Examination of Witnesses (Questions 100
- 118)
TUESDAY 19 DECEMBER 2006
LORD DRAYSON,
MR DAVID
GOULD CB, MR
AMYAS MORSE
AND MR
MARK GIBSON
Q100 Chairman: Thank you for what
you have said about the role of this Committee. There is a worry
in my mind that you will thank us and we will congratulate you
and we will forget the important message that you had at the beginning
of keeping absolute focus on this in the future as well as in
the past and thinking "That is right, job is done, we do
not need to concentrate any more". From what you say it is
essential for everyone to concentrate very heavily on achieving
something out of this.
Lord Drayson: I think that is
absolutely right, Chairman. One of the things which I will be
expecting in my checklist for 2007 is that this time next year,
if you ask me to come before you this time next year, you will
ask me "How is it going on the technology transfer on Joint
Strike Fighter" because I am going to maintain my focus on
the technology transfer being delivered as I have in terms of
reaching the Memorandum of Understanding.
Q101 Chairman: Can we have a copy
of that checklist, please?
Lord Drayson: Yes, that will be
done in January and then you will be provided with a copy.[4]
On that very important point on Joint Strike Fighter, it is complex,
a lot of this is detailed engineering stuff—your point about
the source codes and so forth—it is having this absolute
clarity of which aspects relate to sharing in the economies of
scale long-term to make sure we get value for money of the aircraft
and which aspects relate to delivery of operational sovereignty.
We have got absolutely the operational sovereignty that we need
but people should not forget that the whole affordability of this
aircraft internationally comes from the pooling of the orders
and the Through Life support.
Chairman: Minister, we would normally
try and finish at 12.30 but you have got such an interesting job
that we will go on for another 15 minutes. There will be some
questions we will want to write to you about. We cannot leave
research and technology without some questions being asked because
it is central to the whole of our defence capability.
Q102 Willie Rennie: The Government
stated a target of R&D investment of 2.5% of GDP, what is
going to be the defence industry and the MoD's contribution towards
that target?
Lord Drayson: I believe that we
need to increase investment in defence research, we need to shift
the balance in terms of the split between the development side
of things and the earlier stage of research side of things. That
is the thinking which we set out in the Defence Technology Strategy.
We are now talking with industry about how we implement that.
The way in which that target gets hit in terms of the percentage
is both the Ministry of Defence and industry investing in research
and there have to be the appropriate incentives for industry to
take risks on research. The dominant model for defence research
in the past has been the Ministry of Defence deciding what the
future is going to be and therefore telling industry, "This
is what we want researched" and paying for it. That is fine
but, alongside that, we have to encourage industry to use its
own thinking about what the future might hold, to take risk, to
invest in that research and then, if it is successful and we use
it, to be good at getting it through to the frontline. For that
to happen they need to be rewarded for taking that risk. Some
of the business models are used in other industries, such as the
sovereign IT and the pharmaceutical industry. We are in discussions
with industry to come up with that, that is a deliverable that
has come out of the Defence Technology Strategy and I am expecting
that to become clear in the first half of next year and that will
then be part of the overall plan that we have for Ministry of
Defence investment in research. We have already set out that we
expect with the current plans to see a slight increase in defence
research spending but we are looking at this whole area. What
we are trying to shift is from a model which is 100% the Ministry
of Defence determining what is done and funding what is done to
having more of a mixed approach which needs us to look at the
rewards and incentives for industry to do that. That is how I
think we get towards this target of the appropriate level of investment
invested in research.
Q103 Willie Rennie: Are you able
to put a figure on it in cash terms about what the contribution
from Defence would be?
Lord Drayson: I will be able to
once we have got to the end of this discussion with industry.
Industry is going to take some convincing on this because what
industry rightly says is "But the MoD is the only customer
for defence research, it is not like there is competition for
the research that we do". We do say to them—and I will
bring Amyas in on this because he has been doing some of the negotiation—"Yes
but you know that the model is often that cutting edge research
is done for a defence need which leads to an innovation which
then finds its way into the civilian sector, sonar for detecting
submarines is now used in medical applications for looking at
babies in the womb. There are good models for this innovation
and what we want to see is that the risk/reward balance is shifted
to incentivise industry to do more work investing and we recognise
those. Do you want to say something, Amyas?
Mr Morse: Yes. I am chairing a
sub-committee of the Defence Industrial Council. Interestingly,
industry has brought up some very good ideas in this area and
it is mostly not on the theme of how much money is going to be
put on the table, it is mostly about enabling them to change the
balance. In this debate, keep on having a simple economic model
in your mind. If you are asking industry to spend money on research
and development and you look at the amount of spend, you look
at the return they expect to get and you discount it for risk,
if the answer of the sum is zero or minus zero they are not going
to do it, it is as simple as that. The discussion is about changing
that equation. There are various ways it can be done, mostly by
reducing uncertainty in some way or by increasing economic leverage.
Where we have got to in the Committee is we have got five or six
recommendations. We are going to have a final look at them at
the beginning of January and report back to the Industrial Council.
We have only had a couple of meetings and come out with significant
agreement. Mostly it is about being clear on looking at export
potential, yes, giving some form of supportive commitment when
industry is going forward and helping them with applications of
intellectual property on a wider marketplace, seeing what we can
do for them in the States and so forth. There are areas like that
where we are exploring and mostly, as I say, what they choose
to bring up to us is enabling assistance from Government. I do
think there is a fruitful territory that we can develop.
Lord Drayson: SMEs are going to
be very important to this. That is another thing which we have
not talked about much.
Chairman: We will come on to that very
briefly.
Willie Rennie: I think we have covered
most of the issues if you want to move on.
Q104 Mr Jenkin: Can I just ask a
short supplementary on technology. In the discussions with the
United States about technology sharing, do people over there express
anxiety about us sharing technology with our European partners
and, therefore, the United Kingdom is potentially a leak into
Europe?
Lord Drayson: Yes, they have expressed
that concern.
Q105 Mr Jenkin: What do you have
to say in order to reassure them?
Lord Drayson: "No, we do
not".
Q106 Chairman: That is very satisfactory.
Lord Drayson: It is very important
the United Kingdom respects technology transfer agreements and
keeps secrets secret.
Q107 Chairman: They are convinced
by your answer?
Lord Drayson: We have signed the
MoU, Chairman.
Q108 Mr Jenkin: They are not worried
about the role of the European Defence Agency in attempting to
harmonise defence procurement in the EU?
Lord Drayson: No-one has specifically
mentioned to me a concern about the European Defence Agency.
Q109 Willie Rennie: Just one more
question: the US are very good at research and development investment,
and they seem to be improving even more. Are you concerned about
that gap and do you think we can catch up with the United States
in defence?
Lord Drayson: I think we need
to recognise that is the nature of the very different sizes in
the markets but there are many examples, both within defence and
within a number of industries. If you look at the pharmaceutical
industry, this country spends considerably less on pharmaceutical
research than the United States but in terms of the bang per buck
we get for the research that we do spend, it is considerably higher.
The UK is the world number two in pharmaceuticals and world number
two in terms of defence. It is about making sure that we spend
the money that we do spend as efficiently as possible but making
sure, also, that we are spending enough, which relates to the
comments I made earlier, and being innovative in the relationship
which we put in place to deliver this.
Q110 Willie Rennie: The SBAC have
said that the Defence Technology Strategy "...does not give
a picture which is sufficiently complete for industry to make
the investment decisions". Have you addressed those concerns?
Is that part of what you were saying?
Lord Drayson: The Defence Technology
Strategy is a pretty thick document, full of clarity but a lot
of stuff in defence technology we have to keep secret. This is
all unclassified, there is a lot of defence technology science
which is classified which we cannot publish in a document like
this. This has gone far further than we have ever been able to
go before and I think that is recognised.
Q111 Willie Rennie: Can you address
those concerns?
Lord Drayson: Yes, we need to.
I think it is the nature of the job that we do, and a lot of what
we do in defence science and technology has to stay secret. In
so far as we can give that information to industry we are doing
that and we need to continually test what more can we give which
is a greater level of clarity to enable the industry to know what
we want. I think it is a pretty impressive level of detail already.
Q112 Willie Rennie: Having said I
am finished I have got one more. The Defence Manufacturers Association
said that the MoD will have to significantly increase its contribution
to defence research rather than necessarily industry. Do you think
that is the case?
Lord Drayson: We have got to do
this together, that is the answer. It is about getting an agreed
framework on risk and return, how that is shared and, as importantly,
cutting out the waste. All this defence research in the end is
about getting military capability, doing a better job for the
Armed Forces. It is about the process of innovation too, how good
is industry and the Ministry of Defence at getting science and
technology through to military capability on the frontline. I
think there it is about avoiding wasted effort, killing projects
off early if they are not going well, having a good process for
the management of innovation and that is about learning from other
industries which use other techniques alongside the one which
defence has used hitherto to manage innovation more effectively.
Q113 Chairman: There is just one
question which I think industry does not fully understand, namely
how industry is to be incentivised to spend more on research and
technology. Can you explain that?
Lord Drayson: In the end it is
about the Ministry of Defence paying a higher profit margin where
industry has taken a risk.
Q114 Chairman: You will get that
past the Treasury?
Lord Drayson: Yes, because I think
that is the basis of how innovation works in every other industry.
It needs to happen within defence because we need to incentivise
people to think for themselves about what the future threats might
be, to use their brains to come up with solutions and, if they
are right, and we use that technology, we bring it through to
the frontline, then they are rewarded for the risk they have taken,
exactly as Amyas said, it is reflected in what is the discounted
value of money for the risk that they have taken and provide them
with an adequate return. What that means is the Ministry of Defence
has to differentiate between research that the MoD has directed
and paid for, for which there is zero risk for industry, therefore
a lower return, and those areas where MoD has not funded it, has
benefited from industry and industry's shareholders taking a risk
and for which it therefore has to pay a higher return. Yes, we
have to take that through, convince the Treasury that provides
value for money and I believe we can make that case effectively.
Q115 Mr Hamilton: One of the things
I think is quite important, listening to what you are saying,
is the number of things you have clarified in my mind, which has
been very refreshing because on many occasions when we leave the
Defence Committee I am still puzzled by the answers we are given
and have to refer back to them all the time. Could we continue
that theme that you have just finished on. In your foreword you
refer to small and medium companies and enterprises, how important
they are. When I have been going around Scotland and different
places in the United Kingdom talking to the supply chain, I am
quite shocked in some cases to find how risk averse the major
companies are and how they are able to pass it on to the SMEs
and they do it quite regularly. The SMEs are in a position where
they cannot complain formally because they need the business and
therefore they have that problem to deal with major companies.
You have indicated on two or three occasions in your answers about
how important the relationship is between yourselves and the larger
companies and the relationship with SMEs. How do you clarify that
and how are you able to ensure that small and medium enterprises
are not mitigated against?
Lord Drayson: We are very mindful
of that. We recognise that there is always the temptation for
the big companies at the top to vertically integrate and suck
out the profitability from the supply chain. Where we have this
inter-dependence between us as the customer and that sector it
is very important for us as a customer to have a healthy supply
chain. Therefore, when we are entering into long-term agreements,
partnership agreements with the prime contractors, we recognise
that we need top level systems integration prime contractors in
this country. The contracts we enter into have to make sure that
those contractors look after their supply chain. We are doing
that in two ways. One, in the contracts we judge the contractor
by how well it can explain to us what its supply chain is. You
would be surprised some of them are not as good as you would hope
at being able to explain to you the technology tree, where does
all this stuff come from and what are the key inter-dependencies.
You find, when you look at these supply chains, there will be
a small company employing 50-100 people doing a very clever thing
which if that company disappears your ability to do the whole
thing is hugely affected. That is the first thing: do they understand
the supply chain and, secondly, put in place the contractual elements
to make sure that they are incentivised to fairly develop that
supply chain. That is about us making it easy, as easy as we can,
for people to start up a business within the defence industry.
Last Friday the SBAC announced their supply chain initiative,
SC21, which sets out executive guidelines. It spells out to you,
"If you want to get into the defence industry as a small
company this is how you go about doing it and these are the things
to think about in your relationships both with the MoD as customer
and with your supply chain". It is about rewarding those
companies at the top for looking after the supply chain properly.
It is about training, motivating and developing the teams that
report to David Gould and Amyas Morse, having an understanding
of the commercial structure, having an understanding of the supply
chain—we need people in the MoD who understand the supply
chain properly—and then rewarding good behaviour and penalising
bad behaviour.
Q116 Mr Hamilton: Notwithstanding
the fact that you deal with a major contractor at the time, how
do you do a check to make sure that is being done?
Mr Gould: We oblige them to tell
us what their supply chain is and how they are treating them.
The more we move into these long-term improvement arrangements
with contractors the stronger we are able to do that. The other
thing we can do is in particular use parts of the research programme
which we compete which give us much more information about where
innovation is taking place inside the supply chain. It is not
just "tell us", but it is "why are you using big
company, why are you using that particular technology, why did
you not choose that, what was the basis of your choice",
so we become much better informed about how we do it. I certainly
do find, talking to small and indeed medium sized companies, who
need to innovate to get into the supply chain, to get into business
with the big prime contractors, you find that when you ask them
"How much of your profit do you reinvest in research and
technology" the answer is much more positive, much higher
levels of reinvestment in medium-sized companies than you find
in the big primes. That has to be a major part of any programme
or project manager's skill, in particular the support they get
from the commercial staff to make sure those right questions are
being asked all the way through.
Mr Morse: The only thing I would
add is as to transparency, going forward we are going to be requiring
transparency so we can see into our major suppliers and know that
they are applying what they said to us they would do.
Q117 Mr Hamilton: You are checking
it?
Mr Morse: Yes.
Q118 Chairman: It is now 12.47 and
I would quite like to stop. We could ask questions about munitions
but I suspect it would probably be best to write rather than to
do that because I know David Borrow and Adam Holloway want to
pursue some lines on that. We have asked a lot of questions and
there are a lot of questions we will ask in writing.[5]
We are most grateful to you all for coming. I am sorry some of
you have not been cross-questioned asclosely as I know you would
have liked! Minister, thank you very much indeed to you and your
team for an excellent session. It has been very helpful.
Lord Drayson: Thank you very much,
Chairman.
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