Appendix: Government response
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)
1. The Department is grateful for the Committee's
validation of our work to date and also of their support in our
implementation of the DIS. The Department shares the Committee's
frustration at the slow progress in the maritime sector but note
that progress is being made with discussions on industrial restructuring
in this sector.
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)
2. We are working hard with our industrial partners
to achieve managed reform within the sector and are beginning
to see real progress. The proposed BAES/VT Joint Venture, announced
in December 06, demonstrates real commitment by industry and offers
the prospect of a through-life entity managing major surface warships
from design to disposal. The parties involved in the restructuring
initiative continue to take an active role in the Carrier project
as part of the CVF Alliance.
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)
3. The Department remains fully committed to the
Carrier programme. The project is continuing its Demonstration
phase, aimed at maturing the design and identifying risks to the
point that a main investment decision can be taken.
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)
4. The Department agrees the recommendation. The
surface ship sector needs clarity on future loading if it is to
make informed investment decisions. We are already working with
industry to agree the level of business required to sustain key
skills across the maritime sector. We hope to give further clarity
on future build and support programmes in the second half of the
year.
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)
5. The Department notes the Committee's comments.
However, the Department together with the key industrial players,
have been working to develop principles for collaboration and
to define how, commercially, collaboration may operate to deliver
reduced cost and the improved performance needed to ensure a viable
enterprise well into the future. Discussions are progressing well
and there has been agreement on the route map to a Long Term Collaboration
Agreement. In the meantime, the parties are working ever more
closely together and there is evidence of positive behavioural
change and innovation.
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)
6. The Department notes the Committee's comment.
A 22-month construction drumbeat has been put in place for contracted
boats (1-3), and assumed across the remainder of the planned Astute
Class, in order to optimize resource utilization and maintain
capability in the supply chain.
7. Value for money improvements to Boat 4 are already
available from construction lessons on Boats 1-3, e.g. through
the increased use of modularization and vertical outfitting. A
formal MoD programme of work is also in place, jointly with key
industry suppliers, to deliver unit and through-life cost reductions
for Boat 4 and beyond through such areas as design improvement,
specification challenge and collaborative working.
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 Department welcomes the Committee's interest
in the fixed wing aircraft sector and the plans to explore with
BAE Systems the viability of a Long Term Partnering Agreement
(LTPA) to help sustain the key industrial skills and capabilities—wherever
they may be in the supply chain—needed to support and upgrade
the current and future aircraft fleet. On 1 March 2007, the Ministry
of Defence signed a Foundation Contract with BAE Systems—a
key step towards the delivery of a full and legally binding LTPA
by the end of 2007. Specifically, the Foundation Contract is intended
to help establish the key elements of the LTPA and inform the
detailed negotiations ahead. It also incentivises BAE Systems
to further transform its air sector business and the efficient
delivery of the key through life defence industrial capabilities
the Armed Forces require.
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. The Department welcomes the support of the Committee
to this initiative and are continuing negotiations with our collaborative
partners and industry.
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. The Department agrees with the Committee's conclusion
and would add that as well as informing future decisions on the
mix of manned and unmanned aircraft, targeted investment in UAV
TDPs such as TARANIS should also help sustain many of the aerospace
engineering and design capabilities in UK industry that provide
assurance of MoD's ability to operate and support our future fixed
wing aircraft. This programme also provides UK industry with the
opportunity to develop a competitive edge in a potentially lucrative
military and civil market.
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. The Department welcomes the Committee's continuing
interest in the Complex Weapons sector. Work to develop a Strategic
Partnering Agreement (SPA) with Team CW is making progress, with
the overall construct and performance measures that will underpin
an agreement being refined. Despite initial expectations that
this work might conclude early this year, the complexity of an
agreement with five separate companies means that final negotiations
and, subsequently approvals, for both industry and the Government,
will take longer than expected.
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. The Department notes the Committee's concerns
regarding job losses but welcomes the acceptance of the longer
term aim of the DIS of a sustainable defence industry. The Department
will continue to work with other Government Departments and agencies
to provide the necessary support to those areas affected.
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. The Department welcomes this comment. The retention
and upskilling of essential staff is a key tenet of the DIS.
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. The Department welcomes the Committee's intention
to examine the progress made in implementing the recommendations
of the Enabling Acquisition Change Report and looks forward to
assisting the committee with such an inquiry
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. The Department welcomes the support provided
by this report. A comprehensive programme to enhance commercial
skills through training and promote increased professionalism
is being implemented. Resources to deliver this are being identified.
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 Department notes the Committee's comments.
The Defence Technology Strategy is not a costed balance of investment,
and the next steps with our industrial partners will be to assess
jointly the resources required to maintain priority national capabilities
and ensure that our implementation plan to maintain them is jointly
affordable. The Defence Technology Strategy will enable MoD and
Industry to cooperatively plan their investment in research and
development, rapidly bringing the benefits of advanced technology
to the frontline.
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)
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)
17. The Department accepts these recommendations.
SMEs have a critical part to play in delivering capability to
our front line forces. Initiatives such as the competition of
ideas aim to remove barriers to innovative ideas being exploited
from both academia and SME. The Defence Suppliers Service provides
information and guidance for new defence suppliers, and we organise
a range of supplier days organised both directly and under the
auspices of the Defence Manufacturers Association. The Department's
latest research supplier day organised in conjunction with the
RDAs was attended by 120 SMEs.
18. The Department expects all SMEs in the supply
chain to be treated fairly and properly by MoD and its primes
and is undertaking a review of whether the contracting processes
discriminate against SMEs. While prime contracting will continue
to play a major part in our commercial arrangements, there is
more that the Department needs to do to ensure that the supply
chain structures below primes are well structured, open and encourage
innovation or competition. The Department welcomes the recent
Supply Chain 21 initiative from the Society of British Aerospace
Companies (SBAC) which aims to roll-out best practice at all levels
in the supply chain.
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. Although the Department has significant experience
of negotiating complex, high value arrangements, the Long-Term
Partnering Agreements do offer new challenges. The Department
has set up dedicated teams, comprising experienced negotiators
and, where appropriate, external specialists, whose sole responsibility
is to negotiate and implement these arrangements. Lessons identified
as each arrangement is let are passed on to the next teams to
ensure best practice is followed and any pitfalls avoided. More
importantly, prior to entering into any long term partnering arrangement,
MoD and its industry counterparts are following a due diligence
process akin to that seen for Private Finance Initiative to ensure
that neither party is disadvantaged.
20. For the longer term, the Department is producing
more detailed partnering guidance, in consultation with industry,
to ensure wider commercial best practice is adopted, to explain
to those involved in any partnering related activity, what is
required, how best to approach negotiations and manage the relationship.
In parallel, the Department will undertake a full review of what
skills are required for these arrangements, carry out a skills
gap analysis and provide appropriate training.
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)
21. The Department is producing a Partnering Handbook
in consultation with industry that will set out how it will approach
Partnering for the future. The Handbook, the first draft of which
is currently out for comment with industry, will include sections
on how Long-term partnering arrangements should be arranged, how
the relationship should be managed and monitored for effectiveness,
and recommend joint industry/MoD workshops to ensure that the
best benefit for both parties is obtained.
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)
22. Value for money continues to be the key consideration
in delivering the capability our Armed Forces expect. The Department
will not enter into Long-Term Partnering Agreements unless they
offer value for money to the taxpayer.
23. In headline terms, each long-term partnering
arrangement requires the contractor/ industry concerned to transform
its business with the emphasis on year on year cost reduction.
Put bluntly, if industry do not reduce the costs, sanctions involving
reducing agreed payments, will be taken. Before each Long-Term
Partnering Agreement is entered into, a robust analysis of the
costs is undertaken between MoD and industry with incentives introduced
to deliver value for money. At regular intervals, a joint analysis
of the cost basis will be undertaken and if value for money is
not being achieved, action will be taken to address the matter
and alternative arrangements considered.
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)
24. Maintaining and introducing competition below
the prime contractor level is a key Departmental policy. Existing
contracting processes require industry to demonstrate that it
has maximised the opportunities for competition below the prime
level by the provision of a Make or Buy Plan. If a contractor
seeks to change the Make or Buy plan it must seek Departmental
agreement.
25. In parallel, the Department is working with
industry to look at ways of increasing the level of and nature
of access by SMEs to the Defence Supply Network through better
understanding of where SMEs provide added value and widening the
scope of advertising Defence procurement opportunities by both
the Department—for direct contracts, and by Prime Contracts
for sub-contracts. There is also ongoing consideration of how
to best actively manage the joint Departmental and Industry Codes
of Conduct so as to enable an accurate assessment of the quality
of the management of relationships within the supply network and
how these compare to the common principles enshrined in the codes.
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)
26. The Department notes the Committee's concerns
about the robustness of the Memorandum of Understanding and their
desire to take evidence on this.
27. In regard to the extent that UK industry will
have access to technology transferred under the MOU, the Department
has received the necessary assurances from US with regards to
information access, in order to operate, maintain, upgrade and
repair JSF, thus ensuring UK Operational Sovereignty can be achieved.
The Department intends to monitor progress with the US very closely
before committing to purchase aircraft.
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)
28. The Department will continue to closely monitor
the US STOVL requirements and the performance of the STOVL variant.
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)
29. An outline agreement has now been signed between
the Ministry of Defence and the US Department of Defense to initiate
and facilitate discussions on export control and technology sharing
which will cover Government and industry-related issues and aim
to increase transparency, timeliness, and predictability through
mutually determined business process improvements.
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)
30. Regarding the site rationalisation of the former
Royal Ordnance Factory sites at Bridgwater and Chorley, BAES LS
remain responsible for successful transition to the new arrangements
and continue to implement robust contracts to manage their suppliers.
The company maintain their assurance that they will not close
their sites until the new supply chain arrangements are sufficiently
mature and until we have confirmed that we are content. The Department
has formed a joint project team with the company to oversee the
transfers and verify that they are taking every reasonable step
to guarantee supply to our armed forces
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)
31. The project (Project MASS) looking at the secure
sustainable supply of general munitions is ongoing. It is charged
with delivering a value for money solution.
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)
32. The Department accepts this recommendation.
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)
33. The Department accepts this recommendation. Implementation
of the DIS and the subsequent Defence Acquisition Change Programme
(DACP) is proceeding apace throughout the department with many
of the recommendations already implemented across the MoD. The
most obvious examples of this are the creation of the Defence
Commercial Director post and the merger of the DPA and DLO to
form the new DE&S from 2 April 2007.
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)
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)
34. The Department has now put in place robust mechanisms
to ensure that the costs of retaining critical capabilities in
industry are considered during each planning round. This will
be reviewed as part of Planning Round 2008, and where necessary
will expose and review the premium associated with the maintenance
of industrial capabilities which are key to our operational sovereignty.
Nevertheless, the DIS is expected to deliver improvements in long
term value for money, and this is also expected to be a key element
of the Long Term Partnering Arrangements being put in place in
each sector to drive industrial efficiency and performance improvement.
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)
35. The Department accepts this recommendation and
is developing measures that will allow this monitoring to take
place.
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)
36. We welcome the Committee's continued involvement
and look forward to briefing again in the future.
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