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The Deputy Speaker (Baroness Hooper): My Lords, the time allotted for this debate has now elapsed. Does the noble Lord, Lord Rodgers, wish to withdraw his Motion?

Lord Rodgers of Quarry Bank: My Lords, I would much prefer to precede it by thanking those who have spoken in the debate. There is no time to say anything else. I beg leave to withdraw the Motion for Papers.

Motion for Papers, by leave, withdrawn.

Defence Industrial Strategy

2.05 pm

The Parliamentary Under-Secretary of State, Ministry of Defence (Lord Drayson): My Lords, with the leave of the House, I shall repeat a Statement made in another place by my right honourable friend the Defence Secretary. The Statement is as follows:

"With permission, Mr Speaker, I would like to make a Statement about the Defence Industrial Strategy, which I am publishing today.

"The men and women of our Armed Forces play a vital role as a force for good in the world. Whether they are in Iraq, Afghanistan, the Balkans or closer to home, I know that the whole House is very proud of the work that they do in dangerous and demanding circumstances.

"Our Armed Forces, however, can only be this effective if the MoD and industry work as a team to provide them with the best possible tools to do the job. The Defence Industrial Strategy—the product of five months' concerted effort by Ministry of Defence civil servants, the Armed Forces, other government departments, industry and the trade unions—has this at its heart.

"The House will know that we are in the middle of a substantial transformation, enabled by the sustained growth in the defence budget that has been a feature of each of the spending reviews that has been conducted since the Government came to power. We are procuring a series of major new
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platforms including Future Aircraft Carriers, about which a Written Statement was made yesterday, Type 45 Destroyers, new medium-weight armoured fighting vehicles, the A400M, Typhoon and Joint Combat Aircraft. The strategy has at its heart the delivery of truly network-enabled capabilities, linking sensors, decision-makers and shooters in a much more integrated way.

"We expect these new platforms to have very long service lives. The future business of the defence industry in many sectors will therefore be to support and upgrade these platforms throughout their long service lives, rapidly and incrementally inserting technology to meet emerging threats. It will fulfil new requirements and respond to innovative opportunities, but not immediately move to design and manufacture the next generation.

"Change is sometimes challenging and painful, but it can be more painful if we do not change. It can lead to redundancies and no market for the products. The strategy will require rationalisation within the defence industry, particularly of over-capacity in production facilities. In some cases, sustaining the skills, technologies and industrial capabilities that we need will be challenging. While we may look overseas to meet some requirements, we will need to ensure that we maintain military freedom of action and safeguard national security.

"All this implies the need for a comprehensive strategy for how we engage with the industrial base. The DIS, building on the 2002 defence industrial policy, articulates a strategic view of our defence requirements going forward by sector and the principles that will underpin procurement and industrial decisions in the future. It communicates, for the first time, to industry and the City those skills, technologies and industrial capabilities that are assessed as being required onshore, here in the UK, in order to sustain the Armed Forces' ability to operate with an appropriate level of sovereignty. It recognises that this will be possible only if we have a healthy, profitable and internationally competitive industry that is capable of responding to our requirements. The DIS also investigates how we might, with industry, address mismatches between planned activity and the work required to sustain desired capabilities. It will give industry and investors a much clearer idea of our priorities, allowing them to plan more assuredly for the future. That is of benefit to management, workers and shareholders alike.

"I now turn to the impact of the analysis we have conducted on specific sectors of the defence industry. In the maritime sector, the Government are investing in the biggest naval shipbuilding programme that the Royal Navy has seen for two generations. The highly capable expeditionary fleet that will result will offer significantly enhanced military capability, well suited for the demands of the 21st century.

"However, we need to recognise that the industry is currently fragmented. Different companies and facilities undertake submarine build, surface ship
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build and support, even though the skills required often cross over. We must also face up to the fact that current levels of work will not last forever. Once over the hump of the major reinvestment in new ships in about 10 years' time, it will not be affordable to sustain excess industrial capacity in the longer term. That means making plans now so that we can keep the required key skills onshore.

"For submarines, we are committed to maintaining onshore the ability to design, manufacture and support through life all aspects of this capability, which is so important to our national security. But cost growth in the area is a real and persistent problem. We have to control this. To improve productivity, a new structure is required.

"As my announcement on the future carrier in a Written Statement to this House yesterday demonstrates, we need to sustain the ability to design and integrate complex surface ships and support and maintain them through life. A stable and healthy programme of warships and other complex vessels will continue to be built in the UK, and this will maintain and grow the high-end skills that we need. However, we may look to outsource some lower-end manufacture offshore. This makes sense, not least in order to avoid the boom and bust cycle of sustaining or creating capacity for which there is no long-term demand. This is also a much better arrangement for employees, providing the basis for more security and stability to develop and enhance their skills in long-term, structured and secure employment.

"In the air sector, the RAF is in the middle of a substantial re-equipment programme, introducing into service the Typhoon and looking forward to the arrival in the next decade of the Joint Strike Fighter. These aircraft will both last for at least 30 years. So our current plans do not envisage the UK needing to design and build a future generation of manned fast-jet aircraft beyond the present projects.

"This has unavoidable consequences for the medium-term shape of the aerospace industry. But we need to retain the high-end aerospace engineering and design capability required to support, maintain, operate and upgrade Typhoon and JSF through life so that they are capable of tackling new challenges and incorporating new technology. This is key to operating our aircraft as we choose.

"The aerospace industry has a critical role to play here and there will be substantial business opportunities for BAE Systems and for other companies such as Rolls-Royce and Selex. I am pleased to announce that we have reached an agreement with Rolls-Royce to provide future through-life support to the RB199 engine on the RAF's Tornado aircraft.

"As the focus shifts from designing and building new aircraft towards supporting them through life, industry will have to make a challenging transformation. But we are committed to working
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with industry to manage it to our mutual advantage. To that end, we intend to enter into negotiations with BAE Systems in the New Year with a view to agreeing how best to work together and with the very many other key suppliers in this sector to ensure that the key skills and capabilities that we need are sustained in a cost-effective manner. This work will be complex and arduous and will necessarily take time, but it is essential if we are to sustain capacity in a period of high transformation.

"This is an exciting, high-technology industry with a healthy future. I am delighted to announce that we will invest in a significant technology demonstration programme for uninhabited combat aerial vehicles. This will help us better to understand the potential military benefits of uninhabited aerial vehicles, including combat versions. This investment for the future will also assist in sustaining the required capabilities to support our new manned aircraft.

"The armoured fighting vehicle fleet remains key to our land forces. Therefore, we must retain a capability to maintain and upgrade both our current and future equipment. We intend to work with BAES Land Systems—the supplier of 95 per cent of our current inventory—through a partnering agreement that will incentivise it as the systems engineer for the current fleet, contracting for capability provision, and will bring advanced land systems technologies into the UK. I am pleased to announce the signature today of an agreement articulating the principles under which such partnering will be taken forward.

"Looking to the future, we need industry to deliver the complex system of systems that will make up the Future Rapid Effects System. The most likely solution will be a team in which national and international companies co-operate to deliver the FRES platforms, led by a systems integrator based in the UK.

"A high concentration of knowledge relating to the existing fleet and a healthy international competitive environment also characterise the helicopter industry. As we announced last spring, we are working with Agusta Westland to promote a more open and predictable but demanding partnered relationship, providing better value for money while reducing the company's reliance on our investment to sustain the design engineering skill-base. We are also currently undertaking a detailed capability and value-for-money assessment of the Agusta Westland future Lynx product to meet both our battlefield reconnaissance and surface combatant maritime helicopter requirements. However, as we have long made clear, we will continue to look to the vibrant and competitive global marketplace to satisfy our future helicopter requirements.

"The Government have made a major investment over the past 10 years—through such projects as Brimstone and Storm Shadow—in guided weapons. We attach considerable importance to sustaining
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capabilities for the design of new weapons, including upgrades, and their support through life. But the scale of our investment in this area is likely to reduce by 40 per cent over the next five years. This is likely to lead to overcapacity and an inevitable requirement for rationalisation. This may require us to temper international competition in the short term. And we will need to consider whether there are approaches we might take together with our allies to maintain critical skills, while maintaining a welcoming face to those other companies that have established a UK presence in this field.

"In the general munitions sector, we regard assured access to ammunition as vital. But this is not to say that all components need to be sourced onshore. Eighty per cent of our requirements are currently met through a long-term partnering agreement with BAE Systems, with the remainder being supplied via competition from a range of suppliers both here and in the US.

"The command, control, communications, intelligence, reconnaissance, counter-terrorism and chemical, biological and radiological protection sectors are growing markets both here and in the US. This reflects the growing importance of network-enabled capabilities as well as the sad reality of the terrorist threat that we face. The UK has a number of very successful, highly innovative companies operating in these areas whose profitability and dynamism are manifest. We intend to continue to look to the market to sustain our requirements.

"Value for money will remain the bedrock of our commercial policy. Competition will remain a major element of this; but it will not be used when other tools, such as partnering, would deliver a better outcome or where it would impinge on our operational sovereignty. The DIS does not signal a move in the direction of protectionism. The UK operates the most open defence market in the world and is at the heart of efforts to encourage other nations in Europe and further afield to follow suit.

"This is a challenging agenda requiring real change in the shape of the industrial base. This will not be without pain. But only if we collectively face up to the need for change will we succeed in being able to provide our service men and women with the equipment they deserve.

"Delivering the DIS will require sustained effort on both sides and real leadership. That is something that Paul Drayson, who has done so much to produce the strategy, and I are determined to provide over the coming months. We look to industry to respond. The rewards on offer are substantial—sustaining the key technologies and capabilities required to maintain the operational edge of our Armed Forces and preserve national security first and foremost; enhancing value for money for the taxpayer through improved acquisition performance; better returns, health and sustainability for industry in return for such improved performance; and, for the nation as a whole,
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sustaining a high-value, innovative and technology-driven industry that will provide quality, skilled jobs for the future.

"On that basis, I commend the Defence Industrial Strategy to the House."

My Lords, that concludes the Statement.

2.21 pm

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