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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