Public Administration Select Committee - Minutes of EvidenceHC 123

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Oral Evidence

Taken before the Public Administration Select Committee

on Monday 25 February 2013

Members present:

Mr Bernard Jenkin (Chair)

Alun Cairns

Paul Flynn

Robert Halfon

Kelvin Hopkins

Priti Patel

Steve Reed

Lindsay Roy

________________

Examination of Witnesses

Witnesses: Sir Jeremy Blackham KCB, former Chief Executive, EADS UK, and former Deputy Chief of the Defence Staff, MOD, Professor Christopher Bovis, University of Hull, Dr David Moore, Director, Centre for Defence Acquisition, Cranfield University, Robin Southwell, Chief Executive, EADS UK, and President, ADS, and Professor Trevor Taylor, Professorial Research Fellow, RUSI, gave evidence.

Q163 Chair: Could each of you first introduce yourselves for the record?

Sir Jeremy Blackham: Sir Jeremy Blackham, former Naval person, with 41 years in the Navy and some time as Head of the EADS UK London office, before Robin Southwell took over, and now an independent speaker, writer and commentator on defence, amongst other things.

Professor Bovis: Good morning. I’m Christopher Bovis. I am a Professor of European Business Law at the University of Hull.

Dr Moore: I am David Moore. I am the Director of the Centre for Defence Acquisition at Cranfield University, which is based at the Defence Academy of the United Kingdom.

Robin Southwell: Robin Southwell, CEO of EADS UK, seeking to replace Jeremy Blackham in that role, and also President of ADS, which is the trade body for the defence and aerospace industry.

Professor Taylor: I am Trevor Taylor. I am a Professorial Fellow at the Royal United Services Institute, and I also still teach a little bit at Cranfield at the Defence Academy.

Q164 Chair: Thank you all very much for joining us. This session is part of our inquiry into procurement generally, but defence being such a large part of the overall procurement budget of Government, we did not think we could ignore this. For me it is going back to one of my old haunts, which is a great pleasure. Briefly, could each of you say why defence procurement has been dogged by the same kind of problems for decades, despite initiative after initiative after initiative? I am looking at one or two faces that have been responsible for some of those initiatives. Sir Jeremy Blackham?

Sir Jeremy Blackham: Thank you, Chairman. I think the problems are fairly endemic, but if I can just characterise one or two parts of it, there is a general riskaversion mentality that runs throughout the Ministry of Defence and indeed other parts of Government. This means that people are rather unwilling to put their heads over the parapet and make difficult decisions. As a consequence, many difficult decisions have not been made, which has led, as we all know, to an overheated defence programme. Once you are in that position, you have very little room for manoeuvre indeed.

It is not assisted, I might add, first of all by the length of procurement projects. Projects typically run through their life for 20 or 30 years, whereas strategic and technical change is very much quicker than that, so there is a tendency to always be running to catch up and to be behind the curve, as it were, and therefore to introduce change into programmes, which makes the programmes longer and more expensive. A quick procurement is always the best and cheapest procurement, and there has been a reluctance within the Ministry itself to make these tough decisions and go for quick things. There is always a feeling that if you just waited a bit, you could do it a bit better.

Finally, the decisionmaking process itself has been hidebound not only within the Ministry of Defence, I am sorry to say, but also outside it, in other parts of the Government that are involved, and this in itself has led to a general mentality within the Ministry of Defence that it does not really much matter how quickly we do this. That is itself an inheritance of the Cold War, when of course it did not matter very much.

Q165 Chair: I am making a list. Risk aversion and the time it takes.

Sir Jeremy Blackham: And reluctance to make decisions.

Q166 Chair: Okay. Professor Bovis?

Professor Bovis: Thank you, Chairman. In my view the problems with defence procurement, not only in the UK but across the European Union and also overseas, are primarily systemic. There are two reasons for that. First is the inability to understand risk. Risk transfer and risk management between the public and private sectors, between defence and private contractors, is very, very generic. The gestation period, often augmented by the lack of procedural rules in engaging the private sector, creates a very problematic system that is timeconsuming and very hungry on budgets, and creates a very adversarial relationship towards the end of the delivery of the programme.

On top of that, there is a limited amount of capability in terms of human resource, often on the part of the public sector. Procurement has evolved as one of the most sophisticated disciplines, engaging with the law, economics and management, and often the public sector is very slow to understand the requirements of modern procurement: early engagement with the supply side, and also demonstration projects, where the specifications and standardisation of a specific piece of equipment for defence can be ironed out from the beginning.

Q167 Chair: Dr Moore?

Dr Moore: I will try and keep these to bullet points, but they could be expanded on. It is context; it is a bureaucratic environment that is trying to work with an entrepreneurial environment. Added to that, the military is a hierarchical environment, so there is a context to take into account. There is an issue over processes. Processes have been seen as the answer to the problem: if there is a bad process, if there is a problem, put another process in. Culture has been touched on. There is a shorttermism that is based upon accounting systems, and despite all the rhetoric, there is still an emphasis on price rather than throughlife cost. Two or three things have been touched on. There is an issue about relationships. There is a lot of talk about relationships; they are difficult in the context, and indeed the whole idea of professionalism. There is a lot of talk of professionalism and the skills and qualifications necessary, and those are the issues as we have moved over the last 10 or 15 years.

Q168 Chair: Thank you for being brief. Mr Southwell.

Robin Southwell: It is kind of more of the same, Chairman: risk. The effort to take no risk means you end up taking huge risks. It is an understanding of risk that is at the heart, and I agree with the Professor.

It is also about responsibility. Sometimes when you are having a negotiation there are large numbers of people in the room, none of whom, if you were to ask them, is responsible for the decision taken. On the industry side it is very clear who is accountable, and I think that is one of the issues. It is not aided by the fact that many of the people in the room are only there on a shortterm basis, because they are mostly consultants, all of whom are paid generally an awful lot more than anyone else in the room for sitting there and hopefully elongating the process, so they can make more money.

Another issue is pace. I was talking to Gerald Howarth before the election, and I said, "If there is one thing you should try and do, halve the procurement cycle". I believe you can do that within the context of maintaining your governance and your process, and get some pace and some agility into the process.

Q169 Chair: If you are ordering a very big piece of kit, how do you halve the procurement process?

Robin Southwell: You carry on with exactly the same guidelines and timetables, except that every single timetable, in terms of the period, you divide by two. You will end up doing everything, but you will create an urgency and an imperative, and I think you will end up with better decision taking. It used to be the fact, did it not, Bernard, that you used to buy the equipment that was absolutely correct for the last war? Now I think we are two wars away from having the right equipment. We introduce equipment that was absolutely relevant two wars ago. It is getting slower rather than faster.

Finally, there is the whole issue that has already been touched on: value for money. Are we trying to get it cheaply? Are we trying to get it with total capability? Are we trying to buy things that are good for the UK economy? There are so many factors there under "value for money" that I do not think any one person knows what the term actually means.

Q170 Chair: Professor Taylor?

Professor Taylor: I would emphasise risk, but in a slightly different framework. There is a reluctance to embrace risk, and in many parts of the community there is a longing for certainty that just is not there. When you are moving to try to develop large pieces of complicated equipment, with the best will in the world, nobody knows what it will cost or quite when it will be ready, and yet we tend to live in a rather fanciful world that we do know. I think there is a longing for certainty, which is misplaced when you are dealing with the most demanding pieces of kit.

The other thing I would add to what my colleagues have said, and it is related, is that defence acquisition is a very, very challenging business, and it is most unlikely you will get it right most of the time. We are concerned with security of supply; we are concerned with a wholelife perspective; we are concerned with buying things that other people are trying to destroy as you are moving along, as well as the domestic politics of employment and so on that come up. We are trying to buy things that you believe will be useful in 20 years’ time, and not many of us do this in our private lives. I would like a little more recognition that defence acquisition is an extremely difficult thing to get right in every dimension, and therefore we tend to have a rather unreasonable expectation of what "really good" would look like.

My experience around the world is that the UK has quite a decent reputation on defence acquisition-not a bad reputation for defence acquisition-but of course in our own country it is rather different.

Q171 Chair: Interesting. Perhaps our expectations are not high enough. If we had higher expectations, perhaps we would do better.

Robin Southwell: I think what the Professor is saying-and I agree with you on this-is that we talk about how we are not very good at this. That was the implication, probably. However, if you benchmark Defence against any other Government Department, we are probably world leaders, certainly in the UK. If you benchmark our procurement organisation in Abbey Wood against most others around the world, as I think the Professor was saying, we are pretty good. We are probably one of the best procurement organisations in the world.

There are legions of anecdotes-be it the States, be it France, be it Australia, Canada or other countries-where they have their list of horror stories in procurement, as we do, and overall I think we are far more innovative. We are willing to try and do things better than most countries, so in the round we are not as bad as we think we are.

Chair: Thank you. We are all going to have to be very snappy if we are to get value out of this session.

Q172 Robert Halfon: Good morning. How do you judge whether the Government have got better at buying defence equipment and services-in other words, defence procurement-over the last couple of years?

Robin Southwell: The Government has not been buying an awful lot over the last couple of years, so that is probably-

Q173 Chair: It is probably quite an improvement.

Robin Southwell: Yes. They do not intend to buy an awful lot over the next few years, simply because of the budget, so they have done really well, because they have not bought anything.

Q174 Robert Halfon: There must be some things getting procured.

Robin Southwell: They are doing quite a bit of UOR, urgent operational requirements, and that process-sorry, I do not want to hog the limelight-seems to run extremely efficiently and effectively.

Sir Jeremy Blackham: I have to agree with Robin that there has not been much. UORs are procured effectively, but they are procured effectively because they bypass the greater part of the bureaucracy. The urgency is not to tick boxes; the urgency is to get something in the field quickly, so that is relatively straightforward. It is perhaps also worth saying that we are always focusing on the bigticket items-not surprisingly, because of their cost-but the bulk of procurement is of items around £5 million, £10 million, £15 million, or £20 million in value, and that is done well and quickly. It is the bigticket items that cause the trouble, and they cause trouble because they are inherently complex. A nuclear submarine, for example, is about the most complicated item that is made anywhere in the world. We focus on them because they run overtime and overbudget, which, as Trevor has already said, is not surprising.

Dr Moore: There is also an emphasis on procurement of services, as opposed to equipment, and more and more outsourcing, so that services can be provided.

Q175 Robert Halfon: Is the evaluation of defence procurement too focused on whether projects are delivered to schedule and on the budget, rather than the actual quality of the outcomes, in your experience?

Professor Taylor: That is a very good point. The project management perspective that dominates much of the discourse is about time, cost and performance, and that is what you can measure at the time, but of course that does not really tell you if a project is successful. A project being successful is buying something that proves to be useful in the future, and you really do not find that out until the future unfolds.

My favourite example is the building we are in. I understand when the Houses of Parliament were built they were late and overbudget. Would anyone say that this was a failed project? It is one of the most iconic buildings in the world. To a certain extent, when you asked how you judge performance, people tend to look at time, cost and performance because that is all that is available at the time, but the real test comes over time as to whether you bought things that are useful. That is a matter, to a certain extent, even of good fortune, or maybe bad fortune if you have to use it in a military operation.

Q176 Robert Halfon: How else might you test whether the Government is getting better value for money?

Professor Bovis: If I may, a good gauge is benchmarking with the terms and conditions of the contract. The contract-the legal interface between the defence sector and the private sector-will comprise the parameters of what is to be measurable. Quite often Governments go further than the acquisition of equipment for defence. They look for industrial policy and social policy, they include offsets, and they have a variety of other instruments they can perhaps either facilitate or engage with, not only the private sector but also the society at large.

In other words, flexibility is an issue here. That is why it is so difficult, and absolutely impossible in scientific terms, to have an accountability benchmark exercise for gauging the success or otherwise of a defence contract.

Q177 Robert Halfon: So you are saying it is impossible to judge whether it is value for money or not?

Robin Southwell: Who is the customer? If the customer is the frontline troop that is actually using the equipment-if we use that as an example-there is no evidence in recorded military history of someone who has used a missile or fired a gun that has hit the target shouting, "Eureka! I am glad they got that 10% cheaper by that extra negotiation." They want capability, and they want the ability to make that piece of kit work. That is what your customer wants at the end of the day.

Q178 Robert Halfon: But you would not buy something on the grounds that it would hit X; you would surely buy something saying, "This missile carrier will perform in a certain way. It will not malfunction. It is not too expensive."

Robin Southwell: No, you buy it because it will hit the target.

Dr Moore: If I may, what is being measured-and Professor Taylor has already said it-is a set of metrics that are built around time, cost and so on.

Q179 Robert Halfon: There must be a way of saying whether something passes the Ronseal test, and does what it says on the tin. The Ronseal test surely will then show whether it is providing value for money or not. If it does not do what it says on the tin, then it is not providing value for money.

Robin Southwell: Yes.

Robert Halfon: According to you, you are saying that is not possible.

Professor Taylor: It is more complicated than that. I think you would find, if you looked at some American programmes, although they have better knowledge, that the F-18, for instance, came into service, if you like, with less than it said on the tin. It did not deliver fully what was in the contract, and some of us have grave doubts as to whether the F-35 will deliver what is in the DOD contract with Lockheed Martin at the minute. The thing is whether it does enough. I have put evidence to your colleagues on the Defence Committee that suggests we should avoid using the term "value for money", because nobody knows what it means and it means different things to different people, and ask people to say precisely what they mean by that topic.

Q180 Robert Halfon: Surely "value for money" means, as I say, it does what it says on the tin and it is not too expensive for the taxpayer? That is what value for money is.

Professor Taylor: But in some circumstances a contract-and in the United States this is quite common-can be considered value because it keeps an industrial facility in being, so that it can be available when you need to build the next generation of tanks, and that industrial capability is there. If you say, "What is on the tin is the industrial capability", fine, but it is not the intermediate work that they may have been given.

Q181 Robert Halfon: Should one not know that? If it is about industrial capability, should one not know that that is what it is for, when buying the product?

Professor Taylor: Yes.

Chair: We are being very quick; thank you very much indeed. Do just chip in when you want to.

Q182 Steve Reed: My question is also on value for money, but that might be difficult since "value for money" is being contested as a term, but taking Robert’s broad definition of value for money, do we need to be looking at organisational reform to improve how we achieve that within or through the MOD?

Sir Jeremy Blackham: There has been a great deal of organisational reform, much of it, I might say, identical to the previous attempt at organisational reform. There is a need for some organisational reform, but I do not think that is the fundamental problem. The fundamental problem is relationships. The relationship between the MOD and the industry has already been mentioned, and the relationship between parts of the MOD has been mentioned. It is also an issue about skills and incentivisation, and incentivising for the purposes that you want to achieve, as opposed to for any others, and getting people to understand what the prime requirements are.

If you ask people to produce the cheapest possible kit, they will do that. If you ask them to produce the best possible kit they will do that too. The problem is that we are somewhere in the middle of all that, and I do not think any amount of organisational reform is going to do that, although I would not mind seeing rather fewer people trying to trip each other up.

Q183 Steve Reed: So we are not defining the key requirements and not meeting them?

Sir Jeremy Blackham: We are not doing that, but behaviour is usually the problem, rather than structure and process.

Q184 Steve Reed: Can you elaborate a bit more on the behaviour issue? What sort of behaviours are got wrong?

Sir Jeremy Blackham: Yes. It is partly a matter of focus, and it is a matter of understanding. For example, the MOD has very little commercial understanding. It has very little contractual understanding. We have already said that it has very little understanding of risk, how it should be handled and where it should be placed.

Q185 Chair: So if everybody in defence procurement just did everything 50% better, that is the best reform you could implement.

Sir Jeremy Blackham: I suppose so, but with respect, that is a bit of a truism. It does not say very much about what they ought to do, does it? If we all did better, we would do better, if you see what I mean.

Q186 Chair: We could stop moving the deckchairs around.

Sir Jeremy Blackham: There is a need for focus, and understanding these concepts, rather than shifting deckchairs, yes.

Professor Bovis: A process and a system reorganisation would be beneficial, for two reasons. Across the system reform would bring more commercialism into the equation between public and private sector, between the defence sector and the contractors. In that way, we would be not only understanding but also apportioning risk in a better way. Risk has a price, and we need to put a price tag on any portion of risk that is allocated between public and private sector.

The second thing is the gestation period. Often, this is the combinative effect of delays, overruns and budget overruns. Again, if we can shorten the period of procurement, if we can streamline and segment the administrative systems of procurement and contractual engagement, the whole system then will give value for money in the terms that you have used. On top of that, the UK is a pioneer for engaging with the private sector in relation to total value cost-full economic value cost.

Dr Moore: You asked about structure and organisation, and the answer was to do with behaviour and culture. Within the MOD, particularly from a procurement point of view, there is a lot of knowledge. Sometimes that knowledge-the marketplace, pricing, etc.-is suppressed by the system. The system is such that you have to follow the processes. An individual cannot be wrong if they follow the processes. If they use their judgment to say, "This is a better valueformoney item", however you define that, the system may well show them that they cannot do that, and they therefore follow the system.

In answer to the question of whether change is needed, I think it is about the knowledge base that is used, and allowing professional decisions to be made, and judgment to be made, which is difficult when the system challenges that. There is a case for bringing the two together.

Q187 Steve Reed: Are you aware of any example that illustrates the point you have just made?

Chair: However controversial you like.

Dr Moore: There are probably a number that we are all aware of.

Paul Flynn: What are they?

Q188 Chair: It would help us if you could give us an example.

Dr Moore: If you look at UORs, for example, there is a system that one is supposed to follow, but UORs enable decisions to be made very quickly, literally using judgment of what the marketplace is, and those work very well.

Steve Reed: I do not know what a UOR is, I am afraid.

Dr Moore: Sorry. Urgent operational requirements. It is is where somebody-a number of people acting in an intelligent way, if you like-is able to say "We need this, and we need it quickly". That is for a specific need. Those are good examples, if you like.

Q189 Chair: UORs are not necessarily offtheshelf solutions, are they?

Dr Moore: Not necessarily. It is probably easier to get something off the shelf. We often adapt things, but that can be done quite quickly.

Q190 Chair: For example, in counterIED technology, that is a constant process of invention, rather than anything off the shelf.

Robin Southwell: I would add that there are three areas-and I believe just three areas-where we have capability gaps. I think we should be better at negotiating, and I think there should be more money put into creating really good commercial negotiators, and good buyers. We do not use the word "buying" enough. Secondly, we should be extremely good at the analysis of risk and having the latest systems and processes in place for risk analysis to support these judgments.

Thirdly, project management-you can never be good enough at project management. If we had, in those three areas, the ability to pay a few people more money in terms of salaries, and the ability to incentivise them, then that would go a hell of a long way towards addressing the issues we are looking at now, as well as removing consultants from Abbey Wood, at a stroke, and halving the pace of time that we need to do things.

Q191 Steve Reed: So we need to match private sector salaries in some areas?

Robin Southwell: No, I do not think you need to match them, actually. I think people are worthy, and they want to do a job for their nation. I have mentioned before that you should get some people out of university, pay them a reasonable salary, and after 10 years, if they have done the job, give them an MBE. That does not cost us anything. I think that-

Paul Flynn: Absolutely, yes, treat them with contempt.

Robin Southwell: No, but I think people are driven-

Paul Flynn: That is the way the country is run, yes.

Chair: I will come to you in a minute, Mr Flynn.

Q192 Steve Reed: Several of you now have talked about the need for more commercial skills. Presumably that would mean people who had been in the private sector, not just graduates. They would be demanding higher salaries.

Robin Southwell: It would be a mix. When I was 24, I was a buyer. You do not have to be that experienced, you just need to have a grounding and have some knowledge. A lot of it is innate commercial skill. I would have a balance between a postgrad entry scheme and training people up, and asking people to come back out of industry. It would not take you too long to create this pool of great buyers and great commercial negotiators.

Q193 Lindsay Roy: Perhaps one of our distinguished panel would be able to respond to this. In terms of competitive tendering, can you explain what the reverse auction process is, how it operates, and what dividends it brings, if any?

Professor Taylor: In my view, the main problems in defence are to do with the large pieces of equipment that involve development work, which are not available to be supplied through an auction. Reverse auctions have some role in some of the commodity area, but-

Q194 Lindsay Roy: This is in connection with military garments, contracts for £30 millionodd.

Professor Bovis: We focus predominantly on price. With auction theory, when you procure you focus 100% on pricing, and this is something that the entire policymakers in Europe, in the UK and in the world, try to move away from. We try to get the most economically advantageous offer, something on the table that fits the value for money-

Q195 Chair: We are told by Francis Maude, the Cabinet Office Minister, that the photocopier paper in the Ministry of Defence is the most expensive in Whitehall, and the Ministry of Defence insists that this is a strategic issue and that they cannot compromise on the paper they buy. Do you recognise this kind of story?

Sir Jeremy Blackham: Yes.

Q196 Lindsay Roy: Can you just explain what a reverse auction is, how it operates, and what dividends, if any, it brings?

Dr Moore: If you take copier paper, we all, as possible suppliers, offer copier paper; you say you want it, and we then anonymously reduce our prices until you get the best possible price, in effect, for copier paper.

Q197 Lindsay Roy: Is that a timeconsuming process?

Professor Bovis: Yes.

Dr Moore: The challenge with it is getting the specification right at the beginning. If you do not clarify what it is you want, which sounds easy but is surprisingly difficult to do, then a reverse auction can be the wrong thing.

Q198 Lindsay Roy: So there is work to be done there.

Dr Moore: Indeed.

Q199 Priti Patel: Can I ask you all for your view? Do you think there is a lack of commercial nous within the Civil Service in the MOD?

Sir Jeremy Blackham: There is a lack of commercial experience, which is perhaps the most important thing to say. I am not sure, looking back on my own career, that you can develop commercial nous without commercial experience, and there is not very much of that.

Chair: So the answer is yes.

Sir Jeremy Blackham: There is a reluctance to move people in and out. I tried, for example, to arrange an exchange scheme, or swap scheme, between my staff and industry, and it failed. It failed partly because when people came in from industry, there was a reluctance to let them have information, partly on security grounds, but more importantly because they would be taking information back and their competitors would not like it. When we moved people out into the commercial world, we often did not see them again.

Q200 Priti Patel: Can I just ask on this point: do you think it is an institutional mindset that the MOD specifically has? Have there been any attempts to bring in a degree of business capability or capacity within the MOD, amongst the Civil Service?

Sir Jeremy Blackham: Just to finish my answer, I think it is a problem that Government has. I do not think it is confined to the MOD, by any means. I am sure I do not need to talk to you about the West Coast Main Line. It is an inherent problem: you are expecting people hired for one purpose, which is the making of policy, to perform in another field, without giving them specific training and experience to do so, so it is hardly surprising if they are not very good at it.

Professor Taylor: There is a significant amount of commercial expertise in the MOD, and some of the best people I have come across have been very acute. The MOD’s traditional problem is that it went from having contracts officers to having commercial people. By contracts officer, I mean somebody whose dream it was to write the contract that would, if you like, allow you to fly and forget. Once you had the contract, you did not have to worry, and if anything went wrong, you just waved the contract at the contractor and the contractor would have to fix it.

The move towards commercial officers was probably 15 or 20 years ago, when it was recognised that it was not just a matter of understanding the contract, but a matter of understanding the whole commercial environment in which your suppliers were operating, and the kind of thing that you might be asking to be done in the future. I think if there is a general issue in the MOD, and perhaps outside the MOD, it is that there is too much faith in contracts to be able to deliver what you want, because the world changes and you find yourself relying on a legal document, and when you want to change it, it becomes quite expensive.

The MOD has struggled to get people to move away from being contracts officers, and when we talk about the MOD, by the way, we are talking here about DE&S; to Mr Reed’s question about organisation, many people, when they say Ministry of Defence, sometimes mean the main building in London. The main commercial expertise in the MOD is based in Bristol. There is a significant amount of it there. It is not perfect, because people are often struggling with an internal MOD system that they must understand as well as dealing with industry, and it could be strengthened, there is no doubt, but the MOD has brought in people.

The MOD brought in a Chief Operating Officer from the commercial sector, with good commercial and project management expertise. He left believing, and recognising, that the MOD have what he said was the best defence acquisition organisation in the world. He was brought in from the private sector, and is back in the private sector in a senior post now. It is not that awful. It could always be made better, but it is not that terrible.

Q201 Chair: Can you tell us who that was?

Professor Taylor: I think if you were to contact Dr Tyler, he could probably give you a clue as to who it was.

Q202 Chair: Dr Moore, very briefly.

Dr Moore: Briefly, if we had to put words to what Professor Taylor has just said for commercial branch, the old view might have been that they were blockers rather than a more modern view of being enablers, and that the contract had to be perfect before you could move forward. There is a second point: it is not just the commercial people. Decisions are often made involving a much wider group. For example, I have just been asked by the MOD to put together a oneday course about engaging with industry. The idea is for very senior people-one star or above, and sometimes two stars-the knowledge of commercial issues, such as basic legal issues, is not always high.

Q203 Paul Flynn: The Government is considering outsourcing the management of defence equipment and support to these Governmentowned, contractoroperated units. Is there not a lesson from the United States, in the role that Frederick and Kimberly Kagan played as the right–hand people to Petraeus? They were by his side, privy to all the private secret documents, were in all the meetings, and they wrote most of his report to the Secretary of Defence in America. Their theme throughout was to discourage the peace initiatives and encourage the conflict and continuation of the conflict.

They were not employed by Petraeus, they were not employed by the military, and they were not employed by the Government. They were entirely employed by defence contractors, and the role they were playing was the role that is the aim of defence contractors, which is perpetual war, to keep the contracts coming, as we have done in this country. On the other side of that, we have Prime Ministers who are addicted to war. They loved it: Thatcher did; Blair did; Cameron does. They dig out the Churchillian rhetoric and they see themselves elevated-

Chair: Can you ask your question?

Q204 Paul Flynn: Yes, indeed. I was just saying that we have these problems. If we get the contractors in, are we not inviting the fox into the chicken coop? I believe the history of defence procurement in this country has been a continuing 50year-possibly longer-disaster of producing bits of equipment that are changed and altered, with political influence, with constituency nationalism, where MPs are put under pressure: "If you do not support this, jobs will go". There is British nationalism, there is European nationalism-"We will stuff the Americans on this"-and we end up producing bits of equipment at about four times the market value when they are actually produced.

Is it not a backwards step to get private contractors at the helm, taking decisions, when their interest is in perpetual wars, and we emerge from one to the other?

Professor Taylor: I would have a slightly different take on it, which would be that, if you like, the dominant guiding idea for the last probably 30 years of our public sector management has been new public management, with its emphasis on faith in the private sector, outsourcing, core competence and these kinds of themes. If you are going to go down that route, then a core competence for outsourcing is to be able to deal with the private sector. If you then reach the stage with new public management that says, "Not only are we no longer any good at doing things in Government, we are not even any good at contracting with people to do things, and we need to get somebody else to do that for us", there is a very large question about what Government does at all.

There is, in the US, a concept of the inherently governmental; it is a political and legal concept, but there is a sense that when Government is looking at outsourcing and contracting, there are limits beyond which they do not go. Currently, I do not think that is part of our discourse in the UK, and for me contracting and outsourcing is a responsibility that Government cannot and should not delegate. It is the equivalent, to me, of outsourcing your brain.

Chair: That was the conclusion we reached in our inquiry into IT and Government-that the Government has contracted out too much capability to the big systems integrators. I see nods across the panel.

Q205 Paul Flynn: If we leave it to the politicians on one hand, who are vainglorious and want to punch above our weight, and see themselves becoming a footnote in history, and on the other hand the contractors, who have a vested interest in builtin obsolescence and making sure that the contracts are continuous and carry on for ever, is it not right that we should have a Civil Service that is dedicated to the general good of the country, and can take a balanced decision between the two?

Robin Southwell: Yes.

Chair: That was a nice brief answer.

Robin Southwell: I would add, though, that the industry does not seek warfare, nor does it seek to perpetuate warfare. You mentioned that a couple of times, and you are wrong, sir.

Q206 Paul Flynn: I think history would judge against you. Having in this country been involved in two recent wars, where we replaced one rotten Government in Iraq with another rotten Government, and we are now leaving Afghanistan and handing it over to the Afghan police, who are skilled in murder, child molestation, corruption and God knows what else, and we are being geed up-by, among others, defence contractors in America-to go to war with Iran. There is a deliberate history of this, and it is clear from outside. Of course the contractors are there in Washington, lobbying like mad for more wars. How can you deny that?

Robin Southwell: I comfortably deny that, and on behalf of every executive I know in the industry-and I have been in it some time-I do not know one who wishes for this country to go to war, or wishes for this country to continue warfare any longer than you, the politicians, seek for us so to do.

Q207 Paul Flynn: Politicians love war, I am afraid. We would not be in wars-

Robin Southwell: It is your choice; that is why we elect you.

Q208 Paul Flynn: We see Secretaries of State here who talk about punching above their weight, which means dying beyond their responsibilities, and spending beyond our interest, and they have been doing it for a long time.

Chair: Last comment on this.

Q209 Paul Flynn: This is the final question. Are you seriously telling me that the defence contractors here and in the United States-these huge companies-are planning for the end of their industry, because if conflict and war end they go out of business? They are no longer in production. Of course they are advocating more wars.

Robin Southwell: That is not true.

Q210 Chair: One last comment from a member of the panel on this.

Professor Taylor: Chair, first of all, it is something of a diversion, but there is a real point, which is that if you think of outsourcing a contracting function, then there is a question of which companies out there are capable-with the knowledge that is necessary in some of these specialised areas like nuclear submarines, combat aircraft and so on-and have the expertise in that area who do not already have a network of commercial relationships that would make it difficult for them to act as an impartial contractor.

Q211 Paul Flynn: Final question: was it the politicians, was it the civil servants, or was it the contractors responsible for the fact that we are building two aircraft carriers with no aircraft to go on them, at vast cost, and a number of people who are responsible for those decisions are now working for the companies with billionpound contracts there? Are politicians, civil servants or contractors responsible for the two aircraft carriers?

Robin Southwell: Who signed the contract?

Paul Flynn: The Government did.

Sir Jeremy Blackham: A different Government, I think.

Paul Flynn: Indeed it was, absolutely.

Q212 Chair: Sir Jeremy, the aircraftcarrier fiasco might have overlapped some of your period when this was your responsibility for equipment capability.

Sir Jeremy Blackham: It did, yes.

Q213 Chair: Can you answer that question? How does this happen, and how is nobody held responsible?

Sir Jeremy Blackham: I was not in the Ministry of Defence at the time of the Strategic Defence Review in 199798, which was the review that decided that we required these creatures. I was responsible, eventually, for trying to get the show on the road. I am bound to say that the beast that now appears to be emerging is a slightly different shape and size from the one that I had envisaged at the time, so I am not sure what happened after I left.

Q214 Chair: Why do you think this occurs: that nobody is held responsible?

Sir Jeremy Blackham: Because nobody is there long enough to be responsible, if you see what I mean. Even with the best will in the world, a carrier will take you 10 years to build. I agree 20 sounds rather excessive, which is what we now seem to be doing, but it takes 10 years to build. Unless you are prepared to leave people in posts for that sort of length of time-and not just, if I may say so, officials, but the people who make the initial decisions, which of course is impossible under our constitutional system-it will be very hard to pin people down.

Q215 Paul Flynn: The Sunday Times claimed there were 3,500 former Ministry of Defence staff now working for defence contractors in Britain, and some of the politicians who signed that contract are now working for the people who got the contract. Who is to say that these people who are not there very long, retire at 60 and will have 20 years more life, will not have a consideration for making sure that there are big, fat contracts awarded to make sure that they have riches in their retirement job?

Chair: There does seem to be a conflict of interest.

Sir Jeremy Blackham: There may be. I will have to accept Mr Flynn’s figures, because I have no idea whether they are true or not.

Paul Flynn: Did you see this report?

Chair: Let him answer the point, Mr Flynn.

Sir Jeremy Blackham: Insofar as I can understand his quite lengthy arguments, the position seems to be that you are complaining that people move out of the Ministry of Defence into industry in order to perpetuate their careers and line their pockets. That is the thrust.

Paul Flynn: That is right, and I think they are doing that. I do not know if you saw the-

Sir Jeremy Blackham: May I finish my answer?

Chair: Let him answer the point.

Sir Jeremy Blackham: Quite clearly, it is to the benefit of industry, and therefore to the benefit of the Ministry of Defence and the country that at least some people with knowledge of defence move into the industries that are serving the defence machine. Otherwise, the industry does not have the appropriate understanding of military operations to be able to meet the requirements of the Ministry of Defence. You also have a further problem, which is that anybody leaving the services-and we require people to leave the services well before retirement age-who requires to pay for their children to go to university, or whatever it is, needs to find employment in an area in which they have the appropriate skills and experience to do so. Some of them will go into the defence industry, and that does not seem to me unreasonable.

Q216 Paul Flynn: Can I commend that you read the account in The Sunday Times of one of our knighted Generals, who said what a great opportunity it was on Armistice Day to be at the Cenotaph. There was not much to do except wait for the Queen to arrive, and it was a great marketing opportunity to chat to contractors, and to get more contracts. Is that the sort of attitude that one would expect from a retired General?

Sir Jeremy Blackham: No, it is not acceptable, and the individual concerned, as I understand it, had been retired for some years, was actually previously the head of the Defence Academy and had not been involved in procurement-

Paul Flynn: But gagging to be involved.

Chair: Please let him answer.

Sir Jeremy Blackham: And he was perhaps misrepresenting his role, which was President of the Royal British Legion. He subsequently said that he had been foolish and wrong, and then resigned from his post as the head of the British Legion. He did not move from a revolving door. I do not know whether he went through the business appointments procedure, as I did myself, when I was prevented from working at all for nearly two years after I left the service, which did not help the family budget a great deal, of course.

Q217 Chair: Briefly, however, is this concern of Mr Flynn’s a real concern in the procurement process?

Sir Jeremy Blackham: Yes.

Q218 Chair: How should it be addressed?

Sir Jeremy Blackham: There is a procedure, which I believe applies to yourselves as well.

Q219 Chair: Do you think it is adequate?

Sir Jeremy Blackham: I was required to wait for two years for some employment, and I did so. I suppose it depends whether individuals feel obliged to follow it or not.

Q220 Paul Flynn: But does not the example that you are giving, that you did not work for two years, mean that you were not exactly selling your native skills, you were actually selling, eventually, after two years, your insider knowledge?

Sir Jeremy Blackham: I did not have any by that time.

Q221 Chair: I think we must move on, but on the GOCO question, what is the difference between contracting out what would be in the GOCO, and contracting out the project management skills? It seems to be that project management skills are what the MOD and indeed Whitehall generally is very bad at.

Professor Bovis: It is the control, Chairman. It is who maintains ultimate control in the contractingout exercise. With a Government company, a Governmentowned and commercially operated company, ultimate brain control rests with the Government, with the public sector, whereas the commercialism that is so much in demand is contracted out and is put in front of the private sector.

Q222 Chair: But the London Olympics committee contracted out a great deal of project management very successfully. Have we got something to learn from that?

Professor Taylor: There was a bit at the end that slipped.

Chair: There always is, but they delivered on time.

Professor Taylor: That was a fairly significant slip-to lose the security for the Games. However, I think that, generally speaking, the Olympics were a very fixed and defined target for a particular point in time, quite different from many defence projects, which do tend to evolve as time goes by. I think we will look forward and see that some of the MOD’s project management needs will increasingly address not simply getting the equipment from industry at the time and for the performance specified, but actually putting all the other things in-the other defence lines of development, if the Committee are familiar with that phrase.

That is a growing project management challenge for the Ministry of Defence: to make sure that all the training, the infrastructure, the support money and the support needs are available The MOD’s project, if you like, is to take a piece of equipment supplied by industry and turn that into capability. I do not think that is something that the MOD can outsource. The contract management dealing with industry is in some cases relatively straightforward, and in other cases it is very complicated.

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Q223 Lindsay Roy: I really just wanted clarification as to whether you feel the Government should be seeking a privatesector operator to be selected to run DE&S.

Chair: In a word?

Professor Taylor: Personally, I was one of the authors, along with Sir Jeremy, of the briefing paper that RUSI produced on the GOCO proposal, and the Ministry of Defence wrote some responses to the Defence Committee. I would leave it to this Committee to decide whether you found those responses persuasive about this proposal, as to how it would actually work in practice.

Q224 Chair: Can I just ask the panel individually: yes or no? Is GOCO a good thing or a bad thing?

Sir Jeremy Blackham: It depends how it will be implemented. I do not have any rooted objections.

Chair: You sound like a politician.

Sir Jeremy Blackham: Perhaps I picked the wrong second career, Chair. It depends how it is going to be operated. I have no objection to it in principle, but it appears to be trying to repair deficiencies that could be repaired by other means, notably the balance and level of skills within the DESO, where the right skills are not present. There is a feeling that a commercial operator can buy them and reward them more appropriately, and attract the right people. It would be possible to do this in another way, I would have thought. I am not convinced it is a good thing-

Chair: So it is a no, then.

Sir Jeremy Blackham: But I am not prepared to say that it is impossible, because I have not seen the details

Q225 Lindsay Roy: So is the key thing here the skills deficit, in your view?

Sir Jeremy Blackham: That is my understanding of what the Gray report says.

Q226 Chair: Does anyone have anything to add?

Dr Moore: If I may, we are wrong to assume that procurement is always undertaken in the same way. There are lots of different strategies for different commodities, different services, and different equipment. Some things are highrisk, some things are lowrisk; some things are highvalue, some things are lowvalue. In other words, we ought to differentiate the approach that we take. Something like a GOCO could work, but only in one of those particular areas. Just to give an example, Kent County Council run a commercial services business. It is, in effect, a miniGOCO, if you like, and it works, but what they do is the fairly straightforward, simple stuff-lowvalue, lowrisk. What they do not do is the highvalue, highrisk.

Q227 Lindsay Roy: So you are arguing, indeed, for a mixed economy?

Dr Moore: Almost, yes.

Professor Taylor: They are on the way with that with some of the big contracts that bolt together lots of purchasing activities. My response would be that I do not see how it would work, say, with regard to the F-35, which is a major project, and I do not see how it would work with regard to the replacement of the Trident submarine. What kind of risk would be carried by a company with regard to those sorts of issues?

Q228 Kelvin Hopkins: Following from my colleague, Mr Flynn, in the 1950s, President Eisenhower expressed his serious concern about the militaryindustrial complex. That has continued, and the fact that Professor Taylor said that the US Government says some things are inherently governmental means that they clearly want to have some strength in Government, and not contract out their brain, as Professor Taylor has suggested.

What are the barriers to the recruitment and retention of staff with the necessary technical and commercial skills within major procurement in Government Departments like Defence? In particular, I am concerned about technical abilities. The commercial abilities, such as negotiating, can be done by all sorts of people, but when it comes to technical matters-and defence is very technical-you really need people with engineering and electronics skills: people who can talk the talk and understand what is happening when a contract is being perhaps amended, because new technologies come along. What is the barrier to recruiting people like that, and keeping them for a long time?

Robin Southwell: I disagree with a couple of throwaway lines there. I think the value in the procurement process is the process of having a thoroughly professional buying activity, whereby you have a negotiation, you understand the risks and the tradeoffs, and you end up with a commercial deal and a legally enforceable document that works for both parties. In my opinion, that is where the real driver for value is contained. One of the enablers of that is that you have the engineering knowledge and nous to understand what you want, understand what industry can provide, and make those tradeoffs.

Personally I feel that the MOD has very good engineering depth and engineering skills. There are, as we have said before, gaps in the area of nuclear, some of the skills there the industry would like, and it comes back to the issue that where there are skills gaps or capability issues, the Government should look at paying premiums for those, rather than lose that capability, which would require you then to bring in consultants at an awful lot more than you pay your own people, if you pay them a little bit more. That is my take on your comments.

Q229 Kelvin Hopkins: I am not dismissing the need for commercial skills, negotiating skills and all that, but I think there is a parallel in the railway industry, where I think engineering has been written down and project management has been written up, to the detriment of the rail industry. That is a personal view, from some inside knowledge, I might say, as well. With our IT inquiry, we came to the conclusion that the Government must have a powerful inhouse body that can make judgments, and that does not constantly need to be dependent upon consultants, people in the industry and people who might have commercial interests themselves later on. They need people whose loyalty is to the state and to the longterm public interest, and the inherently governmental, as well. What are the barriers to doing that? I think it was Sir Jeremy who said that noone is there long enough to see out a project. Why not?

Professor Taylor: One of the barriers is that, I believe, the Civil Service still does not have a training margin. In other words, the Civil Service is sized so that everybody in it has a job, rather than, for a period of your life, you are being educated for the future. Were the Civil Service, especially in the technical and commercial grades, to have a training margin built in so that people would have a specified period in their life where it would be emphasised that they were engaging in personal development, that would be a very useful change, rather than the notion that everything is learned on the job, through experience.

Chair: Thank you for a very valuable point.

Professor Taylor: I am not sure whether the Committee is aware, but the Undersecretary for Acquisition in the US has made this point about the need to strengthen the internal workforce rather than to go outside. He has recognised, in the US, that, as he put it, "highlighting the importance of our people, and developing them and making them stronger and more capable of doing a better job is really number one in terms of my priorities." I think you might struggle to find a senior person in the UK who said that his or her number one priority was strengthening the people inside Government, and maybe a little commitment in that area, which would relate to the training margin, would help.

There are a range of things, I think, about how people are perceived and rewarded, but particularly about how they are perceived. The status of their jobs is very important, and at the minute there has been a tendency to downgrade or denigrate people who work in public service and the Civil Service. If political leadership were to change that a little bit, it would help.

Kelvin Hopkins: I strongly agree with what you have just said, I may say. I think the spirit of our times is that all wisdom resides in the private sector, and somehow Governments are fuddyduddy and reactionary. I take a different view, and I think what you say seems to support that.

Q230 Chair: Can I just ask: what are the barriers to retaining and recruiting those kinds of people?

Professor Bovis: It is a culture issue. It is a culture issue for recruiting Civil Service personnel capable of taking public service, the ethos of public service, and managing and delivering public service to a different generation.

Dr Moore: I have three quick points. Procurement decisions should be made on a technical and a commercial basis. The technical side is diminishing in terms of the number of people in the MOD. The second point is that where we need to put more technical expertise is before the decision is made about a contract. Once it is placed, that is it; it is too late. It is understanding the requirement and getting that right. The third barrier, coming back to the point, is that the more we outsource, the more the power goes to the contractor, and there has to be a balance. There is knowledge, there is power with the contractor, but so there should be with the MOD, and that has to be balanced.

Q231 Chair: What about FIST? It is a very attractive notion that we could do everything fast, inexpensively, simply and tinily: do we buy into this concept?

Professor Taylor: Future Infantry Soldier Technology. FIST is something else.

Q232 Chair: But we are familiar with Colonel Dan Ward’s concepts.

Professor Taylor: Yes.

Q233 Chair: He claims that the Virginiaclass submarine has come in quicker than scheduled and underbudget, because these principles have been applied, and that the idea that defence procurement has to be long, complex, expensive and very big is something we need to challenge. Do we agree?

Sir Jeremy Blackham: I do agree. It is the pursuit of the excellent at the cost of the good. That has always been a major problem. In other words, I sometimes feel that we are trying to outmatch technology as opposed to outmatching the enemy. It is better to have something now and develop it from an 80% to a 90% effectiveness, rather than wait 25 years and get 92%. In principle I agree, but I think it is always important to hang on to the fact that you are trying to do something that is intrinsically exceedingly complex and difficult, and for which there are few manufacturers and few benchmarks.

Professor Taylor: We have a 10year equipment plan, which is pretty fully committed for the next 10 years, so people thinking about requirements are thinking about requirements that will not come into service for 20 years. What will the world look like? It puts tremendous pressure on them to think of something that is terribly ambitious. When you think of the Government’s approval process, it is generally accepted that if you go to the Treasury or the Cabinet Office and say, "We would like a modest increase in capability", they are likely to say, "Why do you want to spend money on that?" There is a strong pressure on you to say, "This will give us a huge increase in capability."

The approval system tends to push people towards very demanding and longterm solutions. I very much agree that many systems could be developed quickly. I do not like the notion of an 80% solution, Jeremy. I think if you were to ask industry, "What is the 100% solution that we can have in six years?" that is a different question from the 100% solution we could have in 12 years. Asking for the 100% solution in six years would be, in many cases, a very sensible thing to do. There are one or two cases where it does not work, but in many cases it would be a sensible thing to do.

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Q234 Chair: But presumably the need to stretch programmes out in order to ameliorate the cost over a longer number of years militates against efficient procurement?

Sir Jeremy Blackham: Yes, and it increases the cost, but there is a problem when you are engaging in procurement programmes that run for 20 years and the fixing of budgets changes annually. I am not sure how any of us here would be able to square that particular circle.

Q235 Kelvin Hopkins: It strikes me that with the Civil Service as it is and the Department as it is, risk aversion is understandable. They have to be cautious. These are civil servants who are moving through and seeking promotion. They do not want to have big decisions that were wrong decisions around their necks, dogging them for the rest of their careers, so they will be riskaverse. If we had a stronger inhouse capacity and more permanent staff, these problems might be overcome. You might get quicker, more efficient decisions if the expertise and strength was inhouse.

Q236 Chair: Sir Jeremy, you have to leave in just a few minutes. Is there anything you want to add that you do not think we have covered, before you leave?

Sir Jeremy Blackham: That is kind of you. I would say that what we have not perhaps discussed in the GOCO solution are the very difficult questions of, "What do you do if it does not work, and how do you recover a capability that you have flogged off to somebody else?" What would you then do to recover the workforce?

Q237 Paul Flynn: Use the budget on the Health Service and education and spend more on defence.

Sir Jeremy Blackham: May I quote you, Mr Flynn?

Paul Flynn: Please do, yes. All the honourable and right honourable yahoos on the Tory Benches will cheer when you say, "Spend more on defence," and are quiet when you say-

Chair: Because we want to prevent wars, Mr Flynn.

Paul Flynn: No, it is incontinence of warmaking.

Sir Jeremy Blackham: I am also concerned about the future of the defence industry, notwithstanding the suggestions that it is being perpetuated by the people who work in it. There is a major question to be asked about to what extent we need to buy, or be able to buy, equipment within the United Kingdom, bearing in mind that in a crisis you can never be quite sure that the shop will either be available to you, or willing to sell to you. That is the thing that is bothering me most about acquisition, because the maintenance of industry costs money.

Q238 Chair: What is the answer to the question you raised earlier, about how you recover a programme that is going wrong?

Sir Jeremy Blackham: It is not a programme that has gone wrong. How do you recover a workforce that has gone? That is my point.

Chair: Right. So it is about onshore capability.

Sir Jeremy Blackham: I think the answer is, "With extraordinary difficulty."

Chair: As we have discovered with the Astute programme.

Sir Jeremy Blackham: That, to my mind, is a major risk in the GOCO arrangements.

Professor Taylor: Jeremy’s point, and my point, would be that if a GOCO were pushed through, would it be an irreversible change? Would you ever be able to get the capability back into Government?

Q239 Chair: Good question. Moving on to the EU question, we are concerned at how EU directives are impacting on the procurement process in Whitehall. It appears that defence is now being drawn into this regime. What effect is it having on the efficiency of defence procurement?

Professor Bovis: Theoretically, the new defence directive, which the UK has also implemented alongside the other member states of the European Union, tries to converge the procurement regimes with the utilities and public sector. Three principles in line: accountability, transparency and mainly competitiveness. The directive wants to insert competitiveness within domestic and European industries that supply the defence sector. It is early to assess the impact, again because we do not have benchmarks to assess the impact of a legislative instrument in relation to the marketplace.

Long term, my humble opinion is that I suspect it will make no impact whatsoever, because member states on the European Union front retain substantial sovereignty in relation to military procurement for national security. Therefore the directive is only applicable to dualpurpose or civilian/military equipment of some sensitive material.

Q240 Chair: Is there any evidence that creating crossEuropean rules will succeed in opening up defence markets for British defence contractors, or are we simply opening our markets to be plundered by other countries that have no intention of opening their markets?

Paul Flynn: The Chairman is not entirely neutral on Europe. There is always this part of every inquiry where we hear that Europe is responsible for all the ills of the planet.

Professor Bovis: It is an extremely valid question, and also very pertinent. At the moment, the public sector directives are going through the motions of the European Parliament to agree that very crucial point of open access to other markets within the European Union and overseas. The key issue here for defence purposes is that the industry is oligopolistic. There are only a few players across the United Kingdom, across Europe and across the Atlantic. If you regulate and legislate heavily on an oligopolistic market, from a technical point of view, the result is very minimal-extremely minimal, negative or positive effect. In fact it would be immaterial, because the same players play by the same rules, and play with the same public sector cashflows.

Professor Taylor: The UK always has a bit of a disadvantage in this field, because English is the second language in many European countries. Therefore the prospect of looking at English tender documentation is not a problem for many German or French people, because they speak English, whereas looking at a foreignlanguage document, for many British companies, is a trial. They do not have many bilingual people, because of the status of English: English is a very common second language.

Q241 Chair: But there is another problem, is there not? Apart from France, nobody spends very much on defence. On every joint programme we have tried to do with France-the Horizon frigate programme, the Eurofighter-they have finished up buying their own kit.

Professor Taylor: The Storm Shadow, Chairman. I think that with this directive there is an interesting case for the UK Government, or a little bit of it, to monitor the performance of the Commission, because it is the Commission that is supposed to enforce this directive, and if the UK Government can demonstrate that the Commission is not doing its job, that will put some real pressure on it. At the minute, the signs that I have seen are that the Commission has been leaning most heavily on some countries from Eastern Europe that are doing offsetled deals. However, I agree very much with Christopher that there is plenty in the directive that means that if you want to plead a national security case, you can do so.

Q242 Steve Reed: I wanted to just ask your views on the Government’s Defence Equipment Plan, published last year and looking forward to the following 10 years. What value do you believe that has for the industry?

Robin Southwell: It is very useful. We welcome it. What it does, as was mentioned earlier on, is to highlight that there is very little new spend available for procurement moving forward. In a sense it is a historical document, because it compiles all the decisions that have been taken, and confirms those which need to be confirmed, rather than in the past, when it was a wish list of numerous projects and products that the country required. It is a new form of document. It is strange, in a way, because it confirms that there will be very, very little new buying being undertaken, certainly in the medium term.

Q243 Steve Reed: So it is not really doing what the Government intended it to do?

Robin Southwell: Very much so, I think it is, because the Government intended to address the mismatch between supply and the ability to acquire. It had to state, "This is what is affordable", and worked out that all the money that has been allocated now into the future needs to be spent on current programmes.

Q244 Steve Reed: Right. Do you all share that view on it? There is nothing else?

Professor Taylor: Yes, I think so. The £38 billion deficit that is so much discussed is actually a much longerstanding problem than simply from 2010.

Q245 Chair: But it has been addressed now, has it not?

Professor Taylor: It has been. What noone has ever come up with, and maybe future historians will find out, is what the deficit was in 1997 in terms of the bow wave of projects. It is a drastically new way to try to produce an affordable programme, to make sure that the equipment stays affordable. I think the National Audit Office, in its comments, did quite a decent job of highlighting the risks that are still inherent in those projects.

Q246 Steve Reed: Does it help the industry plan future investment?

Professor Bovis: Yes.

Q247 Steve Reed: Even though there is nothing new in it.

Robin Southwell: Oh, yes. Industry welcomes it.

Professor Bovis: It engages with the private sector in relation to not only future generations but also current services. It brings together future demands. It takes away the peaks and troughs from the demand side; therefore, the pricing efficiencies are more likely to emerge.

Dr Moore: Generally there is more money spent on support than on the equipment itself, and that helps us all.

Q248 Steve Reed: Can I ask you a slightly different question? The defence industry has called for a National Defence Industrial Strategy to ensure that the Government uses procurement to achieve objectives such as supporting UK business, and I guess UK capacity, in the way that Sir Jeremy was describing before he left. To what extent do you think we should be using defence procurement to achieve nonmilitary goals like that?

Professor Taylor: I would say that was a military goal, and that is a key issue. For me this is a policy question-the highest level of policy. What kind of military power is the United Kingdom? Is it a country that can use its forces broadly as it sees fit, or is it a country that relies on others to decide how it can use its forces? As a citizen I might have a view; as an academic I would say it is up to the politicians to make a decision in this area. The statement in the SDSR and in the White Paper on security through technology was that the ability to use your forces as the Government saw fit was-I think the phrase was, "the essence of sovereignty". I am quoting from memory.

If you accept that, then you come along with the fact that when you do the military operations that Mr Flynn so dislikes, it seems, you must have a supply and support chain of some agility, flexibility and reliability in order to do those operations. That is most secure if it is within your territory. That to me is why it is a military question. It is not a jobs question. It may be for some politicians, under certain circumstances, a jobs question, but if you want to be able to do military operations, if you want to have sovereignty as defined in the White Paper, that implies a defence industrial foundation for what you are doing.

Robin Southwell: My take is this: this Government, and previous Governments, were very clear that they did not want a Defence Industry Strategy. There is no Defence Industry Strategy for this nation at present, and I do not think there is any great talk that there should be one. There is a thing called the Defence Growth Partnership, where we are starting to develop, with the Government, what the capabilities are that we need going forward. However, that is in alignment, working together. It is not a Defence Industry Strategy.

Q249 Steve Reed: Do we need one?

Robin Southwell: Can I make two comments? My first comment is that the valueformoney criterion, which we talked about earlier, which underpins all Government procurement activity, clearly states in the document that no account is taken for industrial footprint or industrial headcount. Value for money takes no account of that. The other point I would make is, given this Government is keen to export military equipment, there is no accounting in the valueformoney criterion that underpins whether or not UK equipment could be exportable. There is a confusion there, and I say that in the most constructive of ways.

My second point is that when the Prime Minister decided that he had to do something over Libya, he did that, I believe, against the advice of the USA. If you remember, during that period of time: "We must do something". "We must not". This country went in, with French support-and they did a great job-pretty much unilaterally to deploy, I believe, submarines, I believe air superiority fighters, I believe missiles, and intelligence and support around that, to provide knowledge. That was undertaken quickly, expeditiously and, Mr Flynn, I think it was a strategic force for good, because it made the difference that in my opinion was right, and that in many opinions was the correct thing to do.

My point is that the Prime Minister, in utilising all of the equipment I have categorised, all of that equipment was British researched and developed technology, probably over two decades, Britishsourced, and the intellectual property, namely the ability to use that equipment and adapt it, was all within the British sovereign capability. That is a useful recent lesson of what, in my opinion, we should be aware of in understanding what the defence industry can deliver. We should, as we move forward, be cognisant of that as we develop the Defence Growth Partnership.

Q250 Chair: Is it not true to say that the Government has a Defence Industrial Strategy? It might not be a very good one, and they might not have written it down, but de facto they have a strategy.

Robin Southwell: I love my country, and Chairman, you are absolutely right, but so am I.

Professor Bovis: There is tremendous pressure from other parts of the European Union and overseas to link defence procurement with industrial policy. There is a document in Europe called the Euro 2020 strategy which links growth and competitiveness with strategic procurement, including defence procurement.

Q251 Chair: So in the absence of a national strategy we will finish up with a European strategy

Professor Bovis: This is probably a vacuum. This is a deficit in my view, Chairman, that we do not have either the courage, or perhaps the vision, to establish an industrial policy in the UK. We had a very, very few small steps for industrial policy in the 1980s in the UK, specifically in relation to strategic industries and investment in strategic industries, with a view to internationalisation. We left it completely afterwards.

Q252 Chair: One of the questions we are asking, and Lord Heseltine made this point, is that the Government should be using its buying power to grow indigenous industries. It manifestly failed on the Bombardier trains, for example, but it has succeeded in other areas. Should this not be happening in defence?

Robin Southwell: I have given a clear imperative in terms of sovereign independence, and the ability for this nation to conduct affairs without asking anyone else’s advice. I also mentioned in terms of exports that this country is, and should be, excelling in the ability to export defence equipment, aerospace equipment and security systems. It is soft diplomacy and it is something we have a capability in. If we are able to ensure that we understand what we are good at, what we hope to be good at in the future-and this is what the Defence Growth Partnership will do-I believe we have a real opportunity to achieve those two objectives. The answer is a resounding yes.

Professor Taylor: Chairman, I would just respond that-I again go back to the policy stance-if you want the UK to be a country marked by this essence of sovereignty, which is mentioned in the Government document, of course it must address the supply base and the industrial base. If you do not care about that, then a completely different set of approaches will hold.

Q253 Chair: And presumably the R and T and intellectual property base.

Professor Taylor: Yes.

Q254 Chair: Would not the balance of expenditure be more effective if a tiny amount was shaved off actual procurement, and perhaps another £100 million was put into defence R and T and into domestic companies?

Professor Taylor: There is widespread agreement inside and outside the MOD that the R and T budget should be higher than it is. Last time I looked, our R and T budget is down to that of Germany. I think it is widely recognised it should be increased, but there also need to be mechanisms so that of the money spent on R and T, the right amount is sucked through into development and does not just die because there are no programmes in which to use it.

Professor Bovis: The rules allow it, Chairman, as well. The European rules, the legal rules, allow flexibility in relation to preferential treatment, without breaching the rules. This is the passion that we have, as citizens, as academics, as executives, towards merging together industrial policy and strategic defence procurement.

Q255 Chair: But is there not a new model of defence procurement available to us in this era of austerity: that we could have much shorter and smaller programmes, and concentrate on developing intellectual and technical capability, which could be exploited and deployed in a crisis, rather than the traditional big bits of kit, with long lead times and the rather oldfashioned, Cold War mentality towards creating big, static capability? I am not putting that very articulately, but am I fumbling towards something useful here?

Robin Southwell: Something that I started with-the idea of pace and agility-is something that we all need to understand. We look at what is happening off the coast of Somalia. It cries out for "gunboats" rather than "Type 45s". The ability for our nation to be able to adapt with speed and pace-and by the way, all these things I mention reduce the cost, rather than increase it-is something that we all need to collectively work towards. We are not doing a good enough job.

Q256 Alun Cairns: Do you think the Government has a role in encouraging consortia of SMEs, as is suggested, in order to bid for contracts? I look to you, Professor Taylor, because in your evidence to the Defence Select Committee, you raise questions about the complexity. Can we take the question in two parts? Firstly, does the Government have a role, and secondly, could consortia of SMEs meet the complexity challenges? Mr Moore, shall I come to you in the first instance, about the first question, and then, Professor Taylor, if you could potentially respond?

Dr Moore: Yes, is the answer.

Q257 Chair: How would that operate? How does the Ministry of Defence do that?

Professor Taylor: There is a documented base that SMEs do lots of innovative things. I have not seen persuasive evidence that they will actually solve the major defence acquisition problems. I think in many cases they need to work with the big contractors, who have the financial base, and have the major programmes, to use the technology. I am aware that in the US there is an explicit Government policy and it is a requirement that a percentage of work must go to SMEs. My American contacts tell me that this, as you might expect, sometimes produces some unintended consequences, such as large companies going to a small company, saying, "We will prepare the bid for you, you will submit the bid, and when you win the bid, you will give twothirds of the work back to me".

Chair: We must look out for that one. Thank you for that.

Professor Taylor: It is very important that SMEs have opportunities, and the Centre for Defence Enterprise is proving to be a really useful mechanism for putting some funding their way, but unless we think about how their technologies get through into the big projects, it is not in itself going to solve things.

Professor Bovis: The rules allow for 30% of the budget of a defence contract to be subcontracted to small and medium enterprises. We have two options-the Government, or the Ministry of Defence has two options-either to preselect, before awarding the prime contract, a list of SMEs and allocate that consortium as a strategic subcontractor to the prime contractor, or, together with the prime contractor, go down a list of SMEs within regions or within specific areas of their territory or abroad, and define who is the most appropriate subcontractor to work under that 30% bracket.

Q258 Alun Cairns: So what you are saying is that the prime contractor should take the lead in putting the consortium together, rather than the Government playing a part in trying to bring the consortium of SMEs along.

Professor Bovis: It could be both, sir. It could be both.

Robin Southwell: There is an inherent belief in what you are saying that SMEs somehow are hard done by, or secondclass citizens, or subordinated. The term I use is that in the aerospace and defence industry, we are all in the same lifeboat here, and we are just comparing who has bigger bailers. We are all in the same challenges. I do not understand how an SME is being hard done by, or is in some sense less worthy.

Q259 Chair: They cannot afford to enter the bid process. They do not have the track record, they do not have the capital, and they cannot sustain the extraordinarily long negotiations. They cannot sustain the cost of that. Is the Government not losing out on a whole lot of innovation and inventiveness, which tends to be concentrated in SMEs rather than big companies?

Alun Cairns: Their turnover will not necessarily meet the criteria.

Robin Southwell: In terms of that, 80% to 90% of those companies that can afford to do it then subcontract the work through the supply chain to smaller companies.

Q260 Chair: We heard about this in our IT inquiry; what happens is that big companies then steal the intellectual property of the little companies, because the little companies find it difficult to guard their intellectual property.

Robin Southwell: No, they do not. I wanted to bring this to a head, because we very quickly get into the realm of anecdote. I have not yet had one example of what you have said being brought to my attention. Anecdotally, I am not sure. My issue is that I genuinely do not believe that SMEs are harder done by in defence, and if they are, tell me and we will sort it. I am saying that with my EADS hat on, as well.

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Q261 Alun Cairns: The Chairman and I met a company a couple of weeks ago that said in order to make a bid-it was an IT contract rather than a defence contract.

Robin Southwell: So it was not a defence contract?

Alun Cairns: Accept the principle.

Robin Southwell: Okay.

Q262 Alun Cairns: It would cost seven figures in order to get the position in order to be successful with the bid, because of the bureaucratic process. That is a procurement issue the Committee has looked at, but the principle is exactly the same. If that exists or persists, the capacity of an SME to spend seven figures on a defence contract is nighon impossible. Would you not accept that, at least?

Robin Southwell: I would add two more to it. You also require unlimited liability; that will not make their morning. The third thing is that all the costs of that procurement will be undertaken by the company seeking. Also, Government will require risk transfer right up until delivery, so this SME has a load of problems if he or she wishes to procure.

Q263 Chair: Are we not missing out on something if we cannot harness the entrepreneurialism and inventiveness of SMEs? Are we not losing something? Are these the seed corn companies of the future?

Professor Bovis: This is the innovation of the UK Government during the negotiations on the new Procurement Directives, to segment certain parts of public expenditure only to SMEs-companies below 500 people, with easy qualification and selection requirements, therefore you have that access and traction with public expenditure.

Q264 Chair: So we are hunting the wrong fox here. We are on the wrong track. This is not a concern.

Professor Taylor: Not at all, but I think the basic point, Robin, is that if you have a policy stance to promote SMEs, you must align that with your procurement strategies. If you say, "I am going to have a procurement strategy of competition, because only competition gives me value for money", that competition has to be fair. It has to be demonstrably fair, legally defensible, and it costs a shedload of money. If you want to support SMEs, align your procurement strategy with it.

Dr Moore: If I can go back to the first question and an earlier discussion that we had, if the performance metric is exactly as Professor Taylor said, you will not get any of the result. If, on the other hand, one of the criteria for performance-and therefore value for money-is that part of this is, "How much have you given to SMEs?" all of a sudden you have changed the way that we work.

Q265 Chair: Should the Government not be prepared to sprinkle relatively small sums of money around SMEs when they are trying to solve a problem, on a noncompetition basis? Eight companies working on <?oasys [pc10p0] ?>the same problem at minimal cost is far more likely to come up with a solution than just letting out a single contract to one company, which only has one set of ideas. It is about innovation.

Dr Moore: That is encouraged, but if you look at the spectrum of procurement, it goes from warships at one end of the scale to desks and chairs. You could probably do that somewhere at the lower end of the scale, but it would be much more challenging at the higher end.

Professor Taylor: I have significant sympathy for that approach. It is well recognised in the field of complexity management that when you are trying to do difficult things, you have to be ready to experiment, but on a limited scale, so that failure does not cause disaster. The occasional technological competitions that the MOD has held, such as Grand Challenge-and they have held them in the US-are very much on that line. The Centre for Defence Enterprise does put out really quite small sums of money. You use that term, but of course one person’s small sum of money is another person’s big sum of money, so you need to be pretty clear. However, I have broad sympathy for the approach you have just outlined, in some areas.

Q266 Chair: And the era of the defence prime lives on, does it?

Robin Southwell: As long as the Government wishes to apportion risk in the manner it does, yes.

Q267 Chair: Offloading all this risk onto defence primes does not seem to have offloaded much risk. If you look at any big project, the Government had not transferred the risk; they have finished picking up the cost.

Robin Southwell: No, you can go through a number of major programmes, and there has been significant risk transfer in a number of projects. There has been benefit through this process.

Professor Taylor: Some risks have been transferred, and particularly some financial penalties that have fallen on major companies. There is also operational risk, and there are limits to the financial risk that a company can receive. Companies can go into liquidation and Governments cannot, so there is a difference. I think there has been significant transfer of risk to the large primes, particularly of a financial nature, particularly in the past.

Q268 Chair: But the risk of wanting to extend the lifetime of the project and elongate the procurement cycle seems to be a risk that the Government then has to pay for itself, if you look at the carriers, for example.

Professor Taylor: The spreading out of the life of the carriers has been largely, I think, a Government choice, because of money, and perhaps also because of the availability or lack of availability of an aircraft for that.

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Q269 Kelvin Hopkins: This question is specifically to Professor Bovis. I understand you have advised the Cabinet Office on how to build a social dimension into public procurement. We have touched on this before. I wondered what response you had received. I think what has come out is that there is a division of view about whether we are truly a free market, free trade nation, or whether they say, "No, we will not have any of that, because that is cryptosocialism and protectionism?"

Professor Bovis: The response I got was a very, very widespread welcoming understanding of the flexibility that exists not only in Europe, but in public procurement. France, Germany, and Italy use procurement for specific purposes, without breaking the laws. In Germany every Land has specific laws designated for the promotion of SMEs. In France, there is a specific overarching umbrella legal principle concerning economic development, which means tremendous flexibility and discretion in the hands of contracting authorities to award public contracts.

For the first time, from 2010 onwards, when the procurement directives were renegotiated, the UK Government has been pushing forwards towards a different approach in procurement. This is not only industrial policy, but flexibility, strategic procurement, promotion of SMEs and the social dimension of procurement, specifically in relation to employment, promotion of employment, combating of unemployment, and also strategic regional assistance for less privileged regions.

We have seen that quite often in Europe. The Court of Justice has recognised on a number of occasions over the last 40 years the ability of Governments to procure and deliver public services in the way they see fit, provided they preserve some elements of competition. We will see that depicted into reality for the first time in early June, when the final casts of the directives are coming out from the European Parliament.

Q270 Kelvin Hopkins: I have said in this Committee more than once that it seems that the Germans buy German products, the French buy French products, the Italians buy Italian, but we buy imports, and if you look at our balance of trade with the rest of the European Union, it is a gigantic deficit of getting on for £50 billion per year, or almost £1 billion per week. Something is wrong with what our Government has been doing over a prolonged period, clearly, and your advice about having a social dimension should be well taken.

Professor Bovis: It is a unique opportunity, now, with reference to the financial crisis, to use procurement, to use the expenditure in a way that benefits a country or a member state and also to internationalise a sector or an industry. My fear is that we are missing the opportunity to point out strategic industries within the UK in order to internationalise and export. We can only prosper if we export.

Q271 Kelvin Hopkins: Are we all suggesting that the Siemens fiasco, when Bombardier lost the contract, is maybe the last stand of the ultrafree marketeers, and from now on we will have much more domestic procurement? Earlier on, I think it was Sir Jeremy who said that the Americans wanted to keep manufacturing capacity in being for the long term. That is a social concern as well. It is not just about immediate jobs, but keeping an industrial capacity. If you lose that over time, you cease to become a successful, serious industrial country. Is Britain not in danger of moving in that direction, in broad terms?

Professor Bovis: I agree with you 100%. We are missing the opportunity in terms of not only internationalisation, but also the capacity for sectoral industries, not only manufacturing but even service or research and development. The opportunities exist, the flexibility exists, in the laws and the policy, and it is up to the courage of the policymakers, the politicians, to take that and implement it in practice. The United States, Canada, China, Japan, are very closed markets, although they operate within the World Trade Organisation, and the quest of the United Kingdom through the negotiations and the WTO was to open specific markets, reciprocally, only to find out how difficult, or how impossible, it was.

Q272 Kelvin Hopkins: This is all very interesting. I remember one comment, I think, from Sir Jeremy as well: he said there was an emphasis on price, not throughlife costs. Throughlife costs should be ongoing capacity, manufacturing capacity, jobs, skills, future generations of engineers, and so on. All of that is throughlife costs, and it should be seen in a very broad context, and not just a narrow view of, "Well, it will cost a bit more if we do not get things right at the beginning in a particular contract".

Professor Bovis: Correct.

Q273 Paul Flynn: Mr Southwell, just to give a balance to the Little Englander views we are hearing in this Committee, we might have to look at when we do our report-

Chair: Let us move to Wales then.

Paul Flynn: -apart from the balanced, wide world-view view that we have here. You worked for EADS for a number of years, which stands for the European Aeronautic Defence and Space company, which is an amalgamation of about 10 European countries. Do you accept this Little Englander idea that we have to retreat behind our barricades at Dover, and act as a single country, or are there not advantages to being part of the European community?

Robin Southwell: I think the issue of strategy is really important. When we get that right, we excel.

Paul Flynn: We-

Robin Southwell: I am going to answer your question.

Paul Flynn: Okay, thank you.

Robin Southwell: We got it right in the motor industry; we took strategic decisions. We got it right in aerospace, with respect to the fact that a key part of the EADS is Airbus, and we engineer and build the wings for every Airbus in the world today.

Paul Flynn: European enterprise.

Robin Southwell: I think if we get these things right, then we really do a very, very good job. I do not agree, sir, with you about railway carriages. I do not know where the technology is in that, but I would say that we need to get things right, and say, "This country is worldclass in these areas, and we will do our damnedest to make sure that, either in collaboration with our friends"-because I have to say that we are not big enough to do everything ourselves, and the wings is a very good example of that. We have strategic partnerships with multinational companies, and what it delivers for the UK is unassailable benefit. I have mentioned two industries where they are successful.

I do not believe in drawing up the drawbridge. I do not believe in oneoff tactical-the winner in that, I think, was Siemens, and they employ many tens of thousands of people in this country, and are huge investors in this country. If it was between a Canadian company and a German company, I do not understand this thing about the British union drawing up the drawbridge. If we get things right strategically, and really think it through, this country can do great things.

Q274 Paul Flynn: The motor industry I remember as a young man is now dead. We seem to be the branch factory of the Japanese industry.

Robin Southwell: It is not dead.

Q275 Paul Flynn: However, you did mention me in one of your comments, suggesting that I might be opposed to all military incursions we take part in. I was very much in favour of Kosovo, and very much in favour of removing Idi Amin in Uganda, and various other peacekeeping measures. We have a role there. What I am against is this myth that seemed to come from the panel this morning, that we can win hearts and minds by using drones and bullets. The result is that we have a very much divided world.

Just one final thing. Why can a small country like Israel be in the lead in producing drones, when other countries are, which I see when I go round arms exhibitions? A country like Israel was leading the world in that technology-certainly for many years, when they were called Unmanned Aerial Vehicles-and it is a tiny state with tiny budgets, presumably, and had a world lead.

Chair: It is an interesting question.

Robin Southwell: The answer is first of all that they acquire technology. I will not go any further than that.

Paul Flynn: From America, yes. That is quite possible.

Robin Southwell: They acquire technology. I will not go any further than that. Secondly, it is a national priority. Thirdly, the range of their drones are relatively short, and their requirements for those drones are relatively clear. Drones, inherently, are not expensive to produce and undertake. The other thing they have to their advantage with the drones is that they do not worry too much about reliability or about incursion into airspace that may be used by civil aircraft. That is not a particular requirement in their local areas of activity. Those factors make a big difference, and allow you to be highly capable in a niche area.

Q276 Kelvin Hopkins: Just quickly, Mr Southwell, Bombardier may well close. We may lose massive manufacturing capacity in Derby. It will have serious impact, and if we felt comfortable about manufacturing and our trade, why do we have this gigantic trade deficit with the rest of the European Union? Something has gone wrong.

Robin Southwell: I am happy to discuss that now or offline.

Chair: It is a question we have already explored in some depth, but I understand the point being made. Thank you very much to our panel. It has been a very, very interesting session, and you have each made some really interesting points, which I hope will be reflected in our report. Thank you very much indeed.