Defence Equipment 2009 - Defence Committee Contents


Examination of Witnesses (Questions 420-439)

MR QUENTIN DAVIES MP, GENERAL SIR KEVIN O'DONOGHUE KCB CBE, LIEUTENANT GENERAL ANDREW FIGGURES CBE AND MR AMYAS MORSE

16 DECEMBER 2008

  Q420  Linda Gilroy: There are obviously tensions and you set out at some length earlier on how you were seeking to balance that, but the Defence Technology Strategy said that the military advantage achieved at any one time depends upon the research and development investment being made during the previous 25 years. What estimate are you making of the impact on the UK's future military advantage from the cut in defence research spending?

  Mr Davies: I cannot quantify that. The important thing is to use the defence research spending as intelligently as possible, for example to try to make sure that as far as possible it is co-investment, so we provide a certain amount of money and we persuade perhaps the private sector to provide some more money, and we therefore leverage our own particular budget. Clearly, some expenditure on research is absolutely vital; no one is suggesting we should get out of the research business but, equally, we cannot say ab initio a priori that spending money on research is more useful than spending money on anything else, I do not think that would be a fair thing to say. This is something which cannot be immune from our examination from time to time as to whether we are getting the priorities right.

  Q421  Linda Gilroy: Can you confirm to the Committee that you are making some estimate of what the impact is—whether it is a 7% cut or not—of whatever cutback there is in the defence budget?

  Mr Davies: Let me put it more positively: we always try and make an estimate of what the value is potentially and what the return may be from any particular defence research spending that we make. If we have to cut something then we obviously decide what is a negative return, what are we sacrificing, we try to be as robust about these things as we can.

  Q422  Linda Gilroy: When do you think we can expect to have greater clarity about what exactly will be in the defence research budget?

  Mr Davies: I once again say, Mrs Gilroy, there is no hidden agenda here and it is not as if I am withholding some announcement which I am conscious of but for some reason I do not want to make it before this Committee. That is not the case at all, I am simply saying that we will be reviewing our defence research spending. When I say reviewing that does not necessarily mean cutting, but we are looking to make sure—as we will be doing on all our equipment and support programmes—that the current spending accurately reflects our present notion of what the priorities ought to be.

  Q423  Linda Gilroy: You would not at this stage agree with the Chief Executive of SBAC when he told us that defence research spending has been cut by 7%—it has been cut.

  Mr Davies: I do not know what the baseline is on which he is making that statement. If you actually look at research spending over the last five or six years you see it is an up and down figure, sometimes it goes up and sometimes it goes down. It has been roughly in the area of £550-£650 million for a number of years.

  Q424  Linda Gilroy: In real terms that is a cut.

  Mr Davies: In real terms, Mrs Gilroy, the rate of inflation is not very great and depending on what baseline you take you can see that there was a real growth in spending over a particular period of years and it may well be that over that period of years there would be a real terms increase in research spending, so since you have got this peaks and troughs picture what sort of trend you deduce and whether it is a positive or a negative growth rate really depends upon where you take your baseline. If you take your baseline at the low point you will find that there is an apparent growth trend over the subsequent period.

  Q425  Mr Holloway: I was always pretty useless at corporate finance but can I just pick up on Mr Jenkin's thing here. You have a table that says "Changes in Resource and Capital Expenditure in the Winter Supplementary Estimate" and it says that Net Provision in Defence Capability is down £950 million and Operations in Peacekeeping going up by almost the same amount; surely what you are doing is your are robbing Peter to pay Paul so you are going down on your future capability in order to fund what you are doing out in Afghanistan or wherever else, so it is a cut.

  Mr Davies: No, Mr Holloway, we are not making cuts; as I said we are making changes in our priorities from time to time and I repeat, we have not cut any of these long term programmes and we are very much committed to these long term programmes. So we are not robbing Peter to pay Paul.

  Q426  Mr Holloway: What is that then? Sorry, I must be really dim, what is that?

  Mr Davies: Let me put it this way—we have already been over this ground—the major re-profiling exercise in the equipment examination was the carriers. We have re-profiled spending on the carriers. I have explained to you already once there is absolutely no element of defence capability cut involved in that at all, it has been possible to re-profile expenditure to take the strain off the coming two financial years without paying any price in terms of the nation's defence capability. It may seem to you paradoxical that we can achieve such an effect, apparently a free effect, because we have not incurred any cost to our defence capability, but that is the case, that is what we have been looking at. Under no circumstances could you characterise such a thing as a cut.

  Chairman: I want to move on to the Defence Industrial Strategy, Vice-Chairman David Crausby.

  Q427  Mr Crausby: Who has the overall responsibility for the Defence Industrial Strategy?

  Mr Davies: I do as a Minister and Mr Amyas Morse who is here with me as an official.

  Q428  Mr Crausby: I would not have needed to ask that question when Lord Drayson was in your position. It was generally accepted that Lord Drayson drove the policy forward and did a tremendous job on it, yet I have to say that the general impression, right across industry and politics, is that the impetus has been lost and the Defence Industrial Strategy has been effectively parked on one side. What do you intend to do about regaining that impetus?

  Mr Davies: First of all, Mr Crausby, I think it is a fair characterisation of the last three years since the Defence Industrial Strategy was first promulgated that we have been implementing it; we have been implementing it—I hope you will give us credit for that—in a rather impressive fashion. All these contracts that we have been talking about, the new contract for the carriers, for example, the contract for Future Lynx which we have just been talking about, are all a manifestation of that, so the best thing that can happen with the Defence Industrial Strategy I should have thought was that it should be implemented, it has been implemented and is being implemented and will continue to be implemented.

  Q429  Mr Crausby: What about the Defence Industrial Strategy 2? As you have just been saying we understand that Mr Morse is in charge of the Defence Industrial Strategy; can you help us on progress on this, please?

  Mr Morse: Certainly. Is that all right, Minister, shall I do that?

  Mr Davies: By all means, I will come in in a second.

  Mr Morse: The answer is that we have not produced a Defence Industrial Strategy 2 in the timescale we originally planned on doing, and that is largely because industry has said "Look, if you cannot be clear about the sector or the strategy and give us some indication of your spending plans we do not want to move forward with policy and the other aspects of it, we want to wait until things are as clear as possible. So it is not a question that we have held it up and industry did not know what we were doing; we have constantly talked to them. Since DIS1 we have also been in joint working with them on quite a number of policy issues in developing positions on those and also looking at some sectoral issues with them, so there has been quite a lot of continuing work. As to the question can we produce a composite of the whole thing, sectoral as well as policy, they very clearly said they do not want to produce the policy for us and we have gone with that up to now. I agree it has led to rather more of a delay in producing that than we planned originally, but that is where we are. The only other comment I will make is that I do conduct, with other colleagues, a number of discussions with industry—sometimes on easy and sometimes on difficult subjects—and we do so on a very frank and business-like and open basis as far as we possibly can. We call a spade a spade when we have to, and industry increasingly does that as well, and we talk to industry before we do things about what makes sense. We are trying very hard to put this into effect and work with industry more closely. I personally very strongly believe in that close approach and as much joint working as we can manage, coupled with a very tough, demanding regime on showing value for money.

  Q430  Mr Crausby: I hear what you say, Minister, that progress has been made on the Defence Industrial Strategy but when we met industry their argument was that the principles behind the Defence Industrial Strategy scheme were "magnificent" but because of the funding problems it was effectively "on hold". Do you believe that? Are the funding issues in these circumstances limiting progress on the Defence Industrial Strategy?

  Mr Davies: No, the two things are quite separate, as I have explained. We remain committed to a very wide range of equipment programmes, we have not cut any essential equipment programmes, and I trust we will not, and industry understands that. They also understand that we have looked again at the priorities and so we discussed that with them in the context of the Defence Industrial Strategy and our partnership with our major defence suppliers. We talked through our views about this during the equipment examination and there were no shocks or surprises for them as a result of that examination. So far as the Defence Industrial Strategy is concerned I repeat, I am completely committed to the principles of that Defence Industrial Strategy, the Government are completely committed to those principles, we are continuing to implement the Defence Industrial Strategy. Whether it makes sense to have a second version of that, Defence Industrial Strategy 2, is a matter on which I am open-minded and I have expressed myself along those lines with industry. In so far as Defence Industrial Strategy 2 gave a greater degree of clarity, a greater degree of investor confidence to industry, in other words in so far as it was more explicit on the sectoral information, on the budgetary information and so forth than the existing one, industry would no doubt be pleased to have it, but if it did not achieve those things—and it might be difficult for us to achieve those things—then there is a great danger having too frequent a re-issue of the Defence Industrial Strategy because it is supposed to be a long-term framework. Lead times in the defence industry are very long so if you suddenly say every two or three years we are going to change the Defence Industrial Strategy that might have a very negative effect on confidence. We are discussing this with industry, I am completely open-minded about what we do about producing some new document or when we produce a new document and I certainly do not exclude doing so.

  Q431  Mr Crausby: Let me tell you what the Defence Industries Council said in its memorandum to us. They agreed that steps have been made towards upholding the principles set out but they said "However overall progress has been much slower than industry would have wished." It is clear that industry are disappointed in the progress that has been made; is industry wrong to be disappointed, are you satisfied with the speed of the progress that has been made?

  Mr Davies: Mr Crausby, I come from a private sector background and one is never satisfied with the degree of market that one has, one always wants to have a bigger market, one always wants to have a bigger market share. It would intensely surprise me if the customers of the MoD at any one stage said "Thank you very much, we are quite satisfied with the flow of orders, we are quite satisfied with the defence budget, we do not want any more." That would not be a natural state of affairs, so I regard it as a very natural understanding of the state of affairs. When they say they would like a bit more money that is perfectly reasonable but they recognise realities, they are getting more money all the time but not, obviously, at the pace that they might conceivably be asking for.

  Q432  Mr Holloway: Minister, listening to you it would seem that everything is going brilliantly, particularly in the two and a half months since you took over, but are there any areas where you might think you could have done a bit better or is everything just going marvellously.

  Mr Davies: We are always looking to raise our game, of course we are, we are always looking to raise our game in defence procurement, we are always looking to do things better, we are always looking to do things cheaper, to get the capability we need more effectively. We are always looking at new contract mechanisms, new financial disciplines and so forth of that kind. If you ask me if I have any concerns about our ability to deliver the capability which the military need and deserve, then I think my main concern is the one that we have already touched on, which is the air bridge. It is a matter of honest considerable concern; there are no miracle immediate solutions available, this is very, very difficult territory for us but it is something that we are certainly all working on and spending a lot of time thinking about. I do not mean to just leave the issue there, I do not mean to just say there is nothing we can do, that is it. We will I trust be taking some measures and in time of course, as soon as we can announce them, we will announce them.

  Q433  Mr Jenkin: Can I just point out that your predecessor but one originally promised us the Defence Industrial Strategy 2 by last Christmas, and then your predecessor promised us in the Spring. Now we have a new doctrine that it might not be necessary to have DIS2 at all, at least it is not necessary to have these documents nearly as often as was originally envisaged. Can you explain what Government policy now is?

  Mr Davies: Government policy is as I just enunciated it, which is that we are totally committed to the Defence Industrial Strategy as it exists. That document dating from 2005 is still a very valid document, indeed it is in many ways our sort of road map and that continues to be the case.

  Q434  Mr Jenkin: Why did Lord Drayson think it was going to be very necessary to produce a new one and you have decided that you do not need one?

  Mr Davies: I cannot answer questions on behalf of other people and I certainly cannot answer questions three years afterwards because contexts change, things change. I am trying to give you, Mr Jenkin, a very frank response and I certainly do not exclude having a new document. As I say, I am open-minded about when that should best be and I am very conscious that there is no point having a document for the sake of having a document, there is no point having a document which is full of general principles and aspirations, the only sort of document that industry is actually interested in—and you will know this as well as I do—is a document which gives a very great deal of clarity and certainty about our purchasing plans.

  Q435  Mr Jenkin: What is holding it up?

  Mr Davies: What is holding it up is that we have of course had the equipment examination. As I have said, the exercise of looking at our priorities and so forth is not something which is just finished once and for all, there are a number of uncertainties still in the future, there will be for some time, we are engaged in operations where the requirements we have for the front line change and evolve quite rapidly, so we need to maintain—

  Q436  Mr Jenkin: What you are saying is that short-term considerations are dominating Ministry of Defence thinking and long-term planning is going out the window.

  Mr Davies: No, on the contrary, we have just placed some very long term commitments, long term orders: Future Lynx and the carriers would be two very good examples there.

  Q437  Mr Jenkin: Future Lynx went through Main Gate two years ago.

  Mr Davies: We have just confirmed Future Lynx, as I have just explained, and that has now given industry a great deal of clarity in that particular business. Mr Jenkin, if I see my way to being able to produce a document which achieves the desiderata of industry then my instinct would be to want to go ahead with it. That is the most I can say to you for the moment.

  Mr Jenkin: Which is not very much.

  Q438  Chairman: Mr Morse told us that it is the absence of clarity that prevents us from having a Defence Industrial Strategy 2; would you agree with that? Am I paraphrasing you incorrectly?

  Mr Morse: What I was saying is that we have a dialogue with industry—and you will have heard this from them I am quite sure—about whether or not we should go ahead with the Defence Industrial Strategy and in producing DIS2 and up to now they have been consistent in saying not unless you can give us a clear statement of sectoral plans on a comprehensive basis. As the Minister has said, the equipment examination has made that difficult.

  Q439  Chairman: You cannot.

  Mr Morse: Not while you are doing an equipment examination.


 
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