Defence Support Group - Defence Committee Contents


3  DSG: Strategic Need

35. Central to Lord Drayson's announcement of the amalgamation of ABRO and DARA, made in May 2007, was his statement of the strategic need to keep some of the businesses of those two organisations within MoD ownership. In his statement he made reference to the need to ensure that the MoD retains "the intellectual property and design skills required to maintain operational sovereignty in key areas as set out in the defence industrial and technology strategies".[50] This was echoed by Baroness Taylor, in an interview in DIGEST, DSG's in-house magazine, in the summer of 2008, shortly after the merger (and while she was still Minister for Defence Equipment and Support within the MoD). In this interview she made clear the strategic need for retaining operational sovereignty in relation to the Joint Strike Fighter (JSF), where the Government needs to "own the knowledge" on key systems:

"An agreement has been reached with the US Government on the basis that the security of their systems is maintained by having our own in-house capability when it comes to upkeep and repairs, and DSG will be crucial in achieving this objective."[51]

36. However, this strategic need does not refer only to operational sovereignty on JSF. The Defence Industrial Strategy, issued in December 2005, before the merger of ABRO and DARA was planned, says of the former:

"ABRO… provides pivotal support to operations by implementation and support for UORs. ABRO also provides the capability for our armoured fleet base repair and maintenance."[52]

The Strategy, which sets out the industrial capabilities which the MoD wishes to see retained in the UK for defence reasons, and those particular capabilities retained within the UK which it wishes to see retained by Government, goes on to say:

"…we… recognise that ABRO provides us with a core capability in the repair and overhaul of the armoured fleet which must be retained in the UK. We judge that until strategies for the future provision of support for the armoured fleet have matured, any change in ownership of ABRO represents an unacceptable level of risk."[53]

This sets out a requirement to retain a capability currently part of DSG within the MoD 'family' only until circumstances change: this requirement is contingent on industry's current inability to provide the capability in question.

37. In its memorandum to us, the MoD sets out what it considers to be DSG's strategic core capacity and capability. This is contained in the table below.Table 3: DSG key strategic core capacity and capability
LAND EQUIPMENT

1.  Unique on-shore[54] Armoured Fighting Vehicle (AFV) Hull repair capability, (to maintain hull   ballistic   integrity), including:

  —Large aluminium milling machines

  —Hull manipulators[55]

  —Aluminium Armour "approved" welders

  —Expert knowledge of aluminium armour repair

2.  Small Arms repair and upgrade capability including:

  —Full Small Arms weapons test facility

  —Secure storage and repair facility located next to the main Defence

  —Storage & Distribution Agency (DSDA) Armoury

  —Knowledge and ability to repair and upgrade in-service small arms.

3.  Repair of legacy Electronic and Communications systems typically:

  —PTARMIGAN Radio system, repair, modify, test, and manage out of service

  —Encrypted radio systems requiring secure repair and test facilities.

4.  The unique footprint; 18 Workshops strategically located, [most of which are] close to the   customer training base to mitigate downtime and transport costs of repairable equipment.

5.  The ability when required to embed staff within UK based Army units.

6.  Level 1 to 4 maintenance, repair and overhaul of the Army's Inventory[56], (if required).

7.  Flexibility, the ability to haul and veer a workforce at short notice to

  meet changing Customer demand.

8.  Management of the supporting supply chain through DSG Land Supply and its own in-house   Procurement Group (PG).

9.  Ready availability of a security-cleared multi-skilled workforce.

AVIONICS (specific to the avionic business at DSG Sealand);

1.  For the combat air platforms, DSG Sealand has played a key role in driving value for money   support   for the fast jet platforms. In the last 5 years they have 'leaned up' significantly and   their prices are highly competitive. At one end of the scale, they are able to deliver low cost   through-life solutions for equipments that Industry would not necessarily be interested in   supporting i.e old/obsolescent equipment and would probably charge premium rates. At the   other end of the scale, they have a world class diagnostic and repair capability for the   support of modern equipments where they are able to access the intellectual property rights.

2.  In summary, the MOD sees a viable DSG as a key component to delivering value for money   support for current and future fast jet platforms in partnership with Industry primes.

LARGE AIRCRAFT

1.  DSG's Large Aircraft business unit located at St Athan provides strategic maintenance and support   for the VC-10 fleet. DSG will continue to provide these services, as a sub-contractor to BAE   Systems, until the out of service date of the aircraft in 2014.

Source: Ministry of Defence[57]

38. The MoD memorandum itself focused on the appropriateness of the model of Trading Fund as the best means of keeping together the key strategic core capacity and capability currently within DSG.[58] We considered it important to discuss this issue in oral evidence with DSG in order to gain a better understanding of what was set out in the written evidence to us: after all, the continuing sense of the need to keep together "key strategic core capacity and capability" lies at the heart of the MoD's decision to maintain DSG as a public body. The lack of any such need with regard to DARA's Fast Jets and Engines Business and Rotary and Components Business led to them being closed down and sold off respectively.

39. In evidence before us, Archie Hughes distinguished between those parts of DARA closed or sold off and those elements retained within DSG. In the former instance there "were a number of people who were in the same space, essentially doing the same type of work", and in the latter DSG was "the unique and sole provider".[59] Later in the session, Archie Hughes again stressed the importance of DSG's unique role:

"In the broad range of what we do as DSG, for a large part of it we are the only people that do it and we are the only people who have ever done it."[60]

Other important DSG activities pointed out to us in evidence by Mr Hughes included "small arms at Donnington… which is another area of capability… that is pretty key" and "the Sealand electronics facility - crypto…avionics - of great benefit to the MoD to retain… in-house." He also noted that it would not make any sense for anyone else to pick up the work currently undertaken by DSG on the VC10s at St Athan (The current out-of-service date (OSD) for the VC10s is 2014: Archie Hughes anticipates no further extension to this OSD).[61] He also added that as well as its unique facilities for armoured vehicles, DSG was also uniquely positioned for dealing with soft vehicles such as Land Rovers: aside from DSG there was "not anyone who could do the totality of the job…., the one-stop shop activity that brings in the geographical positioning of our business."[62] Indeed, DSG recently won a contract from the MoD worth £875 million which success was to a large part founded upon this particular characteristic of DSG.[63]

40. When the question of DSG's unique capabilities was put to Major General Ian Dale, he set out a number of points where he felt DSG's contribution to the MoD was particularly important:

"I can change the priorities for work very quickly and very easily with the Defence Support Group and they have the capacity to swing the resources around as the operational requirement demands it much more flexibly and probably more cheaply than industry ever could, so that would be my first point. …I can draw people out of the Defence Support Group at fairly short notice and deploy them for urgent operational work in Afghanistan and Iraq. ... Many of the DSG work spaces are co-located or very close to garrison areas and airbases, and it is very easy for us to swing work in and out and it is very flexible again, so an industry that takes that on would have to disaggregate in some way in order to achieve that geographic synergy. The one thing that I come back to that I do not think industry can substitute there is one element of DSG - Sealand - which is a government-owned capability and through them we can get better access to foreign intellectual property rights than any industry ever could. That is a really important thing to do."[64]

Major General Ian Dale also pointed out that one of the key things he sees in DSG is its ability "to support legacy equipments or equipments that are running towards obsolescence".[65]

41. Both Archie Hughes and Major General Ian Dale set out a range of capabilities and characteristics of DSG that support its retention within the MoD. However, only one of these, the Government-owned JSF - related capability maintained at Sealand, appears to be one which could not in any foreseeable circumstance be provided otherwise by the private sector. Major General Ian Dale himself made this clear when he told us "with one possible exception [Sealand] there is nothing in theory that industry cannot substitute in DSG so long as they throw their minds and their money at it."[66] Indeed the "key things that DSG can deliver" which the General cited were not impossible for industry, but "cost prohibitive".[67]

42. Major General Ian Dale repeated this point later in the evidence session.[68] With the MoD increasingly looking to industry for 'providing capability', for packages of support, maintenance and modification, which will more and more rule out DSG from future contracts, except as a sub-contractor to industry, this strategic need that DSG fulfills is clearly not permanent. In the future it is likely that its relationship with industry will be as important as its relationship with the MoD. However, as it begins predominantly to subcontract from industry rather than contract from the MoD, its place in the public sector will become less secure and its future as a Trading Fund less certain.

DSG and Industry

43. DSG, although owned by the MoD, sits in the market-place with the defence industries and bids for contracts from the MoD or for sub-contracts from industry. While most of its work, approximately 80% according to Archie Hughes, is carried out directly with the MoD as its customer, some 20% of DSG's work is done for industry under sub-contract.[69] Given the increasing responsibility that the MoD is growing into its contracts with industry for new equipment, where the industry 'provides capability', and therefore takes on repairs, maintenance and modification work itself, it seems sensible to suppose that this proportion of work that DSG undertakes for the MoD can only decrease while the amount of work it carries out for industry grows.

44. As we have seen, many of DSG's unique capabilities are not of necessity unique: they are unique because no-one else has historically undertaken them, no-one would now want to undertake them—as they relate to obsolescent or legacy equipments—or industry has not yet moved to the position, with regard to armoured vehicle repair, for example, where it yet wants to develop its own facilities and challenge DSG on price and performance. It has also to be borne in mind that with regard to some legacy equipments, the VC10s at St Athan, for example, DSG already carries out the work under sub-contract from the design authority, BAE Systems in this case, and not directly for the MoD.[70]

45. In evidence to us, Archie Hughes properly made much of DSG's currently unique capabilities, but he also spoke about the need for DSG to be competitive in the market-place.[71] Given the significant proportion of DSG's work that depends upon its unique capabilities, DSG's competitiveness can only properly relate to bidding for work outside these areas. He told us that one of the reasons for DSG existing as a Trading Fund "was to maintain the focus on us being competitive and commercially competitive".[72] He pointed out that Sealand, for example, provided work at costs "between 25% and 65% cheaper in our electronics activity than similar quotes from industry for that work".[73] However, DSG lost a bid for work on Bulldog to BAE Systems, who subsequently let a sub-contract to DSG for some of that work.[74]

46. Archie Hughes stressed in evidence to us that the way DSG is working with BAE Systems on Bulldog "is a model with one or two modifications that we can use on other potential programmes".[75] No doubt, as some aging systems, such as VC10, pass from obsolescent to obsolete, as work on legacy equipment diminishes, DSG will need more than ever to bid competitively outside its remaining unique areas of work for sub-contracts from industry. There have been fears, which we raised in evidence with Archie Hughes, that DSG might suffer from sub-contracts which pass on to it all of the risk and none of the profit, which industry retains. Mr Hughes denied vehemently that this would be the case.[76]

47. Currently, it would seem that DSG is assisted in its positioning as a customer to the MoD by DE&S Standing Instruction 20, which requires that, "as a retained defence capability, DSG's capabilities and resources should be maximised and the core capability and capacity sustained to ensure their continued availability to the MoD customer".[77] It was put to Archie Hughes that this Standing Instruction gave DSG a preferred customer status that was at odds with open competition. Mr Hughes responded that "most of industry understands what we are the preferred in-house option because of the heritage and history and skill set that we have".[78]

48. It seems likely that this preferred status will last while DSG's unique role lasts: Major General Ian Dale on a number of occasions during our evidence session emphasised that the unique character of DSG was not a permanent fixture—"it is only unique... at the moment because industry is not in a position to provide it".[79] As we have seen, some elements of this unique role will disappear over time while others might be challenged by developments within industry.

49. Increasing pressure for competition, as DSG becomes more vulnerable to the market-place in the future, may threaten the viability of some areas of DSG's work, both geographically and in terms of its range of businesses. DSG has shown since the merger its ability to trade efficiently and effectively both with the MoD and the Armed Forces and also with industry. Managing these relationships while maximising performance and keeping as buoyant as possible its remaining unique and historical capabilities will be key to DSG's future. The MoD should do nothing to threaten this, unless it takes serious stock of DSG's position and decides that the Trading Fund model is no longer appropriate and that DSG's future lies elsewhere. This is a decision that must not be taken likely. We wish DSG well and hope that our successor Committee in the next Parliament will revisit DSG at an appropriate time to consider its continuing performance and progress as a Trading Fund.

The Future

50. DSG is currently looking at its own operations to discover where there might be duplication either within DSG or between DSG and industry which might be resolved. The Electronics and Components Businesses at Sealand, Stafford and Donnington are currently being examined in a synergy study.[80] Clearly DSG will also be keeping under review other areas where its own work mirrors capacity and capability in the private sector. Underpinning DSG's continuing activities, of course, is the vision established by the Defence Industrial Strategy. Already it has been acknowledged that the Strategy could do with revision.[81] Having promised such a revision as early as the second half of 2007, the MoD has so far failed to provide any update. The current view of the MoD is that an update is not needed at this time.[82] This appears effectively to condemn the appearance of any revised Strategy until after the next General Election, when it might itself fall victim to other developments. The hiatus between the original Strategy and any post-Election follow-up will not help in clarifying either DSG's continuing raison d'être or the nature of its developing relationship with industry. This cannot be good. We recommend that the MoD in its response to the Report takes the opportunity to set out a clear vision for DSG's future, taking into account the growing reliance of DSG upon industry.


50   HL Deb, 22 May 2007, col WS38 Back

51   DIGEST June/July 2008 available to download on the DSG website, www.dsg.mod.uk/digest_overview.asp Back

52   Defence Industrial Strategy, B3.25 Back

53   Defence Industrial Strategy, B3.31 Back

54   Required to be retained in UK in accordance with DIS v1. Back

55   Heavy tooling that can lift and rotate complete hulls to facilitate repair activity. Back

56   Subject to certain IPR constraints. Back

57   Ev 22 Back

58   Ev 19, paras 15-18 Back

59   Q 18 Back

60   Q 30 Back

61   Qq 52-54 Back

62   Q 31 Back

63   Ev 20, paras 26-29 Back

64   Q 35 Back

65   Q 18 Back

66   Q 35 Back

67   ibid. Back

68   See Q 36 Back

69   Qq 83, 87; also Ev 24, A5 Back

70   Q 87 Back

71   Q 85 Back

72   Q 82 Back

73   Q 87 Back

74   Q 88 Back

75   ibid. Back

76   ibid. Back

77   Ev 20, para 25 Back

78   Q 81 Back

79   Q 86 Back

80   Ev 19, para 14 Back

81   Defence Committee, Sixth Report of Session 2006-07, The Defence Industrial Strategy: Update, HC 177, para 95; see also HC (2008-09) 107, paras 206-207 Back

82   HC (2008-09) 491, response to recommendations 42 and 43 Back


 
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