Defence Equipment 2010 - Defence Committee Contents

Examination of Witnesses (Question Numbers 340-359)



  Q339  Mr Jenkin: Chairman, I should just draw attention to the entry in the Register of Members' Interests concerning a charitable event that was supported by a defence contractor. I think it is worse for you than that because is not the Bernard Gray report rumbling the industry? A lot of people think that the procurement process for the defence industries has been—and it is not necessarily my view—a bit of a racket and the party is coming to an end? Why is that an unfair charge?

  Mr King: I do not necessarily think it is an unfair charge. There is no doubt about the uncertainty that exists as we head inexorably towards the Strategic Defence Review and the rhetoric that gets pushed around the Bernard Gray report is challenging every programme. So, if you look at our shareholder base, those people who invest in us, who put support in us, yes, they are questioning where is the UK going. If you then come back to one of the key issues which says that we have to retain skills, so there is going to be a set of operational requirements and a set of needs to be provided, it does not help us in recruiting people, in sustaining people in this industry, if there is that amount of uncertainty out there, which is why, when I was asked to comment at first, I said that the important thing is that we go through a very logical, valuable process of the UK deciding what its foreign and security policy is, which leads to a Strategic Defence Review. If you have to go back round the route because it could be unaffordable, then at least you have come up with a policy, which leads to a Defence Industrial Strategy, and then we in industry can align our resources and capabilities around that DIS. That is what our shareholders want, that is what our employees want, and I think that is what the Armed Forces want, because they need to know where this capability is going to come from.

  Q340  Mr Jenkin: I think that answers one of my questions, which is, why have not previous reforms of the procurement process worked, and we were talking about that earlier, and it is basically because there was still far too much uncertainty.

  Mr King: There is a lot of uncertainty and, as Ian Godden said, one of the issues is, do people believe it can be implemented?

  Q341  Chairman: Mr Godden?

  Mr Godden: I was just going to add that it is the implementation issue that I think is the fear. You could say that if there was political will at this stage the Bernard Gray type reforms or equivalent could be done out of sync, as it were, with an SDR because it is an implementation operational matter, and in one sense there is a fear that we have that the next Strategic Defence Review and Defence Industrial Strategy will simply focus on procurement reform and not deal with the other very important strategic matters about capability, operational sovereignty and the need for an industrial base, and that this becomes the focal point and wrongly so. It is a feature of an organisational and implementation aspect which we need to get on with and it will be hijacked by the pressures on the budget as a consequence of that, unfortunately, but it is not the biggest signal in terms of industry worrying about the uncertainty, about the future. That comes in things like the technology, which I know we have talked about before, and research and development comes into it, the programme decisions and the decisions about what is the nature of what we are trying to fight, which is SDR territory.

  Q342  Mr Havard: The question is about the Go-Co, but the truth of the matter is that there is not going to be a Go-Co; there is going to be a strategy for acquisition reform announced in the new year which will say there is going to be a trading fund, because Bernard Gray says, "At the minimum you should have a trading fund", and, when he looks at the Go-Co versus the trading fund, basically they have the same virtues. The only argument he makes is that one would be a slower rate of change in terms of commercial thinking, skills, best practices and so on, vis-a"-vis the other, so that is the background reality, is it not, and is it not the case, if that happens, that the fear you have just expressed is taken care of, because this change to a trading fund and taking account of these things that he lists will be done in the new year in any event before a Strategic Defence Review? Is that right?

  Mr Godden: If you read the tea leaves, which I sometimes try to do, then you might say yes, but I do not know for a fact what is going to happen in the new year.

  Q343  Mr Havard: The Secretary of State has made all sorts of statements about having a review. I do not know whether you have been involved in the discussions about such a review, because it is supposed to take place in the early new year, but clearly he has rejected the Go-Co idea, he has accepted the trading fund, so that is the objective reality against which you plan, is it not?

  Sir Brian Burridge: It is, but that is not a quick outcome. It will take a long time to create a trading fund out of the structure that they have already, and it does provide the one advantage, necessity even, that a Go-Co does not. Under a Go-Co structure I was hard pressed to understand how, say, the Permanent Under Secretary as the Accounting Officer would exercise his accountability because so much of decision-making would potentially be outside his purview and I think he would have a very difficult time justifying a programme, say, in 10 years' time that was run under a Go-Co arrangement. That is my suspicion.

  Q344  Mr Jenkin: Despite all the reforms that the MoD has made and may be attempting to make, what has industry done that has worked, that has improved the procurement process?

  Sir Brian Burridge: I think that on availability contracting in particular industry has done an enormous amount and I was on the other side of the fence in creating the Tornado programme. My colleague was the person I was talking to.

  Mr King: He was my customer; nice chap.

  Sir Brian Burridge: And we both had to move a long way in terms of our aspirations and develop much better our understanding of who was best placed to manage risk. It was not straightforward. It took about 18 months longer than I expected but it broke the mould and it is that mould which pretty much applies now to helicopters in terms of integrated operational support. I think industry has done a lot in that respect, programme management too. The future Lynx was the first post-DIS contract with very long time lags or time distances between milestone payments but very significant milestones, and that was a completely different way of creating a contract.

  Q345  Mr Jenkin: We do appreciate that. We have in fact looked at the Finmeccanica example as an exemplar of this. I am most struck by the comment raised earlier about the lack of people with the relevant skills. Is that not something the industry should be doing? Should there be a new institute for defence acquisition management? Should we be developing a new college to train the people that are required on both sides of the divide in order to bring forward the volume of people that we need to do this?

  Mr King: We do have joint training schemes. We have accredited our programme managers, we have accredited our commercial managers, recognising this, and we do offer these schemes both to the MoD and to industry.

  Sir Brian Burridge: Following the creation of the Defence Academy and real focus on acquisition skills, I think it has moved a long way since the days when it was the Royal Military College of Science focusing purely on weapon technology. I think there is some very good management training available. No doubt it is proving difficult for the MoD to release people. We release people and it is difficult for us as well but you have to make that investment.

  Q346  Mr Jenkin: Do we require a step change in the effort here?

  Mr King: Yes.

  Sir Brian Burridge: Yes.

  Mr Godden: I believe we do. I would say that there was one other programme we have started to implement which needs a step change as well, which is the SC21, the 21st Century Supply Chain programme, to make the whole supply chain of the 3,000 companies that are in this game much more efficient.

  Q347  Chairman: Was that not something that was going to be addressed in the Defence Industrial Strategy 2?

  Mr Godden: It has started and it is early days, I would say. In civil programmes it has been implemented faster, I would say, but on the defence side that started about a year ago. I think it has got another three or four years to run before you would claim it is going to get significant implementation. It is implementation that is the issue, not concept. We have got the concept, we are applying it and we are seeking (which Baroness Taylor signed up to at Farnborough last year) commitment from the MoD to the programme. We have got 550 signatures out of 3,000. It is not the signatories that count; it is the ability to get on with it. That is a programme that is ambitious but needs a step up in terms of real, concrete results.

  Q348  Mr Hancock: Can I just ask you to clarify that, 500 out of 3,000? You say it is not significant, the signatures; it is the attitude, I suppose, you are talking about. Why were so few then interested in signing up physically for something like that? Are they worried about something we have not been told about?

  Mr Godden: No. It is the smaller companies, the £1 million to £5 million companies that believe this is another example of bureaucracy coming from not Westminster but from the south of England or international programmes and so on, and it is a fear of realising that they are having to do this. This is like any industry-wide initiative which all corporations know about. If you apply that in your supply base it takes a long time to get the full range of suppliers to accept that principle. We are still in the missionary phase amongst the small to medium sized companies who have come off the back of four or five years of good economic growth and only really woke up to the fact that they needed to do this as of, say, 2007-08, and they are beginning to wake up to that in a big way now.

  Mr King: As part of the revised structures that have been put in place by the MoD with the Finmeccanicas, the GDs and ourselves in these partnering arrangements, we ourselves have had to learn the skills of how we partner with the rest of the supply chain, and from the SMEs, quite rightly so on their part, there would be slight antipathy at the start in trying to determine whether we were in this for the long run and encouraging them and developing new structures and new skills. I think we are making good progress but we do need to recognise that the UK has, I think, of all European countries, more SMEs than anybody else, and we do need to spend time on this. Going back to a slightly earlier question, what is the worst thing for us, the worst thing would be a knee-jerk reaction which happened around what the budget should be as opposed to a long-term Strategic Defence Review, and in that interregnum we are going to really struggle with the SMEs because they are the ones that are going to get hit first in any cycle change.

  Q349  Mr Havard: There are a number of reasons why I asked the question earlier, and I noticed I did not get an answer to it, which is whether or not you would be involved in the discussion about the Strategy that is going to be published in the new year, not the least of which is this question about SMEs, which has been an issue that has been running for years, about how they see themselves coming into the process and how they can be involved in the discussion. What discussion is taking place about SMEs and larger companies being involved in that new Acquisition Reform Strategy that is just about to be announced but which seems to be a mystery?

  Dr Wilson: If I can make a comment, there has been an ongoing dialogue before we get to this point of producing a paper or a strategy at the start of next year about how SMEs should be engaged. That has been quite a long dialogue with the DMA as it was and is now continued by ADS, and with companies, and I will give you one example of that. When we deal with small technology companies which come up with very good ideas they find it extremely difficult to survive in the defence environment until their ideas can find some traction. My company has set up an R&D technology pull-through mechanism which we have published widely around the MoD, which has quite a lot of intellectual attraction for the people in the S&T community and more widely and probably forms the basis of some mechanism that could be used by MoD and more widely by industry to pull technology through so that SMEs are not left in this valley of death with great ideas that cannot be exploited, so that does not answer your question either.

  Q350  Mr Havard: It might do but is it one of the things that is in the review?

  Dr Wilson: It certainly has been a view that has been put forward to the MoD on countless occasions and I think it has now got some traction.

  Sir Brian Burridge: In inputting to the Green Paper we certainly put forward some views on acquisition reform, particularly the strategic management of R&D, the importance of a pragmatic approach to TLCM, and these are now what will appear, I am told, as challenges in the strategy for acquisition reform which will be published in parallel with the Green Paper. Separately, as the DIC, we have been asked to put forward three or four people to assist the authors with producing their document.

  Q351  Chairman: I am not sure that that is very reassuring because I had the impression that when the Defence Industrial Strategy was produced there were constant discussions between the Minister and industry, and industry, so far as I could see, thought it was a perfect example of clarity and involvement. I am not getting the impression, partly from yourselves—

  Sir Brian Burridge: I would not want necessarily to speak for the MoD but I do not think that this will necessarily be a hugely detailed document. It is not like the Defence Industrial Strategy. I absolutely agree with you. The second version of DIS that follows this we would expect, and I have no reason to doubt, to be deeply engaged in.

  Mr Godden: There are small initiatives, I would say, and I will use the phrase "small initiatives", to consult on various aspects of what you have described. It is a very short time frame and it is not a process that looks like either the DIS process or equivalent in terms of a full consultation over a period of time that we can collectively work through the issues on. There is debate, there is dialogue, but it is of the nature that Sir Brian mentioned, not some big formal process of engagement.

  Q352  Mr Havard: So it does not clear your fear that in fact the other things will not be strategic in a proper sense but will collapse into a whole detailed argument about procurement and acquisition, so the acquisition issues will not be resolved in description before we have the Strategic Defence Review?

  Mr Godden: It depends, I think, on the follow-through from January.

  Q353  Mr Havard: Is DIS more important in doing that than the Strategy Review that has been announced?

  Sir Brian Burridge: The DIS serves us in a different way.

  Mr Godden: Yes, it is a different thing.

  Sir Brian Burridge: And we, as we have emphasised, need to understand the customers' requirements in the sectors in which we operate.

  Q354  Mr Havard: So in terms of this argument that it is about implementation, which I tend to sympathise with, the real argument is that the real working active document that you require that probably the acquisition process would benefit from is a new Defence Industrial Strategy in some detail now before you have the defence?

  Sir Brian Burridge: No.

  Q355  Mr Havard: What is wrong with that?

  Mr King: We are concerned that the Green Paper will be done in the absence of looking at what the industry provides as part of the Defence Review. But we do see that as just an input into an overall SDR, and then, as part of the SDR itself, once it has been settled as to what the requirements are, we would like a full and complete DIS done as to what the industry's position should be in supporting the SDR.

  Sir Brian Burridge: The common thread in almost everything we have said this morning is the lack of balance between the programme and the budget. The most sophisticated way to bring that back into balance is to conduct a policy-led defence and security review, cost it and ask yourself whether that is affordable. If not, change your policy until it is affordable. Otherwise, we do not get, and nor does the customer, a sustainable view on where we are headed. As I think I said earlier, what we look for is a force structure which is both affordable and sustainable with a common understanding in each of these sectors of where it is the MoD wants to go.

  Chairman: I want to move on to David Hamilton.

  Q356  Mr Hamilton: Chairman, there is just one part strikes me and it was Dr Sandy Wilson, I think, that answered it, and that is about the SMEs. The SMEs were extremely critical, not of the MoD but of yourselves because what they were finding when we did the Report the last time was that they were being asked to take all the risk of design and so on and when they were getting selected one would be selected out of five and they were carrying the burden. I understand from your comments that that has somewhat changed and, in terms of the partnership question that Ian King indicated earlier, there is much more partnership taking place now.

  Mr King: Yes.

  Mr Hamilton: My problem is this. At the very beginning of the discussion in the evidence session we talked about, and Dai has touched on it, clarity of purpose. If we get the clarity then we can deal with the issue. The problem I find is that you never bite the hand that feeds you. None of you is biting the hand that feeds you, and I understand that, but we have got to try and work our way through that. My problem is that we have not got the clarity even though the Strategic Review is there. Is it BERR now they call it? It used to be DTI. They are now making it quite clear that we should diversify away from finance and build up our manufacturing base. If we have got a department that is saying this then why can we not get together and sit down and work out a strategy? I know it is very simplistic but I think the easiest way forward is a straightforward way of doing things, but you cannot do that if you are continually moving from bit to bit where we say we do have a manufacturing base and we want to maintain that manufacturing base, as we did with shipbuilding, and then the next thing we do is give contracts out to foreign countries where we do not have a—

  Chairman: So the question is?

  Q357  Mr Hamilton: The question is: are the SMEs getting a fair deal? Are you getting a fair deal? It is about time you started to argue your corner rather than being diplomatic. I tell you, it is like sitting with a bunch of parliamentarians.

  Dr Wilson: Just one comment on that. The engagement with BIS is now much greater than it has been in the past. In fact, Ian Godden and I were talking with Lord Drayson just the other week about, amongst other things, the skills issue that we mentioned earlier and some ideas that might accelerate the focus of the education system on producing those skills. There are many interesting issues being debated, all of which are there to sustain this really quite significant part of the manufacturing base of the country.

  Mr Godden: As the person who often gets his hand bitten off—

  Q358  Mr Hamilton: I notice it is the Scots by the way!

  Mr Godden: —and has put the case forward, there are two features of it. One is the economic impact of the defence sector on the wider economy, industrial activism, manufacturing technology, et cetera, and that is one that we have believed very strongly in and believe there is further work to be done. Progress is being made in terms of making sure the BIS type Innovation and Skills Department is fully aware of what is happening in what has historically been a narrower Defence Industrial Strategy which has been within its own vertical and the wider impact on the economy. Secondly, the recognition of the SME community, which is growing, and I think we were the first to point out 3,000 companies in the UK is more than France, Germany and Italy SMEs added together. We are promoting the interests of the SME community in large measure. In terms of the individual relationships between large companies, medium-sized and small companies, and I would differentiate between those three, not just two, it is up to the individual companies how they conduct their business, but we see that dialogue taking place quite actively in a way that before has been a little bit split apart. That debate is happening and that discussion is taking place—civil aerospace side and defence. We are having a big debate about that on the space side at the moment and there is an even greater debate on the security area where the relationships have historically been quite fragmented with small companies and government. That is a big part of our agenda. You are right, there is work to be done but it is underway and hopefully we will see some results in the next year or two.

  Dr Wilson: Can I come back on the issue of SMEs and some of the issues that we face over the next couple of years. We all welcomed the SDR and the rebalancing of our international posture and defence posture, but the time it takes to do a proper SDR is not instant. Very few SMEs are sitting with fat order books with several years of sales that allow them to weather any reduction in order output by a principal customer such as MoD. Therefore, the SDR really ought to be conducted on a timescale which does not have a terribly deleterious effect on their business. One fears that when we get into the purdah that is always associated with an SDR there will be some fallout, especially in the SME community, and it will cascade down through the primes, the mid-tiers and finally hit hardest those who are least able to cope.

  Chairman: That is a problem well made.

  Q359  Mr Hancock: That uncertainty is not a good value one, is it, and it has persisted for a long time. The carriers are a good example, are they not? Every time a secretary of state or a minister speaks about the Navy or the aircraft carriers there is an on/off switch that the media relates to and there is a scare story about whether the carriers are ever going to be put in the water, et cetera. There has to come a time when industry say, "We can't cope with this state of limbo or on/off situation" and at some stage you are going to have to say, "We cannot go on operating like this" and Government is going to have to listen. It is not only the businesses that are at stake but the tens of thousands of jobs that are on the line all the time. With this on/off business and indecision, lack of speed giving clarity of thought into these issues, when are you going to dig your heels in and say, "We cannot sustain British industry on this method of doing things"?

  Mr King: We are already making those decisions.

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