Written evidence from the Defence Industries
Council (DIC)
INTRODUCTION
1. The Defence Industries Council (DIC) consists
of a number of senior defence industrialists and representatives
of defence trade associations who provide advice to the Government
on defence industrial issues. The DIC aims to take a strategic
perspective of the interests of the UK defence industry and represent
them to Government notably through the National Defence Industries
Council (NDIC) and in other relevant national and international
fora.
2. The DIC welcomes the Government's decision
to conduct a Strategic Defence and Security Review (SDSR). This
is needed given the UK's involvement in significant military operations
since 2001, and the changing threats to national security, which
have been clear for some time. Industry also appreciates there
is a pressing need to realign capabilities and resources to ensure
the long term future of the Armed Forces, the health of public
finances and industry. We welcome the opportunity to contribute
to the Committee's inquiry into the SDSR.
3. This memorandum covers issues that Committee
has indicated to the DIC that it wishes to examine in regards
to the inquiry.
Value of the defence industry to the defence and
security of the UK and to the UK economy
4. The UK defence industry equips and supports
the Armed Forces in performing their missions within the UK and
overseas. In addition to normal procurement, and since operations
in Afghanistan and Iraq commenced, the industry has provided equipment,
systems and services to the frontline via Urgent Operational Requirements
(UOR). Industry has taken on roles at home and abroad that were
previously carried out by the Armed Forces, leaving them to focus
on their key military tasks. Industry works on military bases
within the UK, providing support and training to the Armed Forces,
and also provides in theatre support.
5. The security industry encompasses companies
that are involved in a range of activities from cyber-security,
the provision of specialist equipment and support at points of
entry, public transport, CNI (Critical National Infrastructure),
support during civil contingencies, eg CBRN (Chemical, Biological,
Radiological and Nuclear) protection.
6. The UK defence industry employs more than
300,000 people throughout the nation and makes an enormous contribution
to the nation's science, engineering and skills base. Through
training over a thousand apprentices each year the industry offers
highly skilled job opportunities and substantive careers. Defence
is a diverse sector with world class multinational companies through
to successful small and medium sized (SMEs)—indeed the UK
has more defence SMEs than France, Germany, Italy and Spain combined.
UK defence equipment is internationally competitive and in 2009
defence exports were worth £7.2 billion to the UK economy.
The UK is the largest overseas supplier of defence and security
equipment to the US and the largest defence exporter within the
European Union (EU).
7. Research commissioned by the DIC and carried
out by Oxford Economics found that an investment of £100
million in defence would deliver an output of £227 million
and bring about an estimated additional 1,885 jobs. The industry's
multiplier put it ahead of several notable sectors examined in
the study, including banking and finance, telecommunications and
pharmaceuticals. This reflects a strong UK based supply chain
and the wage paid to highly-skilled workers. The DIC understands
that unreleased work conducted by the Department for Business,
Innovation and Skills (BIS) has recognised the economic contribution
of the industry.
8. The overall security and resilience sector
is estimated to have 600,000 people employed in all regions of
the UK and is expected grow around major events, notably the London
2012 Olympic Games and Paralympics Games. The security industry
represented by the UK Security and Resilience Industry Suppliers'
Community (RISC) includes leading edge service businesses, high
tech research establishments; training organisations; academia
and its spin-offs; SMEs and major systems integrators including
defence suppliers who have been diversifying into the security
sector. The security market is diverse in nature and characterized
by a broad range of customers which span both public and private
sectors. Goldman Sachs estimates the global market to be worth
$140-180 billion and that it will rise to $250 billion by 2018.
Industry welcomes the Minister of State for Security and Counter-Terrorism's
wish to see "a major uplift in the performance of UK security
exports" (currently estimated to be worth around 4% globally)
with the Government playing the sort of role it has played in
the past in relation to defence exports. RISC believes that the
UK has a huge opportunity to export its world leading security
capabilities globally to the benefit of the UK economy.
Industry relations with the MoD, including the
roles of SMEs and the movement of larger companies into areas
usually undertaken by SMEs
9. Industry has regular meetings with the Ministry
of Defence (MoD), in particular through the National Defence Industries
Council (NDIC) meetings, chaired by the Secretary of State for
Defence, and attended by representatives from other departments.
The UK MoD is a key customer for the industry and its relationship
is built around a number of different commercial models, which
include prime contracting, partnering, and more conventional direct
contracting arrangements. Though challenges remain industry has
seen in recent years a less adversarial relationship between customer
and supplier and recognition on both sides of the benefits of
working ever closer to deliver the best capability to our Armed
Forces and which represents good value across the enterprise.
10. The majority of defence work (by value) carried
out by SMEs is subcontracted from primes to the MoD. The supply
chain exists because it is efficient and the DIC does not believe
there is a distinct trend of larger companies moving into areas
currently undertaken by SMEs. From the perspective of a prime
contractor, there is recognition that the company adds most value
through systems integration and the management of major risks,
using the strength of its balance sheet in a way smaller and medium
size companies cannot, especially in a difficult financial climate.
Trade Associations continue to work hard to make the supply chain
work as efficiently as possible and to the benefit of all parties,
chiefly through the SC21 (Supply Chain in the 21st Century) Initiative.
11. There are several steps which, if taken,
would help SMEs grow and expand through new innovations and increased
exports. This would include a streamlined single point of access
where SMEs can consider the multiple Government initiatives on
skills, training and apprenticeships, along with opportunities
that expand and build on the successful aspects of the Centre
for Defence Enterprise. All these measure would support SMEs and
help them transform their business in difficult economic times.
What should be the priorities for, and outcomes
of, the SDSR?
12. In the foreword to "The Coalition: Our
Programme for Government", the Prime Minister and Deputy
Prime Minister said, "We are agreed that the first duty of
government is to safeguard our national security and support our
troops in Afghanistan and elsewhere—and we will fulfill
that duty." That has to be the first priority. Sustaining
key capabilities in UK industry can, in turn, sustain the military
capability which enables the Government to meet the challenges
and threats it faces today, and in the future. Industry would
like to see the Government acknowledge the industrial contribution
it makes to the achievement of national security, and to the Government's
aim to achieve a more balanced economy, as well as the money it
saves the taxpayer through activities such as outsourcing.
13. The SDSR is an opportunity for Government
to set out at the top level how it views the relationship between
industry and itself. We believe that the establishment of a new
Defence Industry and Technology Policy is essential to help the
Government deliver on the pledge made in the Coalition Agreement.
That Policy should clearly define the capabilities that are required
of the industry, and importantly those capabilities that need
to be maintained onshore. Industry incurs huge costs and inefficiencies
from indecision, delay and unclear requirements and budgets. The
greater the transparency of requirements, budgets and timelines
from Government, the lower the cost of bidding and development
for industry, and the lower the overall cost of a programme to
the taxpayer. The greater the certainty that demand will exist
in the domestic market and exports will be supported, the greater
the incentive for industry to invest in UK skills and technology,
including in emerging sectors such as cyber security and space.
14. We know that the size and shape of the Armed
Forces will not be the same at the end of this Review. The Defence
Secretary has set out the criteria by which future capabilities
will be judged. But if it is to fulfil its commitment to the UK's
national security in any meaningful sense, the Government will
need a strategy for the sustainment of a sovereign operational
(or indigenous) capability, whatever its decisions about particular
force structures.
15. Industry believes that operational sovereignty
or indigenous capability has a number of features. First, there
is a need to understand, and be able fully to exploit, the performance
and capability of a weapon system. Second, there is a need for
unfettered access to industrial capability and the testing and
evaluation process which underpins it. Third, there is a need
for access to skills and capabilities in industry when they are
needed which, in turn, requires coherent investment in national
science and technology, and an ability to spot, and respond to,
emerging threats. Some technologies that are so fundamental to
security (eg cryptography) or provide such a capability edge that
the UK must develop the indigenous capabilities in emerging technology
or sustain critical industrial capabilities, even when it is prepared
to share them with allies.
16. As part of the SDSR, the Government should
state its commitment to the funding of Research & Technology
(R&T). R&T should be valued as an essential part of defence
spending, providing solutions for the front line, developing future
capabilities for the Armed Forces and evolving the skills and
technology base within industry and academia. The Government's
commitment to exports will only come to fruition if we develop
the IPR onshore which will produce the exports of the future.
Industry's comment should be considered in the context of the
significant reduction of public funding of defence R&T in
recent years. In 2007 MoD funding of R&T was £540 million,
in 2010-11 it is expected to be £439 million—a cut
of almost a quarter. This trend is unique amongst major industrial
nations which are all increasing their R&T spending.
17. The MoD's investment in R&T will determine
the areas where indigenous industrial capability will thrive.
Likewise, where MoD chooses not to invest and to purchase from
overseas, indigenous capability will be lost. Therefore, MoD should
have a clear vision of how it wishes to exploit technology and
have identified the areas of technology where MoD will invest,
nationally or in co-operation with allies, and where industry
and academia should invest to support national security as part
of Green Paper on defence industry and technology policy.
18. Defence R&T should be fully aligned to
MoD capability planning and to the acquisition programme to achieve
better technology pull-through and improve efficiency by reducing
risk especially through spiral development. MoD, industry and
academia must work together more transparently to extract the
best value from all funding sources, including civil R&T programmes
relevant to national security.
19. MoD funding must be applied intelligently
in partnership with industry and other funding sources to help
bridge the "Valley of Death" between research and programmes.
Better management of technology within acquisition would allow
scarce MoD investment to be targeted on areas which make a real
difference to the Armed Forces, to the future of the UK defence
industrial base and thereby to export potential and economic recovery.
20. The Government has made clear its support
for responsible defence exports. Industry welcomes this vocal
support. From the discussions we have had with Ministers, it is
clear that they see the extent to which the industry can help
drive growth in these difficult times and are an element of a
wider programme of defence diplomacy.
21. Industry believes that success in defence
exports has four main features. Firstly, the creation of UK owned
products and services for the export market. Secondly, high level
Ministerial support to defence exporters. Thirdly, ambitious and
ethical, UK defence and security companies. Finally, a highly
effective Government sales organisation with full support from
uniformed services, MoD, Home Office, Foreign Office and BIS,
backed by competitive commercial support from ECGD. The active
involvement of the Armed Forces in promoting industry, a strengthened
DSO and a faster licensing system would make this a reality.
22. The industry considers that a refreshed policy
towards the industry and a renewed commitment to investment in
R&T are essential to sustain current export success in the
long term. In addition, exportability must move from being marginal
to become a core consideration within the MoD, at the earliest
stage in the acquisition process. This will require an understanding
of the requirements of other nations as well as our own and an
ability to build these considerations into capability planning
and development. From an international perspective the Government
should continue to promote the use of ethical standards developed
by industry such as the ASD Common Industry Standards and the
Global Ethics Principles.
23. As part of the SDSR—and as RISC has
advocated in its own policy outputs to the Home Office,—there
is a need to look again at the operation of the national security
and resilience market and how it can be made to work more efficiently.
A start could be made with the establishment of an authority tasked
with ensuring that the security industry can deliver national
security objectives and fulfil the economic potential of the security
sector. Given the diverse nature of the market, which incorporates
requirements arising from within public and private sectors, Government
and industry should also seek to work together more closely to
develop stronger international policy and recognized standards.
Industry sees the assertion of new common "open" standards
as an important priority because they can help to create the conditions
in which companies of all sizes can focus their investment towards
science and technology
24. Industry believes that transatlantic and
other international industrial co-operation should grow. But it
is important, in this context that tendencies to protectionism
are addressed, that US export control reform is promoted and that
the UK and EU countries increase their R&T investment.
What is the involvement of the Defence industries
in the SDSR, including the individual workstreams?
25. Industry was consulted about the Green Paper
that MoD prepared before the commencement of the SDSR. Once the
Review commenced, in addition to inputs provided at the initiative
on industry, the MoD has consulted industry on some of the workstreams
of the SDSR and the DIC has met with:
— MoD Ministers at the NDIC.
— MoD officials for specific SDSR studies and for
discussions on wider topics.
— The
wider defence and industry community at a series of RUSI policy
discussion events.
26. Individual firms have also met with MoD officials
for bilateral discussions about reducing the costs of current
and future procurement. It is planned to continue the current
pattern of discussion.
What is the defence industries' assessment of
the SDSR process, including the timetables and the involvement
of the HM Treasury?
27. The defence industry welcomes the Review
and particularly that it encompasses the security environment.
While we appreciate the Government's desire to see pace injected
into the Review because the intent has been to align the Review
with the Comprehensive Spending Review, the timeframe for completion
is much more rapid than earlier reviews.
28. Industry notes that Government's priority
is to reduce the budget deficit. It has also made it clear that
there is an initiative to establish a balanced and affordable
programme and to reduce MoD running costs by 25%. This was further
confirmed as part of the coalition agreement which noted that
an SDSR would have "strong Treasury involvement". Industry
understands this and is familiar with the need to deliver better
for less.
29. Industry has not had sight of the full extent
of involvement by HMT but would urge Government to deliver an
SDSR that matches the UK's foreign and defence policy commitments
with the required resources. Industry believes that the outcome
of the SDSR must give private sector investors confidence that
there is a clear plan for the future and that industry understands
in what areas investment will be needed onshore in the UK.
What is the potential impact of the SDSR on defence
industries, including the ability to plan and to adapt to changing
priorities and capabilities emerging from the review?
30. Given the aim of bringing the programme and
resources more into balance, the SDSR might have a profound impact
on the future of the UK's defence and security industries. It
is vital that, in taking decisions, their industrial implications
are properly understood, and that Key Industrial Capabilities
which underpin the delivery of capability are not lost. The Government
must take the industrial consequences of its proposals into account
before the SDSR is published. It is essential that the outcome
of the Defence Industrial and Technology policy is not pre-empted
by decisions which, effectively, take out key capabilities for
the future health of industry and its ability to deliver for the
Armed Forces.
31. There are, however, a number of features
of the SDSR and the development of the new Defence Industry and
Technology Policy which would be positive for the future of the
industry:
— Decisions
which bring stability to the programme will allow industry to
plan with more certainty.
— Clarity
around what must be retained onshore and what can safely go off-shore.
— A commitment
to sustained R&T which supports future production and consequently
exports.
— Retaining
only those activities inside MoD which must be undertaken by Government
and outsourcing where there is capability in industry, including
SMEs and a VfM proposition can be made.
— The
adoption of incremental acquisition which delivers capability
sooner at lower risk and costs, and which supports exports.
27 August 2010
| 
