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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