Examination of Witnesses (Questions 40
- 59)
TUESDAY 19 DECEMBER 2006
LORD DRAYSON,
MR DAVID
GOULD CB, MR
AMYAS MORSE
AND MR
MARK GIBSON
Q40 Linda Gilroy: Do you think it
is possible to look ahead, say, five years and say how DIS will
have helped to create a sort of British dimension to the defence
industry of providing capacity in the UK?
Lord Drayson: Absolutely. I have
already had the feedback (and some of it has been public) both
from international partners, other governments, and feedback from
the management of international companies that the Defence Industrial
Strategy sets out (I think in a way which is unique globally)
the clear rules of engagement with the Ministry of Defence as
the customer on these matters. We are being absolutely upfront
and clear to people about what we expect. Therefore, whilst saying
we are happy for foreign investment, we are happy for companies
which have ownership outside the United Kingdom to supply us,
but they must do so with the clear understanding of the rules
which we expect them to adhere to, which relate to matters of
management, intellectual property and design authority; because
we need to make sure that we do not prejudice in any way, in fact
we use opportunities to strengthen, the operational sovereignty
the United Kingdom has over defence capability when this consolidation
takes place, and in the way in which we do international collaborations.
I think a good example of that was the progress which we have
been able to make on the Joint Strike Fighters.
Q41 Chairman: Are you saying, Minister,
that if those criteria are satisfied you would have no objection
to British defence industry being dominated by foreign owned subsidiaries?
Lord Drayson: I would prefer British
defence industry not to be dominated, but what is most important
is for the Armed Forces to get the equipment they need to do the
job that they have to do, and to deliver value to the taxpayer.
What is very important to do that is that we have access to the
skills and the capacities here in this country. What we cannot
have is a situation where, for those areas where we require operational
sovereignty, those skills, that intellectual property is offshore
of the United Kingdom, because that will prejudice our military
effect. What I hope and expect is that by providing this clarity,
in effect facing up to the challenges of globalisation, we have
a government policy which actually has the best framework to enable
British industry to compete globally and to win. I think by doing
this you create a situation where actually you give industry the
best possible chance in this country to actually do well internationally.
Q42 Mr Jones: Can I turn to the maritime
sector. When you were before us in February of this year you said
you wanted to see the Maritime Industrial Strategy implemented
by 2006. Can you give us an update on where we are with the Maritime
Strategy?
Lord Drayson: Within the maritime
there are two sides to it: the submarines and surface ships. In
both areas of the maritime industry we see that there is a need
for the current situation to change, and our current situation
is that we have patches of very good performance, modern facilities,
globally competitive facilities, but we do not across the maritime
industry see that. We have duplication; we have inefficiency.
What we wanted to see was that industry change, where in the past
businesses have competed for them to work together to provide
a Through Life solution to us. In the past we have had separate
contracts with a company to design and build a ship, a company
to maintain a ship, a company to upgrade a ship. What we need
is to be able to get to the point, and the whole thinking behind
the Defence Industrial Strategy, to be able to contract with people
on a Through Life basis and design in maintainability. That is
how you get better capability and better value for money. We have
seen slow programmes on that; and I think part of that is because
the industry is looking at 10 years of very significant orders.
What I have said is that those orders are not going to come unless
the consolidation and the changes happen. I am very pleased that
now we are seeing the announcement last week of the BAE/VT joint
venture, if that is consummated; and I think that is a structure
which we within the Ministry of Defence think is the right structure—unlike
some of the deals we looked at earlier in the year which looked
like money being taken out of the industry because there were
premiums being paid to shareholders to takeover companies which
meant that money was not going to get invested in the industry.
This joint venture structure creates the entity which we want
to see, to be able to contract Through Life, but does not actually
take money out of the industry. It means that the capital can
stay in the industry.
Q43 Mr Jones: Where does that leave
the CVF in terms of Main Gate?
Lord Drayson: If that deal goes
through, and we have seen the initial announcement, it puts the
CVF in a good position. This is exactly what we need to see to
be able to contract with confidence all the aircraft carriers.
Q44 Mr Jones: You are being a bit
more forceful. I know it has already been quoted about the seminar
last Friday, but what you actually said there was, "When
I said there would not be an order for CVF until consolidation
happens I meant it"?
Lord Drayson: That is absolutely
right.
Q45 Mr Jones: You will not make any
progress on CVF until consolidation actually happens?
Lord Drayson: I believe it would
be quite wrong for the Department to close-contract for the CVF
without it being in place. Industry knows that; I have been saying
that consistently; and I think that clarity has helped industry
get its thinking clear; and I do expect that this will happen.
For me, as a Minister, that is the precondition for signing the
contract.
Q46 Mr Jones: That is very interesting.
Can I come back to where Bernard came in when asking his question
in terms of delivering capacity. Are we saying that the thing
which will determine when our Royal Navy gets its next generation
of carriers is the consolidation of industry, which is actually
influencing the in-service date?
Lord Drayson: Being completely
clear on this, that is the reality anyway. The reality is that
in this market in the maritime industry there is an inter-dependence
between us as the customer and the yards as the supplier. Therefore,
what we have to do is place these orders intelligently to get
industry to changing the way to deliver these carriers on time,
to budget with the requirements. I think fundamentally what I
am trying to do with the Defence Industrial Strategy is to create
a procurement framework which faces up to the reality of the inter-dependence
in certain markets. Take submarines, there is only one shipyard
in the country that can design and build submarines for us; so
whether we like it or not we have to contract with that yard.
The question is: how do we contract with that yard most intelligently
such that we do get the best product, on time, with the best value
for money? In some markets it is not like that.
Q47 Mr Jones: I might have said this
before, it is a breath of fresh air when a Minister comes and
gives straightforward answers. Just so I have got it clear, the
in-service date for CVF will be determined by making sure that
we have got the consolidation of the industry right first, is
that right? You have not actually come up with the in-service
date yet?
Lord Drayson: The in-service date
will be set when we make the Main Gate decision. The investment
decision will be taken when we have got the industry structure,
and I think we are really close now, I really do.
Q48 Mr Jones: That is what will determine
the next sequence of events?
Lord Drayson: Because the industry
structure determines that we have got an efficient industry which
will deliver the carriers on time and for the price. As the customer
you have certain levers, and the most important lever you have
as a customer is placing the order. It is tough because industry,
people, rightly were saying that we need this product and, therefore,
you cannot wait. What I have to do is make sure that I push both
industry and the Ministry of Defence to come to deal with the
reality that the performance on the design, build and delivery
of these aircraft carriers is going to depend upon the implementation
of these changes. Everyone has known this for years; what I am
doing is providing the discipline to get it done and I think it
is going to work.
Mr Jones: Thank you for your honesty.
It is very unusual for the MoD!
Q49 Mr Havard: Is your assumption
that that is going to slow it down a bit or speed it up a bit,
or be largely neutral in terms of when the carriers will come
anyway? Will that make a huge difference to the time of when it
would come in?
Lord Drayson: It will make a difference.
Q50 Mr Havard: Adversely, or not?
Lord Drayson: Let us say the consolidation
does not happen; it keeps not happening; then the time for the
Main Gate is going to be pushed back. Frankly, being very candid
on this, every month that the industry does not do this is a month
added to our opportunity to make a decision on the Main Gate.
Industry doing this actually provides us with the environment
within which we can have the highest level of confidence that:
the in-service date will be met; the costs will be delivered;
and that the key user requirements for the ships will be delivered.
It will give the platform, the basis upon which the project can
be implemented effectively. Because the aircraft carriers are
so big, two enormous ships involving the whole of the maritime
industry, the pivotal effect that the aircraft carrier project
has on the industry means that this is absolutely the right thing
to do, I believe; and I know that the Navy supports that. I am
optimistic in a pragmatic way that this is going to happen, and
that this will put us in a position to get these aircraft carriers
delivered as we want them.
Q51 Mr Havard: I wanted to ask a
question related to that which is about your milestones. You gave
us the milestones in February and you gave us the milestones again
today and under "maritime" it says "within six
months we want to arrive at a common understanding of the core
load requirements to sustain the industry", and the carriers
are part of that. That is what you said in February, and that
is what you said in December?
Lord Drayson: Yes.
Q52 Mr Havard: Six months. Then it
says, "within six months from publication". There are
lots of "six months" here. When do these six months
start and when do they finish?
Lord Drayson: I think the maritime
sector is the area where we have made slower progress than I had
hoped. I think the reason for that we have discussed already this
morning. The announcement last week, and the position this puts
us in on the aircraft carrier project, I hope these are the cracks
beginning to show of this now happening. I would be very disappointed
indeed if, six months from now, we did not have the answer to
this.
Q53 Mr Havard: Is this six months
from now we are going to publish something, so that within six
months of that then it happens?
Lord Drayson: No, that means within
six months from now we will see that the maritime industrial strategy
is being implemented both in terms of submarines and ships.
Q54 Willie Rennie: You have talked
about consolidation within the industry in terms of bringing together
the construction and the Through-Life support so it matches what
the MoD is doing. Does the shape of those partners coming together
determine the Through-Life support to tell you where it is going
to be sited in the future, or does it have no effect at all?
Lord Drayson: It is about a modernisation
of approach in contracting within the industry. An example on
ships, VT, for the small end of warships, is able to enter into
contracts with us on an availability basis. In other words, they
contract to provide a warship at sea doing its military job 97%
of the time. They design it to make sure that they can contract
for that and not lose money because they design into it the attainability
of all the systems within the ship. What we would like to see
is that the industry develops that ability on much bigger ships
in the future. For that know-how to happen those practices, those
approaches, need to be rolled out within the industry; that is
why we see that the BAE/VT proposed joint venture is a really
positive development.
Q55 Willie Rennie: Does it mean they
capture that refit work by doing the deal with a major constructor?
Lord Drayson: No, what it means
is, it is like we have done with the surface ships/port alliance;
what we have to do, given the workload that we have, is intelligently
place the orders such that we maintain the capability within this
country as we need it. The best way to do that is for industry
to structure itself such that it can then, as a whole, contract
with us on these Through Life contracts, and then decide how to
best use the facilities that we have got efficiently; invest in
those facilities efficiently across the United Kingdom.
Q56 Willie Rennie: You are saying
the BAE Systems and the VT deal is only the start of this process.
You need all the others to come into this process as well for
it to be effective?
Lord Drayson: They do not necessarily
have to come on board in terms of a mergers and acquisitions type
approach; it can be done contractually. For example, the best
example of this is on the aircraft carrier alliance. Because the
aircraft carriers are so big it needs most of the yards to be
involved in building these aircraft carriers and, therefore, we
formed an alliance structure. This time last year I would say
I would attend the CEO Alliance Board meetings and they were starting
to get the hang of working together; now it is working really
well. I feel really positive about the way in which the industry
has worked on the aircraft carrier alliance.
Mr Gould: I think what happens
if BAE Systems and VT eventually goes ahead, they will actually
put Fleet Support Limited, which is one of the repair companies,
into that joint venture. There is a small part of BAE Systems
called CS&S which does some maritime work which will go into
that. The contracting pattern in the future will move towards
the kind of pattern we now have for HMS Clyde where we
are actually paying for ship time—we have not bought a ship.
That is the smaller 60 metre one. That predetermines some of the
structure of the industry; but even if you take that JV and it
does come together, there is not enough refit capacity inside
that company to do the whole job we need to do in the future.
Even if we were contracting for the JV for availability for current
destroyers and frigates, for example, they would not be able to
do all of that work in their own premises and would have to have
a contracting arrangement with other yards to enable that work
to be done.
Q57 Willie Rennie: It can be as loose
as the alliance?
Mr Gould: It could be an alliance,
or it could be a contracting arrangement.
Q58 Willie Rennie: You could have
a range of consolidation within the industry?
Mr Gould: Yes, indeed. The alliancing
behaviour in the carrier alliance, because most of these people
are involved in that in some degree, will actually help generate
the right kind of behaviour in the refit work.
Q59 Mr Holloway: In a capitalist
version of Soviet central planning, do you not to some extent
trade-off in terms of delivery timings the needs of industry and
their scheduling of things against the time that you require the
individual pieces of equipment from a military perspective?
Lord Drayson: I would not describe
it as a "capitalist version of Soviet central planning".
I had the experience of explaining the Maritime Industrial Strategy
to all of the union convenors from the National Maritime Industry,
and met all of the MPs and I described myself as a "capitalist".
I believe that the way in which this will work is by creating
a framework where the market is able to respond to the reality
of the interdependence between the supplier and the customer.
If you take CBRN, that is a market which is healthy enough, with
enough players in it, enough competition in it where you can adopt,
if you like, traditional, competitive procurement; but the reality
of the maritime market is that we have seen that competitive tendering
has actually destroyed capability. We needed to recognise that
reality. What we are doing is placing contracts on the basis of
recognising that interdependence, incentivising the industry to
change in the direction that we want but, at the same time, not
getting involved in telling industry how to do it. It is up to
industry how it restructures; but it is up to the Government to
say, "We're the customer. This is what we need you to do".
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