Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 220-239)


21 NOVEMBER 2006

  Q220 Chairman: As a matter of fact, do you believe that the US and the French submarines are more expensive than the British ones?

  Lord Drayson: I do, yes.

  Q221 Willie Rennie: Is it our defence needs or is it the industry demands or their needs that are determining this debate? I am a bit confused.

  Lord Drayson: It is absolutely the defence needs which come first. That is something which underpins our whole policy. It goes across defence in that the Defence Industrial Strategy very clearly puts the defence needs first and this is a decision which will be dictated by the decision that is taken based upon the strategic defence of the country. Once that decision is taken, an implementation of that decision needs to take into account the realities of the industrial base which we will acquire should we decide to go down a particular track. The responses I am giving really reflect our understanding of those realities as they face us today.

  Q222 Mr Hancock: When the Rear Admiral first spoke he talked about seven Astute submarines, subject to affordability and whether we as a nation could afford them. If we cannot afford the seven and we end up with five, then Barrow have a big problem because they would not be able to hold the workforce, would they, for the period of time from the completion of the fifth boat to the start of work on the first replacement Trident? So you cannot have it both ways, can you? You cannot say there is a steady flow and this is all being done to fit in. If we cannot afford seven Astute submarines because the costs cannot be got right, then we have a serious problem in holding onto that expertise anyway, so what is the remedy then?

  Rear Admiral Mathews: I did not say we could not afford, I said that we had to make them affordable and I cannot order seven submarines just to make them fit in; that is not the position we are in. Where we are, is that industry understand that they have to make these submarines affordable and that is what we are working hard with them to do, to deliver an affordable programme which delivers the right number of submarines to support our defence requirements. That is where we are pushing.

  Q223 Mr Havard: May I just be clear about this business of skills? What I was getting from you Mr Gould was that what is crucial are the skills necessary to produce a nuclear-powered submarine as opposed to a nuclear-armed submarine. Is that correct? Doubtless there is a relationship here, but how crucial is that difference? Could you have a nuclear-powered conventionally-armed submarine? How different is the cost of that and the skills necessary to produce that than for a nuclear-powered and nuclear-armed submarine?

  Mr Gould: To produce a nuclear-powered conventionally-armed submarine, which is what the Astute class is, requires very much the same skills as producing a ballistic-missile-firing submarine, but to produce the weapon system for a ballistic-missile-firing submarine is quite different. We need all the skills we have at Aldermaston to produce the warhead for that system and we had the programme of cooperation with the US on Polaris and on Trident to produce the missile and the fire control system for that. The ballistic-missile-firing submarine is the set of skills you need for the conventionally armed submarine plus a lot of others, which is where the warhead technology comes in, but also there are some issues with the design of a ballistic-missile-firing submarine which are different. A complication is that if we continue a programme of cooperation with the US, if that is the decision, the rhythms for the US programme are slightly different in terms of submarine and ballistic missiles.

  Q224 Mr Havard: But the skills sets and the numbers of people involved in the production of the submarine, just the platform, is not hugely different.

  Mr Gould: No, not hugely different.

  Q225 Mr Holloway: The way you guys are talking about drumbeats, it strikes me that you are talking yourselves into the decision that you are going to make eventually. Are you?

  Lord Drayson: Not at all. What we are doing is describing the situation as it exists in reality.

  Q226 Mr Holloway: Well that is a powerful dialectic to make the decision to build new ones then.

  Lord Drayson: Not at all. What we are saying is that if the decision is taken in the future to replace the deterrent, if the decision is taken to replace the deterrent, and if the decision is taken that the right basis for that deterrent should be submarine-based, these are the implications taking into account—

  Q227 Mr Holloway: So if you decide not to build a successor to Vanguard, what effect does it have on your ability to build, construct, service and operate the rest of your submarines?

  Lord Drayson: We would have to look then at the requirement which we would need in terms of the attack submarines, the ones which are conventionally armed and the frequency of build of those and we would still be faced with the need to maintain this capability. We could not have the option of stopping building submarines and expecting there to be a submarine building industry ten years down the track and we cannot expect, it is not realistic to expect, that that submarine industry could be re-built again. Therefore, if you want to have the option in the future to build submarines, conventionally armed or not, you have to provide a minimum number of orders and we judge that minimum number to be a drumbeat of about 22 months.

  Q228 Mr Holloway: That is a very powerful forward-moving argument from both the Navy and from industry to help the Prime Minister, to ease him into making "the correct decision", in inverted commas.

  Lord Drayson: I can understand why you are making that point but I do not believe it to be fair because this fundamental point also applies to other sectors within the defence industry. Some sectors in the defence industry have customers apart from the Ministry of Defence, because the technology can be used in civilian applications, say communications, or they have customers apart from the Ministry of Defence because they have export markets. In the particular case of submarines neither of those applies. We then add on the fact that a submarine is without doubt the most complex example of a piece of defence equipment. The level of complexity is to such a degree greater than other systems that it then adds to the challenge which you have. It is because of the particular aspects which are prevalent in the submarine area, but there are other markets within the defence capability where the same applies, that if the Ministry of Defence does not maintain a certain level of orders, then industry declines and then eventually disappears and it is then not possible for us to source that because we cannot source it elsewhere.

  Q229 Mr Holloway: Just a final observation then. It would seem to me that the decision as to whether or not renew our nuclear deterrent is in small part considerably influenced by these arguments and not the pure argument as to whether or not we have one.

  Lord Drayson: The first question that needs to be considered and then answered relates to the defence need; answering that question first. Then the other issues arise out of that once that decision has been taken as to what the defence need is.

  Mr Holloway: So there will be no surprises when the announcement is made.

  Q230 Mr Borrow: If it is felt that there is not a defence need for a nuclear-powered submarine to deliver nuclear weapons, the MoD would be faced with the option of allowing the industry to die or placing orders for nuclear-powered submarines that do not carry nuclear weapons, irrespective of the defence requirement for those particular submarines and therefore in the cost equation, should we decide to pursue a nuclear weapon option in looking at different platforms, the fact that we would have to spend a lot of money to maintain the nuclear-powered submarine base would mean that there would have to be a very, very strong argument indeed in favour of looking at acquiring any other platform to use as a base for nuclear weapons. Would I be right in reaching that conclusion?

  Lord Drayson: If the decision were taken that there was no defence need for nuclear submarines carrying nuclear weapons, then the next question relating to the submarine industry is whether there is a defence need to have nuclear submarines carrying conventional weapons. If the answer to that is yes, then there is a minimum number of submarines which needs to be built in order to maintain that capability. So yes, on that basis you then have to look at the implications in terms of the frequency in the same way. That does apply to other areas of defence where you have these very specific capabilities for which we are the only customer.

  Q231 Mr Borrow: Following on from the fact that this is an industry for which the MoD is the only customer with a small order book and therefore a very small number of companies involved, one key thing being worked on now, and which is mentioned in the defence industrial strategy, is greater coordination and collaboration between the different companies. How do you think that collaboration and reconstruction are going?

  Lord Drayson: It is a mixed picture. On the one hand, there are great signs that progress is being made. When we look at the productivity which is being achieved, for example at Barrow, the improvements which we are seeing in the Astute build, the news is good. When we look at the discussions that are now going on within industry, for example between those yards, and the expertise involved in the design and development of submarines and those yards that are involved in the maintenance and upkeep of submarines, a really good collaboration is starting to develop and what we want to do is to see that accelerated. We have expertise at both ends, what we want to do is make sure that we learn the lessons to design maintainability into our submarines and that is about good communications between the two, so that is on the positive side. On the negative side, we have seen some things recently which have worried us, for example relating to Devonport dockyard and the decision which has recently been taken by KBR which does worry us about the level of engagement which is taking place and this is something which we are very focused on within the Ministry of Defence.

  Q232 Mr Borrow: Would you have in your own mind a degree of collaboration and cooperation that would be pre-requisite for placing orders for nuclear-powered submarines to replace the Vanguard class?

  Lord Drayson: We have within the Ministry of Defence a clear strategy, which we call the Maritime Industrial Strategy as part of the Defence Industrial Strategy, how we wish to see industry evolve both in terms of submarines and in surface ships. We have said very clearly that we do expect industry to get on with that evolution, to improve productivity, to deliver an affordable ship and submarine programme and we do expect industry to deliver on that. We have seen some good progress in certain areas; I would say the progress which is being made on the aircraft carrier is an example. However, to answer your question directly, there is an inter-relationship between the affordability and the plan to implement a submarine build programme should a decision be taken and the industry construct that would be needed to do it in the most efficient way. Broadly speaking, that means integration of design with upgrade and maintenance to remove overlap and to make the best use of the skills and the know-how which we have in this country. One of the things we need to recognise is that this is an industry which is considerably smaller than the industry which existed at the time of the Vanguard class design and start of that process and therefore we really do need to see that industry makes these changes to ensure that we have the greatest confidence in the development and build of our future submarines. I would say that it is a mixed picture: some areas offer real positive signs and some where we do think the industry needs to go further.

  Mr Gould: The real constitution we are trying to get is, rather than a set of three or four companies getting their benefit, their profit and their return from a piece of the industry, building the reactor, building the submarines but not maintaining the submarine, only maintaining the submarine, that actually the industry gets its benefit, as we are achieving with the carrier alliance, from the overall performance of the enterprise, so they pool resource, pool skills and they have the same intent in terms of designing for maintainability and ultimately contracting for availability. If you contract for availability, then you have to have an industrial enterprise that can take some of the availability risk from us into the enterprise, which means they have to pool design, maintenance and engineering together into a single enterprise. What the commercial construct for that is, is of less concern to me than the management behaviour which you get by having that contracting pattern.

  Q233 Mr Borrow: What encouragement and incentive is the MoD giving to the companies to achieve what you want them to achieve?

  Lord Drayson: It comes primarily from the fact that we are the customer, we determine by the way in which we behave the way that industry responds. You get the suppliers you deserve, depending on how you behave as a customer and for us, the incentive comes from us making it clear to industry that there is a connection between the order that we place and the investments and the decisions that they make, so we reinforce positive behaviour. Secondly, having the commercial incentive, so we have the level in terms of the orders themselves but also in the structure of the contract. The breakthrough which the Ministry of Defence has made in these sectors where there is this clear interdependence between the supplier and the customer is coming up with new contract structures which incentivise industry to perform, in other words to deliver equipment, such as a submarine, to time and to cost and if the industry construct does that, it makes an enhanced profit. So you reward through performance incentives for good delivery, that good delivery on cost and time comes from investment in skills and so forth and that is the incentive that you bring.

  Q234 Linda Gilroy: I would remind members that I have a declared interest in respect of DML in Devonport. Obviously I have had some concerns about the events of the past week, I am not quite sure how clear other members of this Committee will be about what has been happening there Minister, so may I invite you to flesh out a little bit more what you have said about having concerns about the recent behaviour of KBR and the extent to which that reflects on what you have just been describing as to how you achieve the positive behaviour and culture that you have been striving for.

  Lord Drayson: What I have been talking about is this recognition of an interdependence between the supply chain, the industry and the Ministry of Defence and in the case of Devonport, Devonport is clearly a strategic asset of the United Kingdom, it is responsible for the re-fuelling of our existing Vanguard class of submarines, the maintenance therefore of the UK's nuclear deterrent and I am concerned at the way that the spin-off of KBR, who are part owners of the DML facility has been undertaken recently. The fact is that we expressed to the company, to KBR, our concern that, given the performance of KBR as part of Halliburton overall and, given the importance of DML to the UK in terms of nuclear deterrent, we needed to assure ourselves in the Ministry of Defence that any changes in the capital structure had no negative impact on the MoD and the nuclear deterrent. We were assured by the company that we would be provided with the financial information to enable us to reach that conclusion before the company proceeded with the IPO and the start of this spin-off process. I was very disappointed to see that the company did not provide that information and has gone ahead with the IPO process. This has significantly undermined our confidence in the company and this was clearly put to the management of the company yesterday. We need to expedite this financial review, but there are serious issues that need to be resolved to the satisfaction of the Ministry of Defence because this is very important to the national security interest.

  Q235 Linda Gilroy: From the point of view of how this has been perceived locally, where there has obviously been intense interest, they are behaving like an absentee landlord. I wonder whether you could just say a bit more about what the implications of that are for achieving the sort of investment that might be required in the dockyard to meet the continuing safety cases etc.

  Lord Drayson: This is at the heart of the information which we require to see. This is the financial information which we asked to see before the company went ahead with the IPO process. We do need to see this information: we have not seen it yet. It is very important that we do see it, because we need to assure ourselves that there is the capital structure to ensure that the investment is provided to maintain this very important facility in the future.

  Q236 Linda Gilroy: Could you finally tell the Committee what options are open to MoD, to the Government, if you do not receive those reassurances and what opportunities there may be in relation to the consolidation of the industry and what skills base?

  Lord Drayson: We have a number of options. We have a special share in the company which gives us significant rights. We are reviewing those options at present. I must say that we take this very seriously indeed and we are looking at this issue right now; we have taken no decisions at the moment. We have pressed the company and made it absolutely clear that we require this information urgently and we are reviewing the position.

  Q237 Mr Holloway: I hate to go back but I am not quite clear on the question that one of my colleagues asked about the cost of French or US submarines. Would they be more expensive because obviously you have the very high social costs of the skilled workforce that we have here already? Would it be that you still have significant expense in terms of servicing and maintaining foreign boats if you bought them? Why is it that off-the-shelf stuff would be so much more expensive? What is the reason?

  Lord Drayson: It would be wrong to characterise a nuclear submarine as something which is off the shelf.

  Q238 Mr Holloway: We have some common parts at the moment in terms of the re-entry vehicle and so on, so—

  Lord Drayson: I am not clear about the question.

  Q239 Mr Holloway: All I am saying is that there cannot be a gigantic difference, if we accept that we are going to have a nuclear submarine, between one made in France and one made in the United States. How is it that a US one or a French one would necessarily be so much more expensive? That is what I am trying to get at.

  Lord Drayson: Do you want to talk about the differences?

  Rear Admiral Mathews: We need to be careful that we are comparing apples with apples rather than apples with pears. For instance, the Americans design their submarines for a longer life and they have a more expensive core because it is designed for a longer life. They have gone down a different technology route to get there and we have not invested in that technology. So there are fundamental differences between the US submarine programme and our own. I am afraid I cannot comment on the French programme.

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