Defence Equipment 2009 - Defence Committee Contents


Examination of Witnesses (Questions 1-19)

MR MIKE TURNER CBE, MR IAN GODDEN, DR SANDY WILSON AND MR BOB KEEN

18 NOVEMBER 2008

  Q1 Chairman: We start this first evidence session on defence equipment. May I declare an interest at the beginning. Mr Keen, I should declare that you were my Private Secretary when I was in the Ministry of Defence. You are welcome to this evidence session. You will each have your own different answers to this question. If you had to suggest priorities to the new Minister for Defence Equipment and Support and you each had to produce three priorities for him to consider, what would those three priorities be? I am not necessarily talking about programmes—maybe initiatives, capabilities, concepts or programmes. What should, in your view, those three priorities be?

  Mr Turner: Overall, and this is what we said at the NDIC to the Secretary of State, there are really three main areas of defence and defence expenditure on which to focus: clearly, the welfare of the Armed Forces; secondly, the capabilities they need for today's operations, the current operations; and, thirdly, the capabilities, systems and equipment they need for future operations, five, 10, 15 years hence to defend the defence interests, the security interests, of the UK in those out years. There is no doubt over recent years, and understandably the attention has been on the first two, the welfare of the Armed Forces and current operations, that there has been a focus and a great deal has been done in those areas and, frankly, needed to be done. The big concern that the defence industrial base has is the third area, the future equipment programme. Will this country be able to play a role in the world, five, 10, 15 years out? I think it is no secret that there is not sufficient money in the defence budget for the future equipment programme and we have an incompatibility between a Strategic Defence Review of 10 years ago and the role that rightly this country should and wants to play in the world alongside the United States and the amount of money available for that third category. As I say, it is understandable that the first two categories get the attention in the current times, but we are concerned about the long term. The defence industrial base of the United Kingdom not only supports the Armed Forces, and without the defence industrial base we could not have the Armed Forces that we have doing the job for this country, but the skills, technology, R&C, innovation, apprentices, exports that all flow from that. We have a world class defence industrial base and only focusing on the short term and not the long term is of huge concern to us.

  Q2  Chairman: But if you give three priorities and those three are the ones you give, would you give them in that order?

  Mr Turner: I think I would put the capabilities for current operations first, welfare second and the future third, but they are all very important. The first two are getting it; the last one is not.

  Mr Godden: I would add, perhaps on a different tack, that the reform of the defence procurement and the issues around TLCM, etc. should continue to be a priority on the operational side. Mike Turner was talking mainly about the resources going in for the programmes, equipment and services associated with the Armed Forces. I would say that the reform of the defence procurement initiatives should continue as a priority. In fact, it could possibly be accelerated.

  Dr Wilson: Following on from what Ian Godden has just said, I agree entirely with that and I think TLCM is key. I think the process is only part way through and has to be driven quite hard in future to the point where we get proper programme boards with industrial representation on them and it is at that point that we start to get true transparency on future requirements. I remind you that transparency was one of the big tenets of the first Defence Industrial Strategy. I think everybody in industry thought that was going to be the opening of a rather better regime and relationship between industry and MoD. The transparency, sadly, has not materialised yet and I think TLCM is an excellent way of ensuring that it does.

  Q3  Chairman: When you say that transparency has not materialised yet, and we will come on to that in a bit, would it not be a better thing to say that the transparency did materialise and then went away?

  Dr Wilson: I think transparency in times of budgetary constraint is extremely difficult. That might answer the question.

  Q4  Chairman: Not really.

  Mr Keen: Most of the priorities that I would suggest to the Secretary of State have already been mentioned: to emphasise the long term nature of the challenge and the need to balance resources with equipment programmes going forward. It seems to me the central challenge that the Secretary of State has is particularly to do it, as far as the equipment programme is concerned, in a way that maintains the industrial capability that Mike Turner has been talking about. That is essential, both in terms of delivering capability to the front line in the future and also from the point of view of generating the technology and skills in this country that the DIS recognised were important, not least because of the need to maintain operational sovereignty in the future. From my point of view, I think that is the priority. Taking your point about transparency, that takes a number of forms. We are being consulted on a number of programmes as a company at the moment. I suppose if you take a step back and look at what the DIS was trying to achieve in terms of transparency, the sort of generic openness that the DIS was talking about, I think that has proved a challenge in a time of financial constraint. I think the MoD have felt more constrained in opening up the kimono, as it were, to industry through that period.

  Q5  Chairman: I want to get personal here. I had the impression that when Lord Drayson, with his knowledge of industry, was in charge of the Defence Industrial Strategy, his approach was to involve the defence industry at every opportunity that he could in order to get the best industrial strategy that fitted into all the parameters. I had the impression that when Lord Drayson stopped that stopped. Would you agree or disagree with that?

  Mr Keen: I am not sure I desperately want to personalise it. Around the same time, it is the case that the financial challenge was becoming very apparent.

  Q6  Chairman: It has always been bad, has it not?

  Mr Turner: To help, Chairman, with John Reid and Lord Drayson, we did work together hand in glove to formulate a Defence Industrial Strategy, and it was about the defence industrial base of the United Kingdom. Sector by sector we spelt out what should be onshore, what operational sovereignty should be maintained onshore to support the Armed Forces, and then basically what would go offshore for or compete for through life. The issue quickly became apparent that, having a DIS, when we go to our boards and get a strategy approved, we also get the financial backing to execute the strategy of the company. It was quite clear that the Government did not give Lord Drayson, the MoD, the financial support necessary to execute that strategy, and that is the limbo-land we have been in ever since. We have a DIS and have it spelt out in DIS 1 sector by sector with a Strategic Defence Review some 10 years old now, which is the background for that, but we do not have the financial wherewithal to execute that strategy and that is where we are and that is where we have been for some time.

  Q7  Robert Key: Gentlemen, can I invite you to focus on the situation in which we find ourselves today? Mike Turner, you have just mentioned the word limbo? Currently we are waiting for the outcome of the short examination of the equipment programme; we are waiting for the updated version of the Defence Industrial Strategy and we are waiting for decisions on a number of key programmes. Does industry feel that we are in a state of limbo at the moment?

  Mr Turner: Yes, we are undoubtedly and we believe that for the next 18 months at least we will have delays, which inevitably in the long term will cost money, but it is something we have to live with over this period. It is extremely difficult for industry to plan as we hoped we would be able to when we had a DIS, but that is reality. That is the politics that we are facing today.

  Mr Godden: I think the limbo started last year. Whilst the UORs have been very successful and have continued throughout this period, with those exceptions, I certainly in my position feel that we have been in limbo since September 2007. Therefore, there have been 15 months of fairly serious lack of progress, mainly as a result not of personalities but of budgets. Whilst personalities have had an effect, that has not really been the driver for it; I think it has been a budgetary issue in discussions behind the scenes on such. In addition, I think there is a realisation that the defence industrial base is not only a matter of ensuring we can continue to operate our equipment but also its role in exports, innovation, manufacturing and skills has been added. That as a government policy has added some difficulty I think for the debate. It has not just been purely budget; it has been the expectation on other matters which have been in many respects attempted to be brought into the Defence Industrial Strategy in DIS 2 versus DIS 1 and the combination of budget and those extra pressures, let us say, have caused a limbo period, which I hope we will come out of but I certainly do not yet feel we are out of.

  Q8  John Smith: I wondered to what extent you think the current state of play in the continued development in the defence industrial base is directly related to the priority that Mr Turner spoke about, and that is the urgent operational requirements, and the extent to which our Armed Forces are currently committed on two fronts? Is it not inevitable that the focus of the Government is going to remain on capability and the wellbeing of our forces and that the strategic overview is going to step back a bit? Is that not inevitable?

  Mr Turner: I think so. If there is not sufficient budget, clearly you focus on today and that is what is happening. What we are trying to do is focus on tomorrow as well. We do not want just to sit back and watch this country in five, 10 or 15 years' time have no capability of playing a role in the world for its defence and security interests and, frankly, that is what we are facing.

  Q9  John Smith: When you mention insufficient budget, what do you think the budget should be?

  Mr Turner: I have always put on a figure of about £1.5 billion a year more.

  Q10  Mr Jenkins: Always?

  Mr Turner: Not always,

  Q11  Robert Key: Returning to the partnering issue, the short examination of the equipment programme we hope is going to come to a conclusion in the not too distant future. Has industry been sufficiently involved in that short examination?

  Mr Turner: All the companies have been asked a number of questions about the impact of this, that and the other. Clearly there is a concern about jobs in the current climate, not surprisingly, but the feeling we get is that programmes will be stretched out; some will clearly have more favourable funding than others. We do not see any major programme cancellations in the current climate. We think the equipment examination will come to a conclusion in the next few weeks, but there will be no major changes. As I say, some programme will be more favoured than others, but with limited funding available what we want to do is work transparently with MoD to make the best of the situation we are in until we can get to a new situation.

  Mr Godden: My view is that there is a good dialogue taking place company to MoD at a level of programmes, but in terms of the overall programme and the overall industrial strategy on behalf of the nation, that is the thing that is in limbo and not really being discussed in the meantime.

  Q12  Robert Key: I have always thought that there is a difference between asking the questions and having a dialogue. It seems to me that you are saying you have not really been having a proper dialogue over the future of our defence industrial base.

  Mr Turner: MoD has to be careful because every time they ask a question, it gets out in the press—Typhoon is going to be cancelled, the future of BVRAAM, that it is going to be cancelled, and Lynx. You have seen it almost daily in the newspapers, so they have to be careful. Fundamentally, they do not have enough money and that is at the bottom of everything we are facing at the moment. They have to take some decisions to spread out the limited amount of money they have, certainly for the next 18 months.

  Mr Keen: I think there has been a dialogue, as Ian Godden said, but certainly as far as a number of the programmes in which we are involved, I guess we will not know the extent to which we have been exposed to the MoD's thinking until the equipment examination is published. Our sense at an individual programme level is that we are being consulted and that we are being given the opportunity to talk about some of the industrial implications of some of the options that they are considering, which would be significant in some of those cases. Hopefully, when we see the results of the equipment examination, we will see the MoD having taken account of the sorts of representations we have made on individual programmes.

  Q13  Robert Key: The Permanent Secretary told us two weeks ago that he anticipated the review would be completed within weeks rather than months. Is that your understanding, too?

  Mr Turner: Yes, it is.

  Q14  Robert Key: Meanwhile, what impact is this having on your industry?

  Mr Turner: It makes it difficult to plan. The DIS was all about long-term planning assumptions, what we are going to keep onshore United Kingdom and this short-termism that we are experiencing. It will be a bit clearer after the next few weeks but industry is going to have to manage for at least 18 months to two years and decide in the longer term what the UK Government may or may not decide to keep onshore UK, and that is what we are very concerned about. I think industry is going to have to do its best in this period but it is an 18 months to two year period of uncertainty we are facing.

  Q15  Robert Key: How are you going to finance that? That is a long period for you to wait with your employees who are highly skilled and highly paid. How long can you hang in there?

  Mr Turner: It is known that MoD will fund to some extent the long-term programmes and, as I say, I do not think any major programmes will be cancelled but industry, companies, will have to take a view on whether they are prepared, on the basis of optimism in the longer term, to keep some resources in place.

  Dr Wilson: This is not going immediately to be a problem generated by the equipment examination; this problem of companies funding teams and capabilities over an extended period has been going on for the last 18 months quite significantly. I think many companies could point to very significant spend which has come off their bottom line in that period to keep teams going until MoD makes up its mind about what it actually wants to do. It is quite an invidious position to find oneself in and one has to make a commercial judgment on it. As Mike Turner has just said, sometimes you will decide enough is enough and you will pull out of it; sometimes you will stick with it. In order to do that, we do need some view of the long-term plan. The other thing about the equipment examination is that I think the Secretary of State stated that it would provide the basis for going into PR 09, so I do not think equipment examination should be viewed as giving all the answers. I think we will then go into a period of many months of continued debate about options and we will see clarity emerge through the year in PR 09.

  Mr Godden: Can I add one other point which is that certainly my observation from recent trips to Washington is that there is a new dynamic in the shareholder perspective that you talked about. The UK has always been perceived as a good base to invest in for the long term. I think there is a renewed worry that has come, partly because the issues on the US budget are beginning to come into focus now having had a period of long growth and high established positions, but there is now a nervousness from the shareholders from outside this country who have very strong positions in the country and have invested in it that, fine, a year and a half (if you take my premise that we have been in limbo for, say, 15 months) is probably acceptable but if this carries on, they will look at the UK as an industrial base and say, "Is this worth investing in in the future?" My worry is about that as well, shareholders from outside this country saying, "Whereas previously we have invested for the long term, will that be affected by the situation that we have at the moment?"

  Q16  Linda Gilroy: This is about maintaining skills bases. You have just been discussing that. Some of those are more fragile than others and it is not just industry that makes decisions about these things; it is individual workers who have scarce skill resources. In this situation of limbo, are there particular programmes which are more vulnerable to that skills base haemorrhaging with the passing of time than others, and, if so, what are they?

  Mr Turner: Clearly the industry over recent years has been quite optimistic about the long term, particularly the DIS. You have seen that the number of apprentices who have come into the defence industrial base is quite huge actually. Just bear in mind that in the defence industrial base of the UK we have more SMEs in the defence industry in the UK than Spain, Germany, France and Italy put together. We have a huge SME base in this country dependent basically on the defence budget and the primes feeding through this work. There is no doubt about it now that the SMEs are getting quite concerned about the situation. We are seeing signs of apprentice numbers falling, and understandably so in the current climate. In terms of programme areas, I think you know about Lynx, you know about FRES for the land forces, and you know about Typhoon development and engineering. There are many areas where we are very concerned about the ability to keep the skill base together and indeed your point of young people wanting to come into this industry.

  Q17  Chairman: Could I pick up something you said about what you expect to come out of this brief examination, namely no major programmes to be cancelled but things to be stretched out—in other words, moved to the right and presumably salami sliced?

  Mr Turner: No, I think it will just be stretched out to the right. Some things will be accelerated and some things delayed even more because clearly there are priorities for current operations. People need to bear in mind in the long term it costs money. V

   programmes do continue to fruition, in the long term it costs significantly more by doing that.

  Q18  Chairman: That is what I was going to ask you about. Are you able to quantify how much it costs to delay programmes or to reduce the unit numbers or to reduce the capability of programmes?

  Mr Turner: There is one programme I am aware of at the moment where over the next two or three years we could probably save £400 million, reduce the expenditure by £400 million. I know that that will add £600 million to the bill, 50%.

  Mr Godden: I think also in the context of TLCM that we were talking about earlier there is a risk because to implement that programme you actually probably have to spend a bit higher up-front in order to get the lower positions later. I think some of that is at risk in the current situation. It is not just a matter of delaying the programmes but also the idea of the TLCM being a longer term value for money is at risk from this current situation.

  Q19  Chairman: In our last equipment report we as a Committee said that it is expensive to salami slice and to move things to the right and it is time consideration was given actually to taking a programme and saying, "This is unaffordable". What was your reaction to that and what now would your reaction be to such an approach?

  Mr Turner: We do not like it. The reason we have come out clearly and said we do not now want a DIS 2 sector by sector is because we think it would be counterproductive for the UK in the long run. The Armed Forces of our country depend on a defence industrial base being there; they go hand in glove. Maybe we have made a bad job of making that point. We seem to have a public that supports the Armed Forces but we do not have the linkage to the defence industrial base. We think in the current budgetary climate if people were forced to take decisions sector by sector it would be disastrous for the long-term defence industrial base of this country, therefore the UK Armed Forces and therefore for the UK's role in the world. We would rather not have that happening at the present time. We like the principles of DIS; we like Ministers and the Secretary of State saying that is what they are going to stick to, partnering through that capability management. Frankly, that cannot happen until we are through this situation we are in for the next 18 months to two years and sorting out the budget. Without the budget, we cannot do anything.


 
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