Examination of Witnesses (Questions 20
- 39)
TUESDAY 19 DECEMBER 2006
LORD DRAYSON,
MR DAVID
GOULD CB, MR
AMYAS MORSE
AND MR
MARK GIBSON
Q20 Chairman: You said you had experience
of partnering at PriceWaterhouse but that it had not been around
for very long. Are you talking about in the UK?
Mr Morse: In Australia, obviously,
it has been around for longer.
Q21 Chairman: Have you had international
experience of partnering in those areas where it has been around?
Mr Morse: No, and I do not want
to present myself, and nor did I join, on the basis of being a
great partnering expert.
Q22 Chairman: That is the direction
that DIS is moving in, is it not?
Mr Morse: It is. What I am simply
saying is that, as it happens, I have experience of doing some
work in partnering arrangements in the UK but drawing on international
experience; because PW was, and is, an international organisation
I was able to call on colleagues round the world for international
experience.
Q23 Linda Gilroy: Minister, when
you came before us on 28 February you said that pain comes from
change and change is always painful. A major change for industry
is to adjust to putting less focus on the design and development
of new platforms and more of a focus on the insertion of upgrades
and new capabilities and Through-Life maintenance of existing
platforms. Is industry making the necessary adjustments and, if
so, what evidence is there to bear that out?
Lord Drayson: Yes, I do believe
industry is. An early example, I think, we secured was the agreement
with Augusta Westland on helicopters where we negotiated a fundamentally
new type of agreement which linked the procurement of a new helicopter,
Future Lynx, to the performance of the company in the support
of the existing fleet of helicopters. That was, in particular,
the availability of those helicopters on operations in Iraq and
Afghanistan. I remember having the conversation with the leadership
of the company where I said how important it was for us to get
better performance from our existing fleet of helicopters and
that I was going to link that to negotiations of the future contract.
They said to me: "Our ability to support (ie provide spares,
servicing support) for the existing fleet of helicopters depends
upon the Ministry of Defence making timely decisions. Are you
going to commit to the MoD having criteria, metrics, in terms
of timely decisions?" I said: "Absolutely, yes."
So this was a first. This was a contract which had tough goals,
metrics, linked to financial rewards to the company where both
the company and the Ministry of Defence signed up to those performance
metrics. I was there last week, at our largest helicopter base,
getting the feedback and they were saying to me, yes, they were
seeing that this was having a result in terms of the effect on
the front line in terms of the provision of spares availability
to helicopters. So there is an example—there are other examples
on armoured fighting vehicles—where I do believe that we
are implementing this effectively. It is requiring us to develop
new types of contracts and it does require us, as Amyas has said,
to develop within the Ministry of Defence the expertise to do
this. I think we are at the stage of having done this in certain
sectors, and what we need to make sure of is that we get efficient
at the roll-out of this into other sectors by having a standard
form of definition of what we mean in these different agreements,
for example define clearly partnering, and that was one of the
things which we discussed last week at the seminar—how we
do that.
Q24 Linda Gilroy: Part of that whole
history of Smart Acquisition and Smart Procurement has been about
trying to get better value for money as well as delivery of things
on time. What sort of scope do the early lessons of that suggest
to you that there is for achieving that sort of value for money?
Lord Drayson: I think there is,
in the end, a trade-off between the Department providing clarity
to industry in terms of future plans and then industry being able
to invest to provide improved efficiency and, therefore, better
affordability. The more that the MoD can provide that clarity
the better value for money we are going to achieve. The difficulty
in that is that the world changes and, therefore, we have to balance
the fact that the future is uncertain and we need to maintain
the flexibility to do that, to flex our plans to meet how the
future unfolds. However, we need to recognise, and this is where
the MoD has to develop real expertise, both commercially and technically,
and have a real understanding of how these procurement decisions
and the level of future clarity and transparency impacts on delivery
performance at cost. What we are aiming to do, and what has not
been done before, is to take more of a portfolio approach across
projects such that we have a clear view, building on the Defence
Industrial Strategy, on how we make individual decisions on procurement
projects, how that affects the capability within an area, and
how we therefore overall get best value for money.
Q25 Linda Gilroy: You have also been
quoted as saying that in some sectors you would have liked to
have seen greater pace to the change that industry needs to make.
You quoted some early success but what are the sectors that are
proving most resistant, and where would you like to see a better
pace of change?
Lord Drayson: I think the most
difficult this year has been the maritime sector, although I am
pleased that just in the last week we have seen some really good
progress in the maritime sector.
Q26 Chairman: We will come on to
the maritime sector separately.
Lord Drayson: Okay, but I think
that is one example. We have seen good early progress in complex
weapons missiles; we need to now see them, in terms of team complex
weapons, coming together to manage a very difficult decline in
future orders for complex weapons—we need to see that agreement
concluded and signed in the early part of next year. I think we
have made some good progress on armoured fighting vehicles, but
I want to see that further developed in the early part of next
year. Presumably we are going to talk about FRES at some point,
but in terms of armoured fighting vehicles, FRES is a very important
programme and we need to see the development in armoured fighting
vehicles linked to the implementation of our plans on FRES. The
one which I have been pushing hardest to see progress on, and
was getting a bit worried about, was maritime, but I really do
think we are now starting to see some real progress on that, both
on ships and submarines.
Q27 Mr Jones: Minister, you said
you wanted to see movement on more than FRES. We had Sir Peter
Spencer before us last week, and I have got to say it was not
very good, to say the least; it was the worst performance I have
ever seen before this Committee, and he would not give us an in-service
date for FRES, and in fact this is a change in policy that no
one seems to know about in this Committee. Have you got an idea
of the in-service date for FRES?
Lord Drayson: If you recall, we
had a discussion on in-service dates when I came before the Committee
about aircraft carriers. In looking at the problems the Department
has got into in the past, one of the things which I am really
trying to do is put rigour and discipline into the procurement
process, and that means having a project management system where
the rules are clear, people stick to them and then they are judged
by their performance against those rules. An important rule which
I implemented last year was that at the Main Gate decision, at
the main investment decision, we would publish publicly the cost
target, the key user requirements and the in-service date for
projects. Until that Main Gate decision has been taken we do not
publish, talk about, in-service dates because there is a negotiation
that takes place right up until the conclusion of the contract
which allows us to go through the main gate. It really prejudices
your ability to negotiate with the different industrial partners,
and FRES is a clear example of this, those issues around cost,
time and performance. This is about the Department—
Q28 Mr Jones: No, he actually told
us that industry knew what this in-service date was but they were
not prepared to tell us. Can I just turn it round on you, if you
are sat on this side of the table: how can we then judge that
your Department is actually delivering what it says it is delivering
if we do not even know what the in-service date is going to be?
Lord Drayson: You will know the
in-service date for a project when we make the main investment
decision, which is when we commit to buying a piece of equipment
at a future date for a price to a set of requirements.
Q29 Mr Jones: You could go for years
and years on this basis, could you not?
Lord Drayson: No. This is a really
important principle because if you do not have these principles
set down, you lose any ability for people to try and manage—that
is both people within the procurement system and people within
industry—expectations and negotiation positions without
a clear set of rules through the process. You have a phase where
you have the decision about what the requirement is: what is this
piece of equipment going to do; what is it the military need;
what is the general specification? You then go through an assessment
of the different options, the different design ideas, the different
alternatives, and then you explore, with industry, the possibilities.
There is a trade-off. What is more important to you: something
at a particular date, or something with a particular performance
or something at a particular price?
Q30 Mr Jones: So the in-service dates
that have been given to this Committee before by, I think, at
least, two Secretaries of State on FRES and, also, by General
Jackson, did not mean anything?
Lord Drayson: We have changed
the policy to have a clear rule. I remember you saying to me you
thought it was a brave move—
Q31 Mr Jones: "Refreshing",
I think it was.
Lord Drayson: Yes. I think it
is key to good accountability and good project management. If
you imagine: take a project, project X, and one company has got
one particular solution which does not do such a good job but
can be available very quickly; another company offers a solution
which has more capability but needs longer—more development
to get done. If you were in a phase where you have declared your
date, then you have biased the negotiation between those different
options before the Ministry of Defence has decided, with feedback
from the user, which is the most important. So there is a time
when it is absolutely right—and, I think, fundamentally
important—to delivering value for money and the kit on time
and to budget, where you are negotiating those three things. We
have done exactly this on the aircraft.
Chairman: I want to move us back to Linda's
questions now, because I think we are getting blown off course,
rather.
Mr Jenkin: Is the in-service date not
crucial to the requirement of the Armed Services? What is the
point of bringing something into service if it is much too late
for what the Armed Services require? The in-service date should
be up front as part of the requirement.
Q32 Chairman: Answer that briefly,
Minister, if you would and then we will get back to Linda Gilroy.
Lord Drayson: There are often
(I would not say always) different pieces of kit to solve a particular
problem or to do a particular job, and they will have different
levels of development. Therefore they can be available at different
times. So, for instance, you say to the Army: "Which is more
important to you? Is it to have this thing which can do all of
this but is going to be later, or is it more important for you
to have not such a good thing but to have it sooner?" That
is a decision which needs to be taken carefully in conjunction
with the end-user. There will be different views for different
types of equipment. For some pieces of equipment, absolutely right:
"The most important thing is we get something with that lower
level of requirement faster". At other times it will be:
"No, we really want to take longer to get this additional
capability".
Q33 Linda Gilroy: I am tempted to
pursue that but I think the Chairman might stop me! We talked
in previous sessions about the way in which the big changes with
DIS would be job increases in some sectors and decreases in other
sectors, but you want to manage that in a "Smart" way.
Can you give us some indication of where those job increases and
decreases are beginning to pan out and exactly how the Government
is assisting those areas where there are, or are going to be,
job decreases?
Lord Drayson: Clearly, for all
of us, the most difficult areas are where there are job decreases.
If I focus on that area, a clear example of that is in complex
weapons, where, as we set out in the Defence Industrial Strategy,
there were very significant declines in demand for complex weapons.
What we wanted to do was manage our future orders in complex weapons
in the most intelligent way, such that we minimise that effect
and maximise the retention of skills and capability within the
industry. We are doing that; I am pleased at the way in which
team complex weapons has come together, but it has led to job
losses in the different companies, as we expected, over the past
year. What I can say is that (and I will turn to the market in
a moment to talk about the mitigation of this) absent the Defence
Industrial Strategy those job losses would be, I believe, greater
and the approach would have been much less strategic, and we would
not be retaining the key skills that we needed to.
Q34 Linda Gilroy: Can I just ask
you, before you begin, if you can remind the Committee of the
scale of the job decreases we are talking about in that particular
area?
Mr Gibson: I do not know the answer.
Lord Drayson: We are talking about
hundreds of people in different businesses.
Q35 Linda Gilroy: So what would be
a large scale redundancy situation in DTI terms?
Lord Drayson: Yes, but spread
across different businesses; not necessarily all in the same businesses;
across the industry.
Mr Gibson: We do see an obligation
in the DTI to work as closely as possible with the Ministry of
Defence in these circumstances. It was the Government's Defence
Industrial Strategy, so I think there is a clear obligation on
the part of the Department, and particularly the Regional Development
Agencies, to be aware of these potential job losses and try and
do as much as possible to work with the local providers on the
ground, the job centres and the Learning and Skills Council, to
put together packages of support to try and help in these circumstances
and to try and look ahead and ameliorate the situation. An example
is in fixed-wing aircraft in the North West where there will be
job losses over a number of years, and the North West RDA has
put in place a good programme trying to help the supply chain
in the North West improve its performance and, therefore, try
and maximise employment in the long term.[2]
Q36 Linda Gilroy: In responding to
those types of job losses which do tend to happen piecemeal rather
than in one fell swoop, are there sort of particular challenges?
I mentioned large-scale redundancies just now, but certainly in
the situation, which I know from my own constituency, we face
in relation to fairly major job losses arising from the lesser
amount of submarine work, it is quite difficult to get an idea
of who and when exactly the redundancies are going to occur and,
therefore, how you can actually make sure that you do not lose
the skills, which is presumably an aim you would have in the DTI.
Mr Gibson: Yes, it is an aim.
I think honestly the bigger the job losses the more difficult
it is. Against that, in the aerospace sector you do tend to have
more warning than, say, in the automotive sector. We have handled
MG Rover and Peugeot in the Department where you are talking of
thousands of people—in Rover's case several thousands of
people. In aerospace you do tend to have longer lead times; you
can do more planning; and, therefore, you can try and put in place
programmes that help the industry adjust over a longer period.
The answer is: the bigger the job losses the more the regional
agencies have to step up to the mark. In my view they have done
it pretty well recently.
Q37 Willie Rennie: You referred to
close working relationships between the DTI and the MoD in this
area. Do the same kinds of relationships exist with the Scottish
Executive and the Welsh Assembly?
Mr Gibson: The answer to that
is: yes, we work well with the devolved agencies. An example is
of R&D funding where we have received collaborative R&D
funding with contributions from Scotland, Wales and the English
RDAs, as well as the main department. I think the working relations
are very good. Between the DTI and the MoD they are probably the
best ever in my experience. The Defence Industrial Strategy has
played a major part in that genuinely.
Mr Hamilton: My colleague for the Liberal
Party has asked the question I was asking. It just goes to show
that in Scotland Labour and Liberal are working all together!
Q38 Linda Gilroy: If I might turn
to the Minister and just picking up on the point about trying
to retain the skills, and the discussion we were having just now
about the way in which Through Life Capability is very much a
focus point in procurement. How can we keep engineers, scientists
and technicians—both attract them into and retain them—in
defence industries which are going to be geared to product support
and technology insertion into existing platforms, when they may
feel that they want to be at the cutting edge of design and new
equipment?
Lord Drayson: You are absolutely
right, this is a very important issue which we need to handle
and I think we have done a lot this year. We have identified there
was an opportunity and a need to do better at this, so we set
up with industry this idea of team defence—to go out and
actively promote clear opportunities for scientists and engineers,
working within the defence industry. I think there are some important
lessons that the defence industry can learn from other industries,
for example the pharmaceutical industry, and those have been taken
on board. Those have led to specific actions; and those actions.
For example, with the publication of the Defence Technology Strategy,
we launched the grand challenge, the competition for ideas, and
the research fellowships. All of these were to do two things:
one, they were to get people to work on solving problems which
are very real challenging problems that defence has today; but,
two, they were about upping the profile of defence—the fact
that people can have very rewarding and very interesting careers
working within defence, either within the Ministry of Defence
or within industry—just to get over how cool some of the
technology is and how cutting edge it is, and to get a higher
profile. I think we have been successful on that. The response
we have had to the Grand Challenge, the Competition for ideas
and the Defence Technology Strategy has been very positive indeed.
We have also made changes to our graduate recruitment programme.
That has really worked well. I would say that end of the human
resources picture is looking pretty healthy in terms of getting
young people joining. We need to further work in career development
for scientists and engineers within procurement. One of the things
which I want to achieve this next year is career structures, whereby
it is possible for scientists and engineers to stay doing science
and engineering within defence procurement as civil servants or
someone within the military without having to move into other
areas, such that we get deeper expertise in the technology. That
is one of the objectives which we have for the implementation
of the new defence equipment support organisation.
Q39 Linda Gilroy: Finally, turning
to the general shape of the UK defence industry, do you expect
to see significant mergers and further consolidation? In order
to allow other colleagues to come in and move on, perhaps I could
couple that with saying if you see consolidation is it within
the UK; is it international; and, if it is international, is that
mergers or takeovers involving UK defence companies? What is the
general shape? Is it US; is it European?
Lord Drayson: I think the general
view is that the pace of change within the industry internationally
is going to maintain the fairly fast rate that it has had in the
recent past and, therefore, we can expect to see further consolidation.
We were pleased to see the recent announcement of the discussions
around the joint venture in maritime between British Aerospace
and VT. That is an example; there may well be others. The Defence
Industrial Strategy sets out the Government's clear principles
on this, which is that we are aiming to create the most open and
healthy defence market in the world here in the United Kingdom;
but we recognise that to deliver operational sovereignty, which
is a clear objective that we have, we have to have a policy which
is very strict on matters of skills, intellectual property and
design authority. We have seen the effect of that happening, for
example, at Boeing setting up facilities here in the United Kingdom,
to put itself in a position to be able to compete for FRES; because
what we have said on FRES is that, because FRES is going to be
so fundamentally important to the British Army, that we need to
make sure that the intellectual property and the design authority
resides in the United Kingdom and, therefore, companies that wish
to compete on FRES have to compete on the basis that those will
be the rules. I think that is the way in which we effectively
manage the consolidation which is going to take place in the industry,
and is going to take place internationally as well as nationally.
2 The North West Regional Development Agency is supporting
the North West Aerospace Alliance, a regional partner of the Society
of British Aerospace Companies, which has developed and is now
delivering the supply chain excellence programme to which reference
was made. Back
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