Select Committee on Defence Minutes of Evidence


Examination of Witnesses (Questions 60 - 79)

TUESDAY 19 DECEMBER 2006

LORD DRAYSON, MR DAVID GOULD CB, MR AMYAS MORSE AND MR MARK GIBSON

  Q60  Chairman: This time last year when you came before us you said that you were not formulating an in-service date because you wanted to drive out risk.

  Lord Drayson: Yes.

  Q61  Chairman: Now you are saying you do not want to place a contract until the industry consolidation has taken place. Do you regard those as different concepts or the same concept?

  Lord Drayson: Actually I think they are in parallel. They are slightly different. In terms of risk, there is the technical risk in terms of doing the design of the ships; and one of the important things we have done over the past year and made a lot of progress on is in terms of issues relating to where we can introduce commercial build standards—for example, that are used in cruise ship design and construction—in an appropriate way for a warship; where modular design in terms of cabins and so forth are slotted into the hulls; the concurrent design that you use, so you are still designing some parts of the ship in parallel with certain elements of construction. These are practices which we wanted to bring into the carrier project because that was going to be important to the modernisation of the industry.

  Q62  Chairman: Has that now been completed?

  Lord Drayson: I would say that is largely completed, in terms of getting to the position where we are able to take a Main Gate decision, so the two come together. I am hoping we are in a position to see these things coming together shortly.

  Q63  Chairman: The risk has been bottomed-out pretty much, but it is now the consolidation that has not?

  Lord Drayson: Yes. The progress recently on the consolidation, this announcement recently I see as a very positive sign we are now seeing progress on consolidation.

  Q64  Chairman: One final question on the carriers: the discipline you were talking about, would you breach that discipline if you were to tell us the planning assumptions on which industry is working in relation to an in-service date?

  Lord Drayson: I really believe I would, Chairman, because I know that certain parts of the industry would prefer other ships to be built before the carriers were built and it is logical for them to want that. What I have to do is manage overall those tensions to deliver what the Armed Forces need by the date consistent with that.

  Q65  Willie Rennie: It is probably going slightly off the track of what the others want to talk about. You have talked about BAE Systems and VT, but you have not talked about the Babcock DML rumours which are flying around. Would you like to comment on those at all?

  Lord Drayson: Yes, in my comments so far I have focused on the surface ships. These arguments also apply to submarines. In submarines, where we have even greater clarity that we have certain dockyards within the country that provide an element of the provision of our submarine fleet, from design and build at Barrow, through to operations and support at Faslane, in terms of Devonport in terms of refuelling and maintenance of the submarines, again what we want in submarines is the development of Through Life Capability. We want our submarines to have designed in the maintainability. We want the industry to come together in a way which enables us to do that. We have been pushing industry to do that now since the Defence Industrial Strategy was published. I think we have seen progress, in the sense that I have been very impressed in the way in which the performance has improved at Barrow. I think the job that is being done in Barrow, working on the practices there (and you visited the yard, Chairman) that is good. The work which has been done at Devonport in terms of the improvement of the time it takes to refit submarines, that is good. What we need to see is this integration. I think we discussed this when I was here on the matter of the placement of the nuclear deterrent. We were very disappointed with the way in which KBR went ahead with the IPO of the company; and we are now actively managing that situation. It is important (and this is the nuclear deterrent we are talking about) that we ensure we have confidence on the development of this supply chain in submarines, and we need to manage that very actively to ensure that we do achieve that.

  Q66  Linda Gilroy: Turning back to the formation of ShipCo—to what extent are the planning round 2007 rumours, that some ships, say six out of the 25 frigates and destroyers that there are, could be tied up and might never come out of the docks again, to what extent is the work, the support costs of that, tied up with negotiations on the whole arrangement with the formation of ShipCo?

  Lord Drayson: Answering generally: I am looking forward to the conclusion of the CSR, such that we then have got absolute clarity; we can provide further transparency to industry across the board. That is one of the objectives we should have for the end of 2007, on the basis of the resolution of the CSR to be able to provide that; and that applies to everything, not just in terms of surface ship support. Clearly the CSR has an effect on everything.

  Q67  Linda Gilroy: You are saying that the outcome of the Comprehensive Spending Review will impact on how many ships there will be in the Royal Navy in future?

  Lord Drayson: No, I am not making a specific point about those numbers of ships. What I am saying is the outcome of the Comprehensive Spending Review clearly provides us with clarity of where we stand on the defence budget and, within that, the equipment budget, all of these things. That is going to be very helpful in terms of being able to manage the implementation of the changeover in the second half of the year when it is expected that will be delivered. I am not making any comment about what the outcome of that will be—that is above my pay grade—or the impact of any settlement on any particular decisions; because those decisions have not been taken and the settlement has not been resolved.

  Q68  Mr Jenkins: Minister, you just said that we have got the budget now. You have a clear budget line of procurement costs as well, do you, a year-on-year budget?

  Lord Drayson: Yes.

  Q69  Mr Jenkins: At one time we were not completely honest with the industry when we used to place orders and delay orders because we could not afford to place them in that year. The same thing with industry—which was not very honest with us. They used to tell us that things were going to cost £2 million when in fact it was going to cost £6 million. Have you mapped out now totally the requirements we need and the cost of these requirements and the amount of budget we have got on a year-on-year basis?

  Lord Drayson: If we look at the Defence Industrial Strategy, in each of the sectors we set out a graph based upon the existing defence budget, the last settlement, of the equipment programme in each of these sectors; and it sets that out over 10 years. It has a tolerance band within it and that gives, I think, the top level of clarity that industry needs in terms of overall planning within the sectors, and we then have to manage within that. This was one of the things which came out of last Friday actually—which is why I was a bit surprised at your comment, Chairman, that it was a celebratory mood. A clear piece of feedback which the MoD got, I got, on Friday was the need for more transparency than this. I committed, as my objective for 2007, to deliver that clarity to industry; but what I said to industry was that industry needs to show through its performance that that clarity is having an effect.

  Q70  Mr Jenkins: Do we have a condensed version of this within your Department; an actual budget line, so we know what we are going to be buying now, what our commitments are now, and what our commitments are for the next 10 years and where the costs are going to impact on us? Do we have that budget line all laid out?

  Lord Drayson: Yes, but it is of course subject to the Comprehensive Spending Review settlement and negotiations which will take place.

  Q71  Mr Jenkins: Is it possible to get a copy of that in a form I can read and understand?[3]

  Lord Drayson: I will try and provide you with the further detail. I think a good starting point is what is published within the Defence Industrial Strategy. I will see what more we can provide in terms of the detail behind that; but it already provides over 10 years the shape of the demand. You will see from it some sectors show an increase in demand and some sectors show a decrease.

  Q72  Mr Jones: Can I just finish this section in terms of maritime and talk about Astute. One of the milestones the two-page checklist you gave us was the award of the fourth contract and subsequent contracts. CDP told us on 10 October the prices for boats 2 and 3 had still not been agreed, and would not be agreed and that boat 4 would not be awarded before that had been decided. Can you just give us an update on what happened with the order of boat 4?

  Lord Drayson: We expect to be in a position to make a decision on boat 4 reasonably early in the New Year. What we are doing is making sure we have got the best possible understanding in terms of how they got through the process of boat 1, encouraging the company to make the necessary changes to improve performance; there is therefore then a negotiation in terms of subsequent boats; all within the structure of a recognition by us, set out within the Defence Industrial Strategy, that we need to have a frequency of orders to maintain capability. We have said approximately 22 months. We know to maintain that capability in the submarine industry we have to place orders at that frequency but we want to see these improvements to deliver this value for money.

  Mr Gould: We have made some very good progress on boats 2 and 3. Boat 1 has enabled us to actually rebuild the industry. We have had an external review to verify the quality of the industry, which has come out very well. The Minister is quite right, we would hope to be in a position to make a decision on boat 4 early next year.

  Q73  Chairman: When would you expect to agree a price on boats 2 and 3?

  Mr Gould: Just before we make a decision on boat 4.

  Q74  Mr Crausby: Are you really saying you might not order boat 4 even though you have said that in order to maintain the capability it needs to be 22 months and 24 months, and we have already committed ourselves to a Vanguard replacement in 2024? Is there a realistic prospect of not ordering the boats? The point I make is that the Department has put that forward in its White Paper; it seems committed to a Vanguard replacement. It is committed to 22 months/24 months; yet it says it is not really committed to boat 4. I would have thought that the industry is pretty certain you will buy boat 4.

  Lord Drayson: I think the industry also is very clear that we are very serious about price; we are very serious about the changes. We had a mini discussion on this on the aircraft carrier. We have taken a lot of trouble of understanding the procurement process, and we are only going to place orders when we are satisfied that we have got the answers that we need on these three things. I think what we are seeing is that the industry has got this message and is making the changes.

  Q75  Mr Borrow: In DIS you stated that the MoD will work with BAE Systems and the other companies to help restructure the aerospace sector and reach the appropriate size. What is the state of play at the moment?

  Lord Drayson: I think we are pretty close to an agreement with BAE. The important factor of negotiation is that the restructuring and change which we need to see within the aerospace industry is linked to work which we need to see done by the Ministry of Defence. There is this clarity about workload which is related to decisions on things like Joint Strike Fighter, decisions on Typhoon, decisions on the Taranis Unmanned Aerial Vehicle project, which are tied up with coming to an agreement with the company about the changes which we need to see which affect fixed costs and so forth, to again get this balance right for the sustained capability. What has had to happen is that the Ministry of Defence had had to deliver on its side in terms of the decisions around specific areas; so, for example, the Joint Strike Fighter; and then in negotiation that Amyas is leading with the aerospace industry of how we ensure that we get value out of the changes, and we are not paying for the industry to do things which we do not need the industry to do. I think that the signature last week of the Memorandum of Understanding on the Joint Strike Fighter was a very helpful piece of progress to be able to give this clarity. If I may say so, Chairman, I would like to record my thanks to your Committee for the clear stance which you and your Committee took with Joint Strike Fighter, it was very helpful in me really persuading the United States that we were deadly serious about what we said about technology transfer. I am very pleased that we were able to get the technology transfer that we needed and therefore able to sign the Memorandum of Understanding; that, therefore, gives clarity to the aerospace industry in this country. Other things which we have gone: I remember seeing within BAE, within Rolls Royce, Smiths and QinetiQ very exciting stuff in terms of engine work, in terms of autonomous air vehicles. The United Kingdom clearly had some leadership in some areas of technology, which we think is going to be vitally important in the future. It has taken us a year, but we have now put together a project, the Teranis Project, which is to create a unique autonomous unmanned combat air vehicle in the future, and that is going to be another important part of future workload for the industry. The area which for 2007 is a big project for me to deliver is further changes that we need to see in the Typhoon industrial structure relationship with the other partner nations. We have seen some good progress on Typhoon, but not enough; and now that Typhoon is coming online as an important defence capability we really do need to see in 2007 some significant change and improvement in the Typhoon arrangements between the four partner nations.

  Q76  Mr Borrow: Just coming straight to Typhoon, are you saying you are not in a position to order the third tranche or decide how many aircraft will be in Tranche 3 until you are sure that the industry has carried out the necessary changes itself in order to place that order?

  Lord Drayson: Yes. Before we can go forward on a Tranche 3 decision—and we do not have to take that decision yet—I do believe that there needs to be a remodelling of the Typhoon structure. It is very important, I think, that I am not seen as beating up on industry on this point because it is political as much as industrial. It is about getting agreement within the four partner nations upon the way in which we can make changes to the structure for Eurofighter and the Typhoon to deliver better performance in terms of value for money, ability to carry out upgrades. For us we need to see the changes in terms of upgrades to the fighter to give it a ground attack capability to be done efficiently. We do not think that has been good enough up to now and we really do need to see that happening in 2007.

  Q77  Mr Borrow: Your criticism is not simply of BAE Systems in Lancashire?

  Lord Drayson: Not at all.

  Q78  Mr Borrow: In terms of the way in which they have put the aircraft together, it is the overall structure involving partner nations and the way in which their parts of the jigsaw operate individually and then how they are all meshed together that is part of your criticism. Is that criticism shared by your opposite numbers in our partner nations?

  Lord Drayson: I think that is the job that BAE does in Lancashire and they do a good job. It is not that I am criticising that company or the other UK companies involved in Typhoon, it is the structure under which Typhoon has been put together as a European international collaboration, that is what needs to change. I think it is shared by my opposite numbers. I think there is a difference of opinion on the urgency. From the United Kingdom's point of view this is now a very important military capability, these aircraft will be undertaking the air defence of the United Kingdom this year. These are aircraft which could have a very big effect if given ground attack capability, for example in Afghanistan. We need this to be done efficiently. We think there are real opportunities to improve efficiency. We see big differences in terms of spares prices, value for money for different parts of the aircraft, and this needs to change. I hope that this is something which I can effect in 2007.

  Q79  Mr Havard: I agree with a lot of that. Just on JSF though, this is not about the technology transfer element of it but the Memorandum of Understanding, you are talking about a work mix of different things for the industry here and you were talking about JSF as part of that. As I understand it, it says in your latest press release that companies will be able to compete for work in the next phase. What about fabrication and what about deep maintenance? Are there any possibilities at some point or another with JSF that fabrication will be seen in the UK and where will deep maintenance come into that? Will BAE Systems, for example, or somebody else be screwing these things together?

  Lord Drayson: Yes to both of those parts but, talking about the fabrication, it is not so much the screwing bits together but it is recognising that the Joint Strike Fighter has a significant part of it—and that is all Joint Strike Fighters for all nations—which is British technology and it comes from British companies. The most visible, I think everybody recognises, is the lift fan that gives the STOVL the jump jet technology, that is all British. Not so widely known, I think, is the manufacturing know-how that goes into certain elements of the airframe and the ability to manufacture very close tolerances which came out of BAE, but also other parts of the British aerospace industry which are providing very important components to the Joint Strike Fighter which will be on every Joint Strike Fighter internationally. Turning to maintainability, very important to the United Kingdom is this concept of operational sovereignty—


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