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".
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."
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:
provides pivotal support to operations
by implementation and support for UORs. ABRO also provides the
capability for our armoured fleet base repair and maintenance."
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:
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."
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
1. Unique on-shore Armoured Fighting Vehicle (AFV) Hull repair capability, (to maintain hull ballistic integrity), including:
Large aluminium milling machines
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, (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.
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.
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. 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".
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."
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
- of great benefit to the MoD to retain
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). 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."
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.
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."
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".
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."
Indeed the "key things that DSG can deliver" which the
General cited were not impossible for industry, but "cost
42. Major General Ian Dale repeated this point later
in the evidence session.
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
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
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 themas they relate to obsolescent or legacy equipmentsor
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.
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.
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
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".
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.
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
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.
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".
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".
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".
As we have seen, some elements of this unique role will disappear
over time while others might be challenged by developments within
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
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.
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.
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.
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
DIGEST June/July 2008 available to download on the DSG website,
Defence Industrial Strategy, B3.25 Back
Defence Industrial Strategy, B3.31 Back
Required to be retained in UK in accordance with DIS v1. Back
Heavy tooling that can lift and rotate complete hulls to facilitate
repair activity. Back
Subject to certain IPR constraints. Back
Ev 22 Back
Ev 19, paras 15-18 Back
Q 18 Back
Q 30 Back
Qq 52-54 Back
Q 31 Back
Ev 20, paras 26-29 Back
Q 35 Back
Q 18 Back
Q 35 Back
See Q 36 Back
Qq 83, 87; also Ev 24, A5 Back
Q 87 Back
Q 85 Back
Q 82 Back
Q 87 Back
Q 88 Back
Ev 20, para 25 Back
Q 81 Back
Q 86 Back
Ev 19, para 14 Back
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
HC (2008-09) 491, response to recommendations 42 and 43 Back