Examination of Witnesses (Questions 60-79)
MR MIKE
TURNER CBE, MR
IAN GODDEN,
DR SANDY
WILSON AND
MR BOB
KEEN
18 NOVEMBER 2008
Q60 Mr Jenkins: There is some nagging
doubt because you are now saying that was in the bad old days
and the MoD now are all-singing all-dancing, they are much better,
and that that should not happen. But of course in the old days
it was a partnership of two, was it not? If the MoD has got its
side right what have you done to improve your side to make it
difficult not to con the MoD like you did in the past into the
future?
Mr Turner: Frankly, what we said
was that we were no longer playing that game. We were not going
along with a monopsony customer saying, "This is the programme
and these are the terms and if you do not take this programme
on those terms you do not get the job." Frankly, the UK defence
industrial base, my own company at the time was so small, and
we did not have the assets we now have in the rest of the world,
but we had to take it or we were out of business. Eventually we
said, "We cannot go on like this. We cannot go on taking
these complex weapons programmes on fixed price design, development
and production programmes even if it means not staying in business
in that particular area. I am sorry, we cannot do it," and
I am pleased to say that the MoD came along with that, and rightly
so.
Mr Godden: I think there is another
factor at work here. If we go back to the supply chain and say
that we have in this country anywhere from 3,000 up to 7,000 companies
involved in the supply chain, there is an issue about how efficient
that supply chain is. As Mike Turner said, if you do comparisons
between the UK and the US we come out, in a relative sense, very
well. In an absolute sense, if we compare ourselves with other
industries, and we have a nice direct comparison with the civil
to defence side in aerospace, we would say that the whole supply
chain and the SME community and the primes have got work to do
in terms of developing a much leaner, more efficient supply chain
that will match the needs of the programmes, so I think on behalf
of the industry I accept the challenge. We have established a
programme, Supply Chain 21, which is an attempt to overcome some
of those difficulties for which we get criticised. I think there
is that element to it as well.
Q61 Mr Jenkins: I understand that
complex projects do get difficult, but whilst we now, as you just
told us, have a more intelligent customer in the MoD, to do with
merging and the way we work with industry, is it solely legacy
projects that brought down the performance last year? It is last
year that procurement performance declined; why?
Mr Turner: You will probably find
the odd one that is a current programme having some difficulties,
even when the right level of risk reduction has taken place, but
I think if you look carefully at the Major Programmes Report it
was the legacy programmes, yes.
Mr Godden: I would also say that
there has been a lot of focus on value for money but if you talk
to the Ministry of Defence itself, I think it understands that
the value of time has been somewhat under-valued, and it goes
back to this budget issue that you start with at the top end which
is you push to the right because of budget constraints, that delays
your programme, and you start going into that cycle. The value
of time is something that I know that Amyas Morse and the current
Ministry of Defence team are very keen to establish a programme
on and to develop that timeliness in terms of decision-making,
in terms of the risk/reward, getting to the risk/reward boundary
as quickly as possible and agreeing that. I think those are programmes
that would help, in addition to what Mike Turner has said.
Q62 Chairman: Would you describe
the MoD over the last six months as having been more decisive
than previously?
Mr Godden: At the top level I
started off by saying we are in limbo so how can I come back and
say that, so the answer is no, at the top level, but obviously
on individual programmes I think it is happening faster.
Mr Turner: We should give them
great credit on UORs. They have responded for what the lads need
out in Iraq and Afghanistan in a magnificent way and so has industry,
but the rest of it, the Future Equipment Programme, is paralysed.
Q63 Linda Gilroy: Somebody mentioned
Supply Chain 21, I think it was Ian just now. Could you just set
for the record what that involves and what it brings to the table?
Mr Godden: Effectively it is a
programme of establishing lean timeliness and efficiency into
the whole supply chain. The Ministry of Defence signed up in Farnborough
this year to that whole programme, which is an industry-wide programme,
essentially self-help, funded partly by work going on in the regions
and partly by work going on from central government, but largely
funded by the primes themselves in terms of their programmes of
lean manufacture, lean design and the whole concept of eliminating
duplication in the chain. There are 300 companies that have signed
up out of 3,000 that are actively working on that. It is a very
large programme. A bit like I said earlier about 18 months, this
was established approximately 18 months ago. I myself am proud
to say that the programme is alive, well and kicking and doing
a good job, but it could be faster, it could be better and it
needs to be pushed hard from all angles because I think that will
have the ripple effect upwards along with things about timeliness
downwards that we are talking about.
Q64 Linda Gilroy: One of the things
we were concerned about in examining the initial Defence Industrial
Strategy was the ability of small and medium enterprises to access
the supply chain. Is that part of the solution?
Mr Godden: That is part of it.
Q65 Linda Gilroy: If so, is it working
well enough across the piece or are there lessons to be learned
from that for other parts of the supply chain?
Mr Godden: There is still a long
way to go. It is one of those comments where I would say we have
made huge progress in the last two to three years. I would see
this as a five to seven-year programme. If you look at the analogies
in the automotive industry in this country, the automotive supply
chain has still got a long way to go in terms of its quality and
its world standard, but at least on the automotive side we have
final assembly in units which are world-class and very effective,
as we have for example in some of the facilities in defence and
aerospace, but the chain is not yet efficient, in my opinion.
Not when you compare it with other defence, industries I hasten
to add, because versus the French and versus the US our chain
is much more efficient and better value for money but versus other
sectors we have got some way to go.
Q66 Chairman: I would like to move
into the issue of defence inflation now. We have an adviser, Professor
Kirkpatrick, who suggests that defence inflation is above the
average rate of inflation in the rest of the economy and it is
broadly the GDP deflator plus 3%. Does industry have a view as
to whether that exists and whether that is roughly the right rate?
Mr Turner: The US defence budget
planning received wisdom is that the defence industry, because
it is at the sharp end of technology, has relatively low volumes
compared to what happens in commercial industry and that inflation
is significantly higher. The skills that are demanded in the defence
industry mean that defence inflation is significantly higher than
general inflation, and that is allowed for in the defence budgeting
in the United States. I believe it is obvious to anybody that
inflation is going to be higher in the defence industry. Volume,
skills, technologies, materials all come together, and you are
demanding the very highest level of capability which costs money
more than the average and that is why, if you look at the defence
industrial base, we pay people well in the defence industry in
the United Kingdom compared to general industry. The good news
in the US is that it is recognised. They worry, even today, about
the good times returning and people leaving the defence industry
to go into other commercial industry at the expense of the defence
industry and they are concerned therefore to make sure that the
defence industry in the US is properly funded and inflation is
properly funded in the defence industry and that profits are allowed
in the defence industry. They get disappointed if you cannot make
15% profitability in the United States. I think you could study
forever about whether it is 2%, 3%, 5%. I just know it is higher
and for very good reasons.
Q67 Chairman: Is that because you
pay yourselves more?
Mr Turner: We do and rightly so
because the skills that are needed in the defence industry are
higher, I would argue, than any other industry. You go round the
nuclear submarine at Barrow or a Type-45 or an armoured fighting
vehicle the skills and the systems that come together and all
the many types of technologies that come together to make that
capability for our Armed Forces are second to none.
Q68 Chairman: Is that not creating
long-term serious problems for the defence budget in this country?
Mr Turner: Not if it is recognised
as it is in the United States.
Q69 Chairman: One of the problems
is that the Government says that until 2011 it will be putting
into the defence budget an increase over and above inflation of
1.7% and yet if the defence inflation is actually 3% then on an
annual basis it is in fact cutting the defence budget.
Mr Turner: Yes.
Q70 Chairman: Does that not make it quite
important that industry should actually play its part in trying
to keep defence inflation down by for example paying its people
less?
Mr Godden: Can I add two factors
here. One is if you look at medical equipment it is very similar.
Medical equipment is inflating much higher than general inflation,
so it is something to do with the equipment and the capability
of that equipment. If you look at a Typhoon versus a Spitfire
do you see it as a like-for-like? No, it is not. There is a capability
inflation that is going into this which is something to do with
the need for extra capability. If the professors have said they
have done like-for-like on a Spitfire versus a Typhoon, that is
not the case, so there is distortion there and the answer to your
question is that the industry itself does not know any more than
the professors who have studied it. If they have come out with
3% that is what industry believes it is. That is partly to do
with capability and partly to do with requirements being put on
the equipment itself as well as the things that Mike Turner mentioned.
Dr Wilson: As to on-going inflation,
if I might just make the point, I do not think, from the data
I have seen, that the defence industry is inflating salaries at
any greater rate than the corresponding general civil industry.
Q71 Chairman: So you would disagree
with Mike Turner?
Mr Turner: I did not say that.
Dr Wilson's point is that in the defence industry people get paid
a certain level above the average. What has happened in recent
years is that the pay increases in the defence industry are in
line with general industry but the gap is still there, and so
it should be.
Dr Wilson: I think that was the
point well made. I think the other point is really if one wanted
to simplify this most defence products are really bespoke craftsmen
products compared to mass produced products. The volumes are so
small and even large runs of armoured vehicles are actually quite
small compared to their equivalent trucks, cars and what have
you in the civil sector, and so there is necessarily a premium
simply because the volumes never get up to the levels in the civil
business. If you put in traditional learning factors for going
through production, you would see that you need to go many times
more in order to get really significant reductions.
Q72 John Smith: I must say that I
am very sceptical about pleading a special case for unique inflationary
pressures in any industry, defence, health, or anywhere else,
and by your own admission holding up the American defence industry
in terms of its record on procurement and its record on efficiency
is not a very good example. Yes, there is a much bigger defence
budget in the USA and there is much less competition within the
USA for the delivery of defence products, and I think they pay
the price for that. I am concerned that it just becomes an excuse
for inefficiency and for the industry not addressing the cost
increases and the cost overruns. You can take other industries
that are far more technically advanced and require far higher
technical skills but they are driving down costs dramatically.
The obvious area is computing/information technology.
Mr Turner: That is for a mass
world market. I sit on the Prime Minister's Ambassadors Apprenticeship
Network and we compare apprentices across the whole industrial
base of this country. An engineering apprentice in defence costs
each company about £30,000 to train and develop over a four-year
period so the cost that industry invests is significant and we
attract young, bright people into the defence industry because
of the rewards many years out that they will get by being in that
industry. I think the skills that they bring are second to none.
I cannot think of any other industry that requires what you need
on a nuclear submarine or a Type-45 or a Typhoon or an armoured
fighting vehicle, and it is right that the people who train, and
industry invests significantly during that four-year apprenticeship
period, and go through university get the rewards to which, frankly,
they are entitled. Without those rewards we would not have the
defence industrial base of this country.
Mr Keen: I agree with all of that.
I would refute any suggestion that we were not seeking efficiencies
in the company. If you look at the sort of investment that we
have made as a company in lean manufacturing facilities in BAE
Systems, it is massive. In the efficiency that you see at Warton
on Typhoon, as compared with what you would have seen there 20
years ago, there is an unbelievable difference, so I think we
are driving out efficiencies. More generally I would argue, as
Mike has said, that there are some particular complexities about
the defence industry. I understand your scepticism but I think
the reality is that we are like no other industry. That said,
I think there is an issue that we have to address and I think
we have to address it in a number of ways. We have to address
it with the MoD in driving costs down at every opportunity (and
we have already spoken about the sort of things we are doing on
partnering) but I think also we have to try and contribute to
the work that I know the MoD is doing trying to understand what
defence inflation is. I think we can probably help there.
Mr Godden: I think we are mixing
a couple of things up here because we have just published our
annual review of last year and over the last four years the productivity
of the defence industry has gone up between 4% and 6%. That is
people productivity, et cetera. Secondly, just to reinforce
Bob's point, when I go to the SELEX facility in Edinburgh, which
I was born next to, and I look at that facility versus five years
ago, versus 10 years ago, versus 15 years ago, that is a world-class
facility that has been invested in. It has one of the best supply
chain systems and lean manufacturing systems anywhere in the world.
I have been to Japan and I have been to the US and I have been
to France. We have a world-class, productive, highly capitalised
investment in SELEX, for example, so there is a mismatch between
what we are being challenged on here versus what is going on.
I agree that we need to study this inflation issue if it is a
big issue for the Government and we should do, but I do not think
there is any answer that says we are an unproductive (and getting
worse) industry; quite the opposite because that is the implication
of saying that. The inflation then must be something else and
I am saying I think it is a capability inflation myself. That
is my own personal opinion; unproven.
Q73 Chairman: I think that was actually
factored into Professor Kirkpatrick's article. Dr Wilson.
Dr Wilson: I come back to John
Smith's point about the obvious comparison between the UK defence
industry and the worldwide computing and communication industries.
Offshoring is a major factor in keeping costs low because hardly
any of that volume production is done in the UK. Even the development
is now done offshore in many cases and that is something that
is just impossible to do in the defence industry. We really need
to take that factor into account. It is not open to us to go and
have a whole pile of critical software developed in India. If
it is not critical yes we can; if it is absolutely mission-critical
we cannot because it is absolutely essential that that core capability
is in the UK and no-one else knows what it is.
Q74 Linda Gilroy: I too am very sceptical
about what you are saying. I think that the areas that you work
in like computer-aided design should be able to deliver huge savings
in the programmes. They must have done.
Mr Turner: It has done.
Linda Gilroy: I still think there is
the whole monopoly/monopsony-type culture in the industry that
does not drive hard enough to match the undoubted defence inflation
there is with the savings that can be made. I think that we would
have to try and unbundle the two sides of it. We do know that
in the MoD budget they have made a lot of savings with your help
and that that has been rededicated to front-line capability. Therefore,
you cannot just take a straight line of what the increase in the
MoD budget is without recognising that there have been some major
efficiency savings. I just do not get the impression that you
guys are dedicated enough to try and combat that as an issue,
given the tensions that there are, because the gap in the rewards
that come to people who work, quite rightly, and get well-rewarded
in the dockyard at Plymouth, for instance, against what young
men and women who are going out to put their lives on the line
in Afghanistan and Iraq are getting is wrong. That is a very visible
example of the tensions that exist that we were talking about
earlier in the equipment programme as well. There needs to be
more passion injected into trying to achieve that, which I know
from what you have said in your introductory remarks you recognise
and you care about.
Chairman: That was a comment, rather
than a question.
Linda Gilroy: Sorry!
Q75 John Smith: I just want to come
back, it is not my intention to claim that the industry is unproductive
or inefficient; far from it. I think you have a very good story
and a very good track record. I do not think there is anybody
on this Committee who does not support you in your bid for additional
budget funding for the good work that you do. I am fairly sceptical
about the argument about inflation and I think in the long run
it may be counter-productive for you to be arguing a special case
on your costings rather than showing what a good job you are doing.
Mr Godden: What I would like to
do out of that is to promise to study that with you because I
agree with you that it needs reconciliation because it has got
a number of factors in it.
Q76 Chairman: May I say that that
is welcome because I think that, whatever the scepticism of my
colleagues, there are some points that we have to understand here
and we need to get to the bottom of what is the effect of this
small volume, what is the effect of the materials that are used
and the cutting-edge nature of the defence industry, and so if
you can work with us to get to the bottom of that that would be
most helpful. I am glad you are working with the Ministry of Defence.
Mr Turner: Chairman, it is all
very well having these discussions but the bottom line is today
we have a world-class defence industry in this country, one of
the few industries left. If we carry on debating these things
such as inflation—we know how efficient we are and that
we give value for money and if you compare with anybody else in
the world, capability for capability, value for money, what we
bring to the UK economy, what we do in support of UK Armed Forces,
in 10 years' time I will not be here but people will be sitting
around here saying, "Where did it go? What went wrong? What
did we do wrong?" I tell you now this industry is in decline
and unless people pay attention to the budgeting of defence in
this country and the defence industrial base we do not have a
future.
Chairman: We have to pay attention to
that on the basis of our own knowledge and of the facts that we
get by debating it in these fora and so your help in getting to
the bottom of it would be much appreciated.[1]
Mr Jenkins: Before we leave that area,
I am glad you brought up the automotive industry and the increase
in capabilities because there has been a tremendous increase in
capabilities and a dramatic fall in the cost of cars in this country.
They are not offshored, they are built here, designed here and
planned here, in the main. In the world out there technology has
been driving prices down and has produced additional capabilities
but when the argument is made, "We have to pay high wages
because when the good times come back, people will leave the industry,"
what happens then, as the wages outside go up so does the rate
of inflation go up in the economy, so you would be exactly on
a par with the normal economy. There is no reason why your inflation
rate should be any higher because of outside wage rates going
up. That is the first thing. The second point on small batch production,
small batch production was used to set the original price, it
is not about the rate of inflation because that was a given to
start with. I think we should put those two things on the record.
Your argument that servicing offshore costs may lead to a fall
in inflation in Britain now that the GDP deflator might be slightly
lower may be an argument, but it is going to be so marginal as
to have virtually no effect, I believe.
Chairman: I think we ought to move on
from a debate on the issue of defence inflation.
Mr Hamilton: Chairman, could I just ask
for one bit of information. When Ian sends that information to
you, could you also indicate across the board what type of wages
we are talking about. I take the point that Linda makes, the comparisons
are not between industry, the comparisons are in the area in which
the industry is working. I know from my area where there is a
small engineering firm, Taggart's, that the people are well-paid
and it is a good company, but the comparisons are not with areas
like Glasgow or London, the comparisons are with local wage levels,
so if you get that information that would be quite helpful also.
Q77 John Smith: I was going to cover
the effect of current operational requirements on strategic planning
but I think that has been dealt with right from the start in your
opening comments. There is just one area of the impact of current
operational requirements and that is: is there any evidence that
equipment is being used to such an extent now that its life is
being shortened? You are talking about us not progressing with
future equipment requirements. It could be creating an even bigger
gap because the life expectancy of the equipment, especially air
frames, is being impacted upon by current requirements. Is there
any evidence of that and does the industry have a view?
Mr Turner: I think the usage on
helicopters and the need for continued urgent action on helicopters
is well-known. On the fixed wing, the Harriers, yes it is a concern
that they have a stated life and that is being used more rapidly
than was originally planned. At the present time we are building
two splendid aircraft carriers and we all support that, and it
is the right thing for our country to have, but we will have no
aircraft to put on them and that is a big issue for us going forward.
One good thing that comes out of the UORs is there is a debate
that goes on between the MoD and the Treasury about this additional
equipment, in response to UORs how much should come out of the
defence budget and how much should be funded by the UORs. I have
no evidence that the MoD is suffering because of that but I do
not think we have a Treasury that is that helpful to the defence
budget, and I think there is a concern that, yes, the MoD is getting
new equipment on the back of Iraq and Afghanistan and therefore
that is good but some equipment is not having the attention it
will need for different kind of campaigns five, 10 15 years out.
We hear about piracy again today and yes, we have six splendid
Type-44s and two aircraft carriers and seven or eight Astute submarines
but we need frigates. Where is the money for the frigates?
Mr Jenkins: Saudi Arabia to defend their
oil route or China to defend their routes.
Q78 Chairman: Moving on then to the
Defence Industrial Strategy, was I right in hearing Mike Turner
say that it is extremely difficult for industry to plan as we
were able to do when we had a Defence Industrial Strategy? Is
that one of the things that you said earlier in the day? Do you
believe the Defence Industrial Strategy is dead?
Mr Turner: It is on hold. First
of all, the principles are magnificent but also we saw before
us long-term planning taking place in helicopters, on land, air
and sea, against which industry could then plan resources, apprentice
intakes, investments and all the rest. We welcomed it and I remember
the board meeting where we said good, at last we have a future
in the United Kingdom, because that was very much in question.
Now I think I think it is in doubt. We are very pessimistic about
the future because we have the DIS, we have the principles, we
have the strategy; we do not have the money.
Mr Godden: In terms of DIS I mentioned
earlier the limbo of 15 months, I think that is what we had, and
our preference is to stick with DISv.1 as a set of principles
and allow the Government and the civil servants to work out what
needs to be done in the current situation for all the pressures
and then come back to the subject, whether that is early next
year or later, of the extra principles that need to be built into
DIS, in the hope that we will not dilute DISv.1 but we will enhance
it. The issue for us is there is no point in publishing a DISv.2
that either does not reflect the sector strategies or the specifics
around adjustments to the thinking at this stage. Our view therefore
is that it is a balance between being in that limbo period and
therefore the uncertainty for shareholders about what is happening
versus the pressures of the moment. Industry has taken the decision
that does not wish to add to the pressures of either the Government
or of the Ministry of Defence at the moment until it has sorted
out one or two matters, so that is really where we are. I have
worked very, very hard for the last year and I am disappointed
that we do not have a DISv.2 but I accept the principle that we
are unlikely to have it until next year or perhaps beyond.
Q79 Linda Gilroy: Some people are
arguing for a Strategic Defence Review. What are the pros and
cons of that from your point of view and what would that do to
the process that we are discussing?
Mr Godden: We have an incompatibility
today between George Robertson's SDR and the money available for
the Future Equipment Programme, so one of those two things has
to give.
1 See Ev 105 Back
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