Select Committee on Defence Sixth Report


1.With the notable exception of the Maritime sector, good progress was made in implementing the Defence Industrial Strategy in 2006. We congratulate the Minister for Defence Procurement for driving the process forward at a fast pace. (Paragraph 8)
2.We are disappointed that the required restructuring of the surface ship industry has not taken place and that this has delayed the main investment decision on the Future Carriers. It is possible, though not inevitable, that this may result in later delivery of the carriers. This in turn may lead to a capability gap which could be both damaging to the defence of the country and expensive to deal with. On the other hand it might lead to the project being better managed. We accept that the MoD is right to insist on the speedy restructuring of industry, and we will be keeping a close eye on this important matter as it progresses. (Paragraph 19)
3.We were concerned to hear reports that the Future Carrier programme might have been cancelled because of budgetary pressures. The programme is a key element of the 'Carrier Strike' capability needed by our Armed Forces and vital to the future of the UK maritime sector. We welcome the assurance provided by the Minister for Defence Procurement of the Government's continuing commitment to this programme. (Paragraph 20)
4.The surface ship sector needs clarity about future design and build work, and maintenance and repair work, to make appropriate decisions about the best way to restructure. However, until the outcome of the Spending Review 2007 is known, the level of future funding for naval equipment and support remains unclear. It is hoped that the outcome of the Spending Review, expected in the Summer, will provide the clarity the surface ship sector needs to proceed with the restructuring required to deliver equipment and support in the most efficient way. (Paragraph 25)
5.It is disappointing that the consolidation in the submarine industry did not take place in 2006 as expected. We look to the MoD to continue to encourage industry to integrate, as this will be vital to ensuring that there is a focus on Through Life Capability which should deliver substantial savings to the MoD. If the Government's proposal for a new generation of nuclear missile submarines is accepted, it will be essential to have an efficient submarine industry focused on through-life costs. (Paragraph 29)
6.We note the Minister for Defence Procurement's confidence that the submarine industry is making the value for money improvements required by the MoD, which should enable the MoD to make a decision on Astute boat 4 in early 2007. Given the importance of this contract to maintaining capability in the UK's submarine industry, we plan to watch this closely. (Paragraph 30)
7.We note that the MoD is still working with BAE Systems and other companies in the aerospace sector to reach agreement on the appropriate size of the sector given current and future demand. (Paragraph 33)
8.The Typhoon aircraft needs to be upgraded so that it can take on the ground attack role required in current operations. We support the MoD in its aim to improve the industrial structure of the Typhoon collaborative programme, so that the required upgrading of Typhoon aircraft can be undertaken as efficiently as possible and better value for money delivered across the whole Typhoon programme. (Paragraph 36)
9.We welcome the MoD's decision to fund a four year UAV Technology Demonstrator Programme. UAVs have the potential to provide a new dimension to the force mix in the future. (Paragraph 38)
10.We welcome the formation of Team Complex Weapons which should help sustain key skills and capability within the UK. We look to the MoD to ensure that the required agreement in this area is concluded and signed early in 2007. (Paragraph 40)
11.It is regrettable that the reshaping of the defence industry required by the Defence Industrial Strategy has resulted in job decreases in some sectors of the defence industry. However, a more streamlined defence industry will better match the MoD's current and future requirements and ensure that the industry remains competitive when bidding for overseas defence contracts. We note that the MoD, the Department for Trade and Industry, the Regional Development Agencies and the devolved agencies are working closely together to provide appropriate support to those areas affected by reductions in defence work. Value for money in defence procurement is important to the defence budget as well as to industry. (Paragraph 46)
12.We consider it vital that the MoD and the defence industry continue to recruit and retain high quality staff, in particular, engineers, scientists and technicians, in this period of change. Such staff are key to ensuring that the benefits of the DIS are delivered. We welcome the joint "team defence" initiative which has been launched to promote the opportunities in the defence industry. We look to the MoD and industry to continue to review career development opportunities to ensure that high quality staff in specialist areas are not lost. (Paragraph 48)
13.We plan to examine in a future inquiry the MoD's progress in implementing the recommendations of the Enabling Acquisition Change report and whether the expected improvements in equipment acquisition are delivered. (Paragraph 53)
14.Improving the skills of MoD staff, particularly commercial and technical skills, will be crucial to ensuring that the expected benefits from the DIS are delivered. The MoD is seeking to address skills gaps through training or external recruitment. The appointment of the first MoD Commercial Director is welcome, but he must be given the resources needed to develop the commercial skills of MoD staff. (Paragraph 56)
15.We note the publication of the Defence Technology Strategy and the MoD's initiatives to encourage innovation, such as the Competition of Ideas and the Grand Challenge. We are disappointed that the Strategy did not set out how much the MoD would be investing of its budget in defence research. We will be examining the funding of Defence Research and Technology in our forthcoming report on the work of the Defence Science and Technology Laboratory. (Paragraph 64)
16.The MoD has sought to improve its understanding of Small and Medium-size Enterprises and the supply chain, but its progress has been considered slow by one of the major defence trade associations. The MoD should continue to work closely with the defence trade associations, the Department of Trade and Industry, the Treasury, Regional Development Agencies, and the devolved agencies, to identify approaches to improve its understanding in this area further. This will be vital to the success of the DIS. Prime contractors also need to improve their understanding of supply chains and the key role of Small and Medium-size Enterprises. (Paragraph 68)
17.Small and Medium-size Enterprises are often the source of highly innovative ideas and products. In understanding supply chains, the MoD must improve its understanding of the contribution made by such companies and the impact if they disappeared from the supply chain. We look to the MoD to improve its understanding of the innovation provided by Small and Medium-size Enterprises and the investment they make in Research and Technology. (Paragraph 69)
18.Long-term partnering arrangements are a new approach for the MoD and require specialist skills in negotiating and letting the contracts for such arrangements, and for monitoring performance once contracts have been let. We look to the MoD to ensure that its staff who deal with long-term partnering arrangements have sufficient training in such arrangements, or recruit staff with the experience required. (Paragraph 73)
19.We consider that there would be real benefit in the MoD producing a document for industry which set out what partnering relationships should look like, and the principles underpinning long-term partnering agreements. We look to the MoD to take this forward. (Paragraph 74)
20.Some long-term partnering arrangements will be let on a non-competitive basis as in some sectors, if the work is to be retained in the UK, there is no other supplier. There is, therefore, a risk that the MoD may not be contracting with the most efficient supplier and achieving best value for money. We consider it vital that the MoD build into such long-term partnering arrangements incentives which drive real efficiency into the supplier's organisation. This will be particularly important where the throughput of work for such arrangements may well reduce in the future. (Paragraph 78)
21.We note that it is possible to have competition for the work underlying long-term partnering arrangements and that the MoD has introduced measures to encourage this. We consider it important that Small and Medium-size Enterprises are provided with an opportunity to compete for such work and look to the MoD to ensure such opportunities are provided. (Paragraph 79)
22.We welcome the signature of the Memorandum of Understanding covering production, sustainment and follow-on development on the Joint Strike Fighter programme, and congratulate the Minister for Defence Procurement and his staff on its achievement. Because of the MoD's unwillingness to provide us with the supplement to the Memorandum of Understanding, we can only report that the Minister for Defence Procurement has assured us that the UK will get all the technology transfer it requires to operate the Joint Strike Fighter independently. While we are of course pleased to hear this, we continue to have concerns about how things will work out. In particular, we will wish to probe how robust the Memorandum of Understanding will prove in practice and will seek an early opportunity to take oral evidence on this. UK industry also needs to know to what extent it will have access to the technology transferred under the Memorandum of Understanding agreement and its unpublished supplement. These are matters that we will monitor closely. (Paragraph 86)
23.The Minister for Defence Procurement assured us that the US Administration was still committed to the JSF programme and specifically the STOVL variant of the JSF which the UK is procuring. We expect the MoD to keep a close watch on any possible changes to the US JSF programme given the potential impact on the UK JSF programme. (Paragraph 87)
24.There is an initiative underway to create an overarching agreement with the US on the issue of technology transfer. We recommend that the UK Government attach the highest priority to achieving this aim, as a concrete embodiment of the relationship which the UK enjoys with the US. This is needed to ensure that separate negotiations do not have to take place for each future equipment programme and it should lead to quicker decision-making on the specific technology transfers for future programmes. We look to the MoD to ensure that the overarching agreement covers industry to industry technology transfer as well as Government to Government technology transfer, and clarifies the position of UK companies with subsidiaries within the USA. (Paragraph 89)
25.The MoD is finalising new arrangements for the supply of munitions after the former Royal Ordnance Factory sites at Bridgwater and Chorley close. It is confident that these arrangements will provide security of supply in this critical area. (Paragraph 92)
26.Work on how best to sustain the required access to general munitions is ongoing. We look to the MoD to complete this work and commit the required investment by the end of 2007 as planned. (Paragraph 93)
27.It is important that the MoD, working with the defence industry, ensure that the assumptions and proposals in the DIS remain relevant. We note that the MoD plans to review the DIS at the end of 2007, two years after it was published. As the DIS is the Government's Strategy, we also look to other Government bodies, particularly the Department of Trade and Industry and the Treasury, to review the DIS to ensure it remains relevant. (Paragraph 95)
28.The Minister for Defence Procurement is confident that the changes being introduced will be permanent, but this remains to be seen. We look to the MoD to ensure that the changes being implemented as a result of the DIS are fully embedded so that they deliver the expected benefits. (Paragraph 98)
29.The MoD estimates that the costs of implementing the DIS in 2006-07 and 2007-08 will total just over £50 million. However, these costs only cover the MoD internal costs, and do not include the costs which will be incurred in the move away from competitive procurement in many areas, and from sustaining technological and industrial capabilities in the UK. We look to the MoD to estimate the overall costs of implementing the Defence Industrial Strategy. (Paragraph 103)
30.The DIS has, in the MoD's own words, the potential for "major pay-off". However, to realise the pay-off, the required funding must be made available to fund the future equipment programme. We would consider it a real missed opportunity if adequate funding for the MoD to realise the full benefits of the DIS were not provided. We plan to take a close interest in the outcome of the Comprehensive Spending Review. (Paragraph 104)
31.The MoD plans to assess whether the DIS is delivering the expected benefits by asking the Armed Forces, the defence industry and MoD staff whether they can see improvements or a changes in the processes. We welcome such an approach and look to the MoD to ensure that this is undertaken on a regular basis and represents a representative cross-section of different ranks, grades and company sizes. However, we also expect the MoD to continue to measure its performance in procuring equipment to cost, time and quality and to develop metrics to measure its success in managing equipment on a through-life basis. (Paragraph 106)
32.We plan to continue to monitor the progress in implementing the DIS and whether the expected benefits are delivered, and will use the MoD's checklist for 2007 as the basis for doing this. (Paragraph 107)

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