 2015, that sort of number. Within that you then have the MARS which is a particular programme which is what I would see as towards the lower end of the specification. Mike mentioned pooled data in terms of how we see that happening. What we see is those programmes being managed in the UK with design capability in the UK for through life support but with the high end engineering which militarises the vessels being done in the UK.

Q33 Mr Jones: How does that fit with the modern way for example, whether it is BAE Systems or anybody else, of building ships these days where you build them in sections but you do not just do the fabrication, you do all the work inside as well? If they are going to be built in Poland or a former East German yard, how do you ensure that all the expertise that goes inside is not also done abroad?

Mr Cundy: In terms of giving an example, we had a contract from the Minister of Defence to build two survey ships for the Royal Navy. Those were not built in our yard, they were built to a commercial design in Appledore (but that could have been overseas) but at the back end of the contract we were involved with the through life support after the contract was completed. What we did was the militarisation of those ships once they came back to Portsmouth.

Q34 Mr Jones: Yes, but is it not difficult to envisage, especially in some of the larger ships, that you are going to get a situation whereby you are going to build the hulls in Poland, float them across and fit them out because that is going against the way in modern shipyards you are building ships?

Mr Cundy: In your example of BAE Systems and ourselves with the Type 45 we are talking about very complex ships with a lot of outfitting and weapons within the hull structure itself, so within that programme we are doing 80-90 per cent of the outfit in Portsmouth before they are moved to Glasgow. With a more commercial design, it is a tradeoff between how you build the ship in its entirety, which could be done overseas if that was the best case, or could be done in the UK, but the level of outfitting will determine whether you should build the whole ship in one yard or whether you should do it in modules.

Q35 Mr Jones: My concern about this is I do think on MARS we will need that work in UK yards to keep that skills base there. My fear is if you are going to take a simplistic view, which I think certain people in the MoD are going to do, that somehow it is easier and cheaper just to build these in Poland and this is a cheap way of building a ship. It is very interesting the Germans are not going down that line. Other European yards are not doing that, other governments are not doing that; why should we?

Mr Cundy: I think it comes back to the previous point about sizing the industry over the next ten years. What we do not want to do is necessarily increase the capacity within industry to cope with the Type 45 and the Carrier programme and other ships on top of that. I quite agree with you that we should be using this programme to make sure we size the industry over the longer term.

Q36 Mr Jones: Would you not agree though, Mr Cundy, that if it is done properly and planned out properly you could ensure there is a long-term future for existing capacity that is there in UK yards quite a long way into the future, rather than segmenting it and saying we are going to do this bit in terms of carriers etc, then at the same time pushing this stuff abroad? I accept there is an MoD thrust on this. If they start doing that I think there will a bit of a reaction against it because what you are driving is feast and famine again, are you not?

Mr Cundy: No, I think what we are talking about in the Maritime Industry Strategy is a look over the next six months at the size for the industry, so it is ---

Q37 Mr Jones: I will finish on this point. Is there not a danger that we have this huge feast over the next few years in terms of the Carrier and other things, and then we find that because we have put stuff abroad because it is cheaper or more efficient that we end up with the famine afterwards?

Mr Cundy: I think you then come back to capability and having the platforms when the Royal Navy need them and it is the timing of when that happens.

Q38 Mr Havard: I want to ask you two questions. They both follow on in this sense but one is about procurement and the other is about post-2015. It says it "might look to outsource lower-end manufacture". There is a good old Civil Service "might" stuck in the middle of the sentence to give the minister a parachute if he needs it! What it does mean is what you have just been testing, is it not, what is lower-end manufacturing? It goes back to what my colleague was saying earlier on about you have a view about what you need to retain in terms of the through life process here. I was very interested in the memo that was sent by your Chief Executive who said in order to do all this you would have to manage on behalf of the MoD the procurement of ships and the hulls manufactured offshore. What is meant by the management of the procurement? Are you going to be defining in the management of the procurement what the lower-end activity is? What do you mean by manage the procurement because what happens to the DPA in this process? Are you going to take them over? Are they going to disappear? Are you going to drive this process or is the MoD going to drive that process? How do you see that statement practically working in these circumstances?

Mr Cundy: Again coming back to the example I gave on the survey ships, it was a good example where the MoD had a requirement, and they went out to competition to have a design which they wanted to procure. We could then procure that design through a supply chain and in relationship with some of the SMEs we were able to procure those ships. I think the MoD because of the complexity of some of the procurement programmes are not used to managing programmes overseas. We manage shipbuilding for example in (?) where we are managing the construction of ships overseas with a team of people on site, so we have overseers on site to manage that programme.

Mr Havard: So you could cut out the middleman in terms of the DPA, just abolish it?

Chairman: You said you had two questions.

Q39 Mr Havard: You mentioned this question about feast and famine and so on post-2015. We have had some information put to us I forget who by, but essentially the assertion is that so far as shipbuilding is concerned there is effectively in the strategy a quite clear message about the replacement of Trident or certainly the replacement of the submarines, because the strategy document almost explicitly says that in order to do some of the things that are necessary in retaining all these various skills and design capabilities and so on in shipbuilding, there will be a new generation of submarines post 2015, because if all you do is simply upgrade existing boats that will not be sufficient in order to fulfil some of the statements and requirements that are set out in the strategy. That is a set of assertions that has been made to us; what is your view of that?

Mr Cundy: I do not think I am qualified to comment on whether ---

Q40 Mr Havard: It fits in with this feast and famine aspect and what happens post 2015.

Mr Cundy: I am not qualified to comment on the submarine side of life. I have to say on the warship building side of life we will need capacity and design capability beyond 2015 and that could include some of the submarine capabilities.

Q41 Chairman: Would any of the rest of you like to take on this submarine issue?

Mr Griffiths: I do not think any of us is qualified.

Chairman: Okay, we will find some other victim! Thank you very much. Moving back to the general impact of the Defence Industrial Strategy, Brian Jenkins?

Q42 Mr Jenkins: Morning, gentlemen. I know sometimes if you are listening to a Committee you might not get the right emphasis of the question because you are sitting there being nervous and wondering if we are going to trip you up. We are not here to trip you up in any way, shape of form. In fact, listening to some of my colleagues asking questions, I get lost on a question and I understand why you would. However, when Mrs Gilroy asked a question she asked quite simply: if you have got a prime contractor with a lot of sub-contractors how is best practice moved across them? I think, Mr Griffiths, you gave an answer that the European Code of Practice is in place. That is not quite the same terminology or the same document, so when I was involved in a real job, part of my task would be to go out to small contractors and pass best practice between them. I know how difficult it is with regard to intellectual property rights where a firm does not want to lose its competitive edge by giving its secrets away. In that sort of question that Mrs Gilroy was asking you, as the prime contractor how would you ensure that best practice got shared within the pyramid of the group?

Mr Griffiths: I could illustrate it perhaps from the work that we are doing in my particular sector, which is the complex weapons sector, and again the relevant chapter of the White Paper does identify, apart from my own business, a number of other players in the industry whom MoD, from the analysis they have done, recognise as having particular niche capabilities, particular intellectual property, if you want to express it in those terms, which needs to be safeguarded. You are absolutely right there is a sensitivity amongst some of those players about being willing to share the benefit of some of that intellectual property either with us or with other of the players in the sector, but what we have sought to do really, with the encouragement of the MoD, is first of all to initiate bilateral discussions with each of those players to say, "Here on the basis of the White Paper is the best prognosis that is available on the levels of business which are available to this sector over the coming five to ten years. Here is our industrial position in terms of what it means ---"

Q43 Mr Jenkins: I am going to lose the will to live shortly. Yes, we see it as a problem. Yes, we have the technology and the strategy to deal with it, that is what I want to know, and if we have a strategy to deal with things like that, and the strategy we have got for the defence industry, if you can call it a strategy, says that industry will need to reshape itself. My simple question is: if industry needs to reshape itself, what is the future and what shape do you see? If we have got 305,000 people employed in the industry now and we will have for the next few years, let's say ten or 15 years down the track how many people do you envisage being employed in the industry? Where will they be in the country? Shipbuilding is okay; it is still going to be on the coast, we know that, but where will they be - southern England, northern England or wherever - and who is going to do the reshaping because no-one is going to throw themselves on the sword, so who is going to beat these things into shape? Are you going to do it, is the MoD going to do it, or is it left to the market-place?

Mr Griffiths: Certainly in terms of what we are trying to do in our sector - and I use that as an example - what we are seeking to do is to compare the analysis which we have from the key players within the sector, identify looking ahead where we have got duplication or overlap in terms of capabilities either in one company or another and to see between us - and you are right these are not easy conversations - as to where that capability where it is surplus can be eliminated or indeed, and there are instances in the document where there are envisaged future military requirements that perhaps we are not totally equipped to deliver today and maybe jointly we need to invest in particular technologies in order to provide that capability.

Q44 Mr Jenkins: With technology we have a moving feast here and we do not know what is going to happen in ten, 15 or 20 years' time, I understand that, the question is who is going to reshape the industry?

Mr Griffiths: I think the onus is on industry ultimately to do that.

Q45 Mr Jenkins: You are going to do that?

Mr Griffiths: But based on the best available information from MoD as to what its future military requirements and spending plans are.

Dr Price: There is probably a gap.

Q46 Mr Jenkins: It is not a gap.

Dr Price: I said it is a gap in the strategy. The third objective of the Defence Industrial Strategy is to identify how one should go forward and that is probably the weakest part of the defence strategy that when you look at the plan going forward which says how many people will be employed, I think it is probably missing altogether.

Q47 Mr Jenkins: It is not the weakest, it is just non-existent. It is so fundamental and basic that to call this a strategy, you just have to be searching for a better term. This is a wish-list, some off-the-wall idea of "we would like to move forward; how do we move forward?" They have come up with this prime contractor concept to carry the entire load. The prime contractor might carry the load in a specific area or task but not across the industry. You need to sit down as an industry and my difficulty is when you start talking about merging what we start looking at is monopoly. If we have only got one supplier, we are tied into it. How do we know when we get close to falling below that critical mass so that we cannot produce our own defence requirements, because nobody is going to tell us out there, are they, because you have not even got your act together yet as an industry to tell us what shape it is going to be? There are lots and lots of questions that should be basic, fundamental questions that are missing at the present time. Do you agree?

Mr Griffiths: I do not totally agree with that because I think one can envisage a scenario where it might be better to have one player indigenously within the sector who does himself have critical mass rather than three or four smaller players each of whom is below critical mass.

Q48 Mr Jenkins: That is what I am asking for that someone has come up with a plan that we can look at, evaluate as to how we get from the situation we are in now to the next wave where we say we will have an industry that will only comprise of 200,000 employees and do you see that future?

Mr Griffiths: I cannot see it in those quantified terms, but what I would say is for industry to assume the responsibility for sizing and reshaping the defence sector in the way I think is envisaged in the White Paper it is helpful and desirable that industry has the benefit of a greater level of transparency in terms of future military requirements, future spending plans than the White Paper envisages.

Q49 Mr Jenkins: Let's push this a little bit longer. Would you say if I were to sit down with a clean sheet of paper now to design a realistic strategy, what I should do is to look for a company that has extremely good management capabilities, that has good accountancy capabilities, that has a good track record but does not make anything, as my prime contractor as my prime "go and fetch" boy, and they then come to the manufacturers and they come to the people who may not be in the defence industry, who may be outside the defence industry as they knit the project together and they develop project experience and expertise that might be limited in an individual we have got now as a prime contractor? Do you see that as a way forward?

Mr Griffiths: From my experience, it is difficult to envisage a company having the requisite degree of system engineering skills and management skills of the type that you have just described without actually having the ability within that organisation also to understand some of the sub-system technologies that are intrinsic to it. So I do not particularly buy this idea that you can just have a pure system integrator as your prime contractor.

Q50 Linda Gilroy: I am interested to ask a final question of where small and medium enterprises fit into all of this. In particular, I come from Plymouth, the South West, where the supply chain is as big as it is anyway in Europe, never mind the rest of the country. I just wonder if any of you have any experience of the relationship between the small and medium enterprises, universities and knowledge partnerships, because it seems to me we were talking about how they might want to safeguard their innovation from being exploited without them having the benefit of it and knowledge partnerships are surely one way of dealing with that? Do the big primes have a role in relation to the universities in enabling them to facilitate that kind of support to small and medium enterprises?

Dr Price: Clearly from previous experience with Rolls-Royce, Rolls-Royce has led to some extent the formation of university technology centres essentially for partnership development over a longer term period, which to some extent I think the MoD has now picked up with its defence technology centres going forward, which is essentially to make use of the very best capabilities in universities in a partnership of targeting so that there is continuity and consistency of vision for where it should go and that also links in to some extent, in my experience, take Portsmouth for example there is quite a strong knowledge partnership that operates between the smaller companies and the University of Southampton and some of the other universities in trying to promote greater understanding of where the benefits of new technology can be applied and perhaps, Chris, you would like to build on that.

Chairman: Thank you very much. Moving on to complex weapons, David Crausby?

Q51 Mr Crausby: My questions are directly specifically at Mr Griffiths because MBDA specialises in missile systems and, as you have already told the Committee, the Secretary of State has said to the House that there has been a significant investment over the last ten years and investment in this area is now likely to reduce by 40 per cent over the next five years. How will MBDA adjust to a reduction of this scale and, most importantly, how will it retain the specialist missile skills in the UK with this likely reduction?

Mr Griffiths: In part we had anticipated some of this because, as you observe quite rightly, over the course of the last ten years we have seen what we always envisaged to be a peak in terms of the rearmament cycle, so to some extent we had manned up to service that particular peak on the basis of managing that peak by employing a number of particular skills on fixed-term contracts of employment, envisaging all the while that as that peak then declined, as those people's contracts became time-expired, they would be released. At the moment that is the phase that we are going through. Then in terms of sustaining the core skills and the permanent skills that we have within the business, what we have done (again in conjunction with other companies within our supply chain who, if you like, face exactly the same issue) is to propose to MoD a series of route maps for the migration of the current portfolio of weapons that they have in service. Today the UK MoD has 27 complex weapons either in service or under procurement, and one can envisage over the course of the next ten to 20 years that through a policy of technology insertion (not massive new programmes but small investments in particular enhancements to those systems) one could both increase military capability at a relative modest expense but also, through introducing modularity, thin down and reduce the number of systems that need to be retained in service by making them more versatile to particular varieties of applications. The model we have presented in a substantial proposal that we had made to the MoD is a series of planned technology insertions/investments which by reducing the portfolio of weapons would then reduce the through life cost of maintaining the inventory of systems with the Armed Forces today because the programme of work is self-financing through the payback and the reduction of through life costs. We do believe that is a win/win because we believe in total we can reduce the operating costs of the complex weapons that are in service with the UK at the same time as freeing up from those savings funding in the technology insertion, which can contribute to retaining those core skills which you mention.

Q52 Mr Crausby: You present a memorandum to the Committee in which you state that the challenge now is of course to implement the Strategy in time to avoid seeing UK complex weapons industrial capability going into decline, and I think you have said time is short.

Mr Griffiths: Yes.

Q53 Mr Crausby: So who is responsible for meeting this challenge? What needs to be done and by when in order to avoid this decline?

Mr Griffiths: I made these proposals and I sent very detailed proposals to the MoD in the second half of last year. As far as I am concerned, the implementation phase in our sector over the course of the next six months is imperative, and in particular the answer I need over the course of the next six months - and it is that sort of time-frame - is whether or not the sort of route maps that were presented in that proposal are ones which attract the support of the MoD. If the answer to that is yes, then I think there are investment decisions that I can make within the company that would take the first steps towards developing the sort of technologies which progressively over the course of the next ten or 15 years would need to be injected into that portfolio of weapons. In the absence of some clarity as to whether or not the MoD share that vision as to where we are headed then, frankly, as we move into the second half of this year, I have to take across the whole of my business, not just in the UK but France and Italy and Germany as well, decisions as to how I cut capacity. There will be choices to be made, as far as I am concerned, as to where those cuts fall as we seek perhaps to specialise particular capabilities in my sector in one country rather than in three or four. So by the second half of the year it becomes critical for me.

Mr Crausby: I look forward to that.

Q54 Mr Hancock: I think this is a very interesting issue you have raised which is over and above where we are going on our inquiry. It is whether or not this strategy recognises once again the sort of decisions that you have to make. It is the relationship between this strategy and the Defence Procurement Agency and yourselves, which this document really does not address. You once again have raised a real issue where this strategy does not take account of that. How can you possibly make those sorts of decisions if there is no clear strategy relating to where defence is going over the next ten years built into this document?

Mr Griffiths: Well, that is the answer I need because the proposal that I referred to in response to Mr Crausby was one that we did not develop totally in isolation, it was one that we worked up in the second half of last year with a lot of input from the MoD team themselves but, frankly, we are at the point where we need decisions. I do recognise the model I have proposed - which is basically spend to save and reinvesting some of that saving into sustaining industrial capability - is one that really does challenge the MoD's system because it is testing whether or not they are really willing in terms of putting their money where their mouth is to support this through life management approach that is referenced within the document.

Mr Hancock: I find that hard to comprehend because the document does not address that problem, I do not think; I think it fails miserably, sorry.

Q55 Robert Key: If I may follow on. This was what I would have been pressing a little later but since Mr Hancock has raised it, the Ministry of Defence on page 124 of this document, paragraph B11.22 gives a very precise list of technologies with emerging defence relevance and gives you a road map of where it wants you to go in relation to technology. Did you help create that list? Was this your input or is this something the Ministry of Defence is just thinking up by itself when it mentions smart materials and structures, micro electro-mechanical machines, supersonic and hypersonic technologies, wideband, high power electronics, all that list there in that paragraph? Is that your input that you were talking about?

Mr Griffiths: That is not my input. I think, in fairness to the Ministry of Defence, they prepared their view of which technologies were critical. They then went through a process of testing that through a series of sectoral workshops sector-by-sector with industry. I think probably the industry input calibrated their view but I would not say it was sourced from industry.

Q56 Chairman: We will come on very shortly to research and technology which we are building up to now. A quick question about platforms and the sort of insertion of new capability into existing platforms that you have just been talking about. If we are going towards platforms which have very, very long lives and it is the insertion of new technology that is going to be the key, what is the consequence going to be for retaining designers of platforms of new equipment if most of the work is going to be involved in supporting existing technology?

Mr Cundy: Just to give an example, Type 45, that is being designed for enhancement throughout its life. It is a ship which has, as I say, a long platform life.

Q57 Chairman: Yes, but once it is built what will happen to your designers of new systems, new equipment?

Mr Cundy: I think on Type 45 a key issue is not necessarily the designers but how the ship will be looked after through its life. It will be moved away from set piece refits and upgrades to more through life upgrades as it is operational to increase the operational capability. That means that both the designers and the support teams need to be involved throughout its life, both equipment and the supply chain.

Q58 Chairman: Will they not lose the skills to build new ships and build new aircraft if we are not buying any new ships or aircraft?

Mr Cundy: That comes down in the strategy in terms of submarines there needs to be a drum beat of how many years to design a new class of ships or to have a new surface fleet of some sort.

Q59 Chairman: If they do lose the skills what is the consequence for exports?

Dr Price: I was just going to look at it from the modularity of the design looking forward with technology insertion. Clearly, you are looking at a variety of different platforms but if you are doing a technology insertion, ie, an upgrade of a particular avionics, particularly if you look at modern aircraft and modern missile systems, the integration of that new technology, the new sub-system, which may well come from a second or third tier, still requires quite significant impact from the prime contractor in terms of the design capability because essentially you have to model how that new capability, that new technology is going to work with the rest of the system that is essentially your legacy. So a technology insertion, if the structure of the platform is designed properly to accept it, should ensure that a core skill base is retained for some time. Whether that is sufficient to be able to start again with a new design 50 years later, if you take the Carrier in-service length of life, is always a difficult question to answer.

Q60 Chairman: That was, though, the question I was asking.

Dr Price: I understand that. I think it is always very difficult with long life. Clearly one of the classic examples on a submarine is the nuclear steam raising plant where the technology gets gradually older and a requirement for insertion of new capability is required to maintain your fleet moving forward anyway, so I hope I have answered your question, Chairman.

Q61 Chairman: No, you have said it is very difficult to answer.

Dr Price: Yes, I think it is very difficult. To answer your specific question can you retain capability for a new design, because that is where difficulty comes, if you take JFS as a good example, if you look at a replacement of JFS going forward, is it at all feasible for the UK to claim to be able to retain the design for doing that on its own 40 or 50 years from now?

Q62 Chairman: What is the answer to that?

Dr Price: I think the answer is probably no.

Chairman: I see, thank you very much. Moving on to research and technology, Robert Key.

Q63 Robert Key: Does this Defence Industrial Strategy provide you with sufficient coverage? Were you expecting it to say anything different?

Dr Price: With respect to R&T?

Q64 Robert Key: Yes.

Dr Price: It is a very interesting question specifically on R&T. I think there is and there has been a lot of consultation with industry over a significant length of time on the research and technology strategies. There is always the problem that to maintain a broad width of capability the affordability criteria of how much money goes into R&T is always under threat. I the Tower of Excellence and the defence university technology centres have generally been welcomed by industry in terms of giving clear focus of where MoD wants to put its investment. Probably our biggest concern is that it is almost separated from the sector technologies in terms of this industrial strategy. It is very difficult, I would argue, from our perspective, particularly from the smaller companies' perspective, to read the technology and research part and to link it to what is in the main sectors. So I think what it says is quite acceptable. I think where we find difficulty is understanding how it links into the sectors. Are my colleagues with me on that? Does that answer your question?

Q65 Robert Key: Yes. Given future defence programmes are going to be about supporting and upgrading existing equipment, what signal does that give you for your investment in research and technology?

Mr Griffiths: I do not think that necessarily tempers it because one can still see substantial opportunities in the area of technology insertion and the upgrade of programmes for new technology based on R&T investment to still have quite an interesting financial payback for us. What I would observe is that if one looks at the 300 million or so currently spent by the MoD on R&T, then I think the question (which bears on what you are saying) is whether or not there is adequate linkage between the areas for which that spend is being targeted and the future vision of actually needing to look at upgrading and inserting technology into existing platforms, rather than perhaps blue skies thinking aimed at completely new concepts of military capability. I think that linkage is missing.

Q66 Robert Key: In their evidence to us QinetiQ say that clearly the Government recognises that research and innovation is very important but they are silent on the level of government defence research. Do you think there should be more money spent on defence research by the Government as opposed to private companies?

Mr Griffiths: At the moment in statistical terms it represents about one per cent of the combined EP and STP budgets. Intuitively, that feels low but there is some interesting analysis within the White Paper as to the payback in terms of military capability from different projected levels of R&T spend. I do not know if we are necessarily qualified to critique it here but that analysis does indicate that perhaps the level of spending they have today is at broadly an optimum level. There is certainly no indication in the White Paper that there is an aspiration to increase it substantially.

Q67 Robert Key: Do you think the government is funding the right things? The government can accept a risk which you might not be able to accept in terms of investment and research. Have the government got it right?

Mr Medwell: With the current problems we have in Iraq, we have not spent nearly enough on studying the issues there in respect of our personnel and what we could do to protect them. Things have skewed. We are still looking at Cold War investment as opposed to peace keeping investment. There are a lot of issues there and, had we known more about this, we could have redirected that money and probably have saved lives.

Q68 Robert Key: The Defence Industrial Strategy does say here that there is a need for further work in 2006 to inform our research and technology priorities. Are all four of you involved in that further work to inform research and technology priorities?

Mr Medwell: We have not yet participated but we have been invited to participate in a number of think tank sessions aimed at responding to that action during the course of the first half of this year.

Q69 Robert Key: Are any of you members of the UK Council for E-Business?

Mr Griffiths: The DMA has a number of companies that are members of it.

Q70 Robert Key: What about the Transatlantic Secure Collaboration Programme? Are you involved in that?

Mr Griffiths: Personally not.

Q71 Robert Key: We are told about all these splendid organisations. The Transatlantic Secure Collaboration programme is clearly very important, looking at the whole question of other people's secrets and technologies that you are going to be able to share critical bits of at critical times. Yet for example, in paragraph B12.18, the Strategy is talking about the development of a European Defence Agency, saying that EDA work may lead in due course to a longer term strategy to consolidate testing and evaluation capabilities across Europe. On the one hand, you are looking at Europe and developing more of Europe in that particular regard; on the other hand, we know the transatlantic work with the United States is of critical importance. How is the United States going to look at companies like you if you get too involved with European companies?

Mr Griffiths: You will probably have to ask them.

Dr Price: It is a difficult balance but the ITAL waiver provision remains a critical issue with respect to transatlantic technology.

Q72 Robert Key: That is interesting because I certainly have been convinced that the ITAR waiver is not as important as we thought it was. Am I wrong?

Dr Price: You still have the problem with early research activity for companies that are operating both sides, as obviously we do with 50 per cent of our business in the United States. It is very difficult with the TAA restrictions on the transfer of very early ideas which often start the innovative process going, where you have quite significant bureaucracy on one side of the pond to start the discussions. That can create a bifurcation of technology investigation which probably is to the detriment of the UK side of the technology balance.

Q73 Robert Key: In the end, the employees of our defence companies are going to be the people who deliver these strategies. Investment in people is therefore critical. Is the United Kingdom now capable of producing young people sufficiently educated in science and technology to fulfil our dreams for the future of defence in this country?

Mr Griffiths: There is no question that they are capable of doing it. There may be concerns as to whether, notwithstanding the pressures on the market here, we are producing them in sufficient quantity. In particular, it is a real theme for me within my own business when I look at the throughput of young people through the A level system, perhaps acquiring very high quality qualifications at that level in those sorts of subjects that you think would be applicable through the tertiary education system, to developing careers in this sector and how many people with those sorts of qualifications are then lost to the engineering community as a whole and perhaps take preference in banking, accountancy, the legal profession or whatever.

Dr Price: The attractiveness may be the most important thing rather than the skill.

Q74 Chairman: Dr Price, is it not your view that the prospect of getting any meaningful ITAR waiver is dead?

Dr Price: Yes. I am not waiting for one.

Q75 Chairman: It is not a crucial issue from your point of view?

Dr Price: Not in that sense, other than the fact that it makes quite a big difference in terms of your industrial strategy. That was the point I was making. It makes a difference to how an industrial strategy from a company point of view would unfold, compared to if it does not exist.

Q76 Chairman: Mr Griffiths, you said that you thought from the Defence Industrial Strategy the figure - I think you are referring to the graph on page 31 under A3.51 - for research and technology spending in the UK suggested that it was at an optimal level. That deals with 2001. Is it not right that there has been a long term decline in UK spending on research and technology?

Mr Griffiths: I cannot quantify it but I believe that is the case, yes.

Q77 Chairman: Does that not, even according to this graph, suggest that the future capability of British defence equipment in, say, 15 years' time will be seriously deficient?

Mr Griffiths: I think that is true.

Q78 Chairman: That does not sound optimal to me.

Mr Griffiths: I did not say it was optimal. I said there was an argument within the White Paper that suggested that the current level of expenditure shown on that graph is the additional payback from increasing the level because the shape of the graph was quite modest. If you see a reduction in the level of that spend, you would fall very rapidly down that graph.

Chairman: Finally, can we get on to the crucial issue of implementation?

Q79 Mr Jones: The foreword to the White Paper says that the strategy will not be delivered unless the whole of the defence acquisition community, including industry, is able to make the necessary shifts in behaviours, organisation and business processes. What happens next? This document is quite challenging to you in industry. Are there any signs that the same tough questioning and hard decisions will occur in terms of DPA who have not come out in the many years they have been in existence with great valour?

Mr Griffiths: If I deal with the second part of that first, it does present huge challenges for the wider MoD, not just the DPA. Where do those challenges exist? First of all, they are behavioural. We have talked about the fact that the bedrock of MoD procurement policy now, as described in this document, is on value for money for defence; whereas if you went back to the 2002 strategy statement competition was the bedrock. That does drive huge behavioural changes in terms of mindset within the MoD and industry. It raises questions as to how you are going to measure value for money for defence and those are not answered in the White Paper. There is this emphasis on through life management. I would observe frankly that if one is genuinely to take a through life approach to this it begs the question as to whether the organisational structure within the MoD, the DPA and the DLA is aligned to that.

Q80 Mr Jones: I agree with you on that but civil servants are not known for abolishing themselves, are they? It is a brave minister that puts something forward and that is thwarted in the MoD. Unless we have those changes this is not going to work, is it?

Mr Griffiths: I do not think it is, no. In fairness though, they have within the wider MoD initiated two quite important pieces of work during the first part of this year, one looking at organisational and structural issues led by a two star Tom MacLean and, secondly, a piece of work looking at the behavioural and cultural changes that need to be made, led by David Febrash. Those are due to report in the first half of this year and I think it will be important to observe what recommendations emerge from that and whether indeed they are implemented. There are significant changes that have to be accepted by industry culturally as well so it is a two way street.

Q81 Mr Havard: What are the business processes that need to change?

Mr Griffiths: First of all, there is this value for money issue, the way in which bids and tenders are evaluated. In the days when competition was the bedrock of procurement policy, it was relatively straightforward. In an environment where we are looking intuitively at much wider considerations, including the industrial dimension, it is very much more complex. The thing that worries a number of industrialists is whether or not, when they are engaging in competition according to whatever new rules are defined, those rules are clear.

Q82 Mr Jones: There is not a way forward. One might send certain civil servants in Bristol running for the smelling salts but has not going down this road, away from competition, pushed the procurement part of it back into industry? If we have these partnership arrangements, some of this should be done to make it more cost effective in terms of trying to get that joined up thinking.

Mr Griffiths: There is a risk though that, if all one is doing through this Defence Industrial Strategy is removing from the top layer to the second layer, the blind application of competition, you are not achieving what I think is the underlying objective. Whilst you are right that the level at which in some sectors competition will be applied may occur now lower down the supply chain, we need to make sure nonetheless that we are not using competition in a way that is going to sacrifice important industrial capabilities which may reside somewhere lower down in the supply chain.

Q83 Mr Havard: Clarity does not necessarily give you transparency?

Mr Griffiths: No.

Chairman: Gentlemen, thank you very much indeed. We are collectively extremely grateful to you for taking the trouble to answer our questions and we hope it was not too traumatic.

Witness: Lord Levene of Portsoken, KBE, a Member of the House of Lords, gave evidence.

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 to 1991. 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 some of how we got to where we are now, which I am either praised or blamed for being to some extent the author of. 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 one per cent 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 ten to twelve years? If the foundation was so good, what caused the problems?

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

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

Lord Levene of Portsoken: You said much of British industry now resides in the United States. It is true that British industry has a lot of interests. 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 do so 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 costs us a lot more, which of course is precisely what happened. We have to look at what is available. We have to look at what technologies are available. We came to the conclusion even 15 or 17 years ago that if we were really to compete with the United States no one European country could do that on its own, simply because of the costs involved. European collaboration would help to make a balance and you would not be in the sort of position you describe, where we are dependent on one country. I would not like to use the phrase "holding us over a barrel" but once you are dependent on one supplier you do not have a great deal of choice.

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

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

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

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

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

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

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

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

Q93 John Smith: You said in your day that there was one major, prime company in this country and it still is today but there is a difference. You also said that we are to a great extent dependent on one country. To what extent are we now dependent on one company? It is estimated that over 50 per cent 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 in to unravel and turn around. I am interested to see what you think of this current policy document which the government has produced. Is it a step forward, in your opinion, or does it take you back to where you came in, because I suspect that there are implications in this report that take you back to your beginnings in the MoD and that some of the faults you had to sort out will re-emerge.

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

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

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

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

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

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

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

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

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

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

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

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