Evidence heard in Public: Questions 1 – 82
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Oral Evidence Taken before the Defence Committee on Wednesday 8 September 2010
-- Mr James Arbuthnot (Chair)
-- Mr Julian Brazier
-- John Glen
-- Mr David Hamilton
-- Mrs Madeleine Moon
-- Alison Seabeck
-- Bob Stewart
-- Ms Gisela Stuart
-- Ian King, Chief Executive Officer, BAE Systems and Chair of the Defence Industries Council,
-- Richard Martin, Chairman, Kembrey Wiring Systems Ltd, and SME Representative on Defence Industries Council,
-- Rear Admiral Rees Ward, Chief Executive Officer, ADS Group Ltd, and Secretary, Defence Industries Council, and
-- Dr Sandy Wilson, President and Managing Director, General Dynamics UK, and VP-Defence, ADS Group Ltd gave evidence.
EXAMINATION OF WITNESSES
Chair: Welcome to the Defence Committee and thank you very much for agreeing to give evidence to us about the strategic defence and security review. I wonder whether you would be kind enough to introduce yourselves, not that you are unknown to the Committee, but nevertheless it would be helpful to have all these things on the record. Shall we start with you, Dr Wilson?
Dr Sandy Wilson: My name is Sandy Wilson. I’m managing director of General Dynamics UK and vice-president of defence for the trade association, ADS.
Ian King: I’m Ian King, CEO of BAE Systems and chairman of the Defence Industries Council.
Rear Admiral Rees Ward: I’m Rees Ward. I’m the chief executive officer of ADS, the trade association.
Richard Martin: I’m Dick Martin, chairman and chief executive of Kembrey Wiring Systems and SME lead on the DIC.
Q1 Chair: I will start with a Mandy Rice-Davies comment, which is not intended to be insulting, but there will be some who watch, listen to or read what you say and come to the conclusion, "They would say that, wouldn’t they?" So if during this evidence session we can do our utmost-obviously, we won’t be able to avoid the risk entirely that that will happen-to avoid talking about individual programmes that would help your particular industries, I’m sure you will be extremely helpful on that.
This strategic defence and security review seems to be being conducted at a bit of a pace. Is it going too quickly? Who would like to begin?
Ian King: When we last gave evidence, or quite a few of us gave evidence, in December 2009-I think it was on 8 December-we said that we would be very uncomfortable if the process was driven purely by budgetary constraints and that we recognised the challenges on Government, but we really wanted the process to be taken right the way through to the conclusion of looking at foreign policy and looking at the vision for the force structure, which then could determine what a set of programmes would be and what the impact on the defence industrial strategy would be. There should be a defence industrial strategy out of this, because otherwise we in the defence community wouldn’t know how to react to the requirements of the defence capabilities.
We understand the need for pace. We were uncomfortable with it at the start, but it was on the basis that following the SDSR, there would be a defence industrial strategy, which I know informs the defence industries technology policy. That’s the basis that we’re working on-that at the end of this process there will be something that industry can react to in terms of its resources, the capabilities and the programmes. We do need granularity on this, and you can see the impact on share prices with the uncertainty that exists out there in the marketplace.
Rear Admiral Rees Ward: When we started off, as Mr King has described, there was a hope that the SDSR would be running in echelon, very close up with a defence industrial policy of some sort, so that when the decisions were taken within the SDSR, they would be taken with the industrial implications fully understood. As you took policy down into capabilities, down into actual programmes and plans, towards the end of the SDSR there would be a linking in of industry, so that as the SDSR reached fruition and the key decisions were starting to become visible, the industrial input and strategy could start to form, so you had a fully informed set of decisions. I’m talking about the SDSR and, as it is now called, the defence industrial technology policy running in echelon, so that you had a fully informed discussion and decision set.
Q2 Chair: Do you think this is a fully informed discussion at the moment?
Rear Admiral Rees Ward: I don’t think so. It is purely because the SDSR has to go at pace, because it has to mesh in, as we understand it, with the comprehensive spending review. Our concern in industry is the potential for a detachment between the SDSR process and the DITP.
Ian King: We said previously that we recognised and wanted there to be a balanced budget, and so the concept of tying it in with the comprehensive spending review-once and for all there would be a balanced programme which we could respond to. That is something we wanted. We take it as read that there will follow on from that the equivalent of the defence industrial strategy, because without that we would not and will not know how to respond. We are making decisions today in isolation from that. We are having to make pretty hard decisions on resources, capabilities and sites in the UK structure.
Q3 Chair: Would anyone else like to add anything? Or has it been covered?
Dr Sandy Wilson: There has been quite a bit of input from industry to the overarching process. The ADS has put in information on how it would expect small and medium-sized enterprises to be engaged on R and T, on exports, on acquisition reform and on some of the underlying principles that might underpin the DIS-for example, an emphasis on systems integration as one of the core skills.
In one sense, the officials within the Ministry should have all that to hand when they come to make decisions. What we haven’t had is much follow-up, caused by the speed at which the process is going on. But significant inputs have been made.
Ian King: And there are a lot of inputs going on at programme level-sector level is probably a better way of putting it.
Q4 Chair: This being a defence and security review, it is not run by the Ministry of Defence but by the National Security Council, from the Cabinet Office. Do you think that there is a sufficient degree of understanding within the National Security Council to conduct this process?
Ian King: Our inputs are into the Ministry of Defence. Our engagement is with the MOD. We do not have any official engagement with the National Security Council.
Chair: So really your answer would be that you don’t know.
Ian King: I don’t know. I don’t know the structure of the final reports against the SDSR are going to be.
Q5 Chair: Is it of concern to you that a body which did not exist three months ago is running the defence and security review of the country?
Ian King: Yes, because we don’t have any engagement with that body. We know that representation on that body is through the Secretary of State for Defence.
Q6 Alison Seabeck: You mentioned the disconnect between yourselves in the SDSR on the defence industrial strategy. Are you confident that by aligning the CSR, and therefore the Departments, with the process, the Treasury will take account of and understand the need that you and industry have for colleges and universities to be able to continue running training and apprenticeship courses, which support the skills that you want for your industries?
Ian King: It is a very good question. We have to ensure that, when we give inputs to BIS or anyone else, they understand the significance of the defence sector. There are 300,000 people in the defence sector. At any given time we have, even within my company, 1,200 people in training. So it is a fairly fundamental part of the education system. We are getting alignment and understanding of the importance of it. For you to ask me if I believe whether this is a fact that the Treasury would take into account, I don’t know, because I don’t know the criteria by which the National Security Council will put the SDSR into play.
Q7 Alison Seabeck: Are you confident that other Departments understand your needs and, therefore, will be lobbying indirectly and by speaking to Ministry of Defence officials?
Ian King: The Departments that we speak to understand the importance of defence to the economy and to the education system if we are going to create a more balanced economy and be less exposed to just the finance sector; I think that they do have a level of understanding now of the importance of defence.
Q8 Mrs Moon: This seems an appropriate place to bring in the question of whether or not they also understand the long-term viability for the defence and security of this country, and maintaining individual skill sets and capacity. The capacity to build a nuclear submarine is not something that can be picked off the shelf after popping down to the job exchange. Is there an understanding of the need to maintain capacity within the work force, and to maintain the independence of our own capacity by having a work force that can produce the defence equipment that we need?
Ian King: You have come to the nub of the matter. This is one sector where there are many lessons to be learned-they are hard for both customers and the industrial sector-when there are discontinuities in capability. If we look at the current nuclear submarine programmes that are going through, we learned hard lessons on the Astute programme when there is a discontinuity between the end of one programme and the start of another. A number of sectors today also have major potential for discontinuities. I can give a couple of examples, and perhaps you will excuse me for going into areas of my business, but I will try to keep them to the sector.
On the carrier programme today, BAE Systems entered into a terms of business agreement with the Government to protect the key industrial capabilities for that sector which allowed you to sustain a warship capability, characterised by activity on the carrier, but leading then to what is called the future surface combatant and other programmes. If you terminate the carrier programme or other programmes without balancing that with an equivalent programme, you will lose that capability and you cannot reconstitute it at a later date.
We also face such potential issues in the air sector where it is probable, I suspect, that the SDSR will conclude that you will come down from a fleet capability of, say, four fast jets to two fast jets. In order to keep the capabilities required to ensure that the Typhoon, for example, can be kept alive and current in terms of capability and meet operational needs, you will need to have another development programme going on. That will not be a manned jet; it will be an unmanned capability, so there needs to be an unmanned combat air vehicle programme to sustain those core capabilities. Otherwise, you will not then be able to upgrade what will be the front-line jet for the UK’s armed forces.
We are making sure, as best we can, that those issues are full and frontal in the decision process, because you cannot reconstitute that capability and you cannot take a capability holiday-I think that was the term used-and then come back to it. You are absolutely right that to leave the sector-there are enough lessons out there which show this-is both unaffordable and unachievable in terms of that factor.
Our concern is that as we head towards the SDSR-the comprehensive spending review-decisions will be made on force structure that could, although they may not be directly attributable to individual programmes, almost be made in the absence of a defence industrial strategy.
Dr Sandy Wilson: A point that I have made to this Committee previously is that the skills that might be divested of a reducing defence industry do not just sit there waiting to come back. They will be mopped up by other industries that need such skills. We are talking about high-level systems engineering skills, which are often described as hen’s teeth. It is an area in which the country generally needs to invest more. You can think of the upsurge in nuclear and alternative energy as being two areas that would mop up those people almost immediately. Then the question would be not of choice, but of them just not being there.
Q9 Bob Stewart: Forgive me if this naive, but aren’t you international companies, and haven’t you got rather large arms-for example, in the United States? So when you talk about a loss of capability, can’t you pull the capability from your international arms? For example, if you lose a capability, British Aerospace has quite a large business in the United States, and I am sure that you all have. When you say that a loss of capability will never be recovered, I ask the rather naïve question, why not?
Ian King: If this were an open marketplace, you are right. But it is not an open marketplace; there are security restrictions.
Q10 Bob Stewart: Forgive me, but you have secrets that you can’t translate across all companies-I know that.
Ian King: In the US, we operate under what is called the special security agreement. We are American in terms of technology and capability. Only if the State Department believes that that technology can be releasable to the UK-or any other country-would it be releasable.
Q11 Bob Stewart: I thought it was a naive question, but I am just asking because assuming that our greatest allies are the United States, and assuming that we didn’t have the capability and the United States was our best ally, surely there would be some kind of-
Ian King: That is quite a big political move to take.
Bob Stewart: I know. That’s why I’m asking it.
Ian King: Which is why at the time of the strategic defence and security review, we said that we need to start with the foreign and defence policy that the UK wants to undertake. What does it want its position in the world to be? What risk is it going to take about the capabilities it wants onshore? Those that it will accept may be at the vagaries of the open market or the restrictions of other countries in transferring them to the UK.
Q12 John Woodcock: First, I have a question for you, Mr King. You talked about the carrier programme. Are you being pressed to reduce the carrier programme to one or to zero? Where are you?
Ian King: The carrier programme is committed against two vessels. That’s the current contractual commitment and that’s what we’re working against. We have been asked to look at a number of options. We were recently asked over the past couple of weeks-probably in the past week or so-to look at a number of options. Contractually, the programme is for two vessels and that is what we are working on.
Q13 John Woodcock: Can you say what those options are?
Ian King: They range from having one carrier to having no carriers but with an equivalent other programme to look at the skills. There is quite a range of options so that decisions can be made.
Q14 John Woodcock: Presumably, from your starting point you will be working through this, but I am intrigued as to what kind of equivalent programme there would be to maintain that skills base.
Ian King: That’s a debate that the teams are going through.
Q15 Mr Hamilton: Before I ask a question, it sounds to me like the old phrase of putting the cart before the horse. We need to get the strategy right and determine where we want to be in the world before we start talking about cuts. The cuts will take us to a place where we might not want to be. They are doing it the wrong way round. That’s what is coming through and that’s what many of us feel. With that in mind, what direct discussions has industry had with the Treasury in relation to this proposal?
Ian King: I will pass that to my colleagues, but to the best of my knowledge we have not had any direct involvement with the Treasury.
Rear Admiral Rees Ward: I can confirm that from a trade association point of view we have had no direct contact with the Treasury.
Q16 Mr Hamilton: Do you think that you should have a direct link to the Treasury given the circumstances and that this is being led by the Treasury?
Ian King: When we started this process we were told that it was about achieving a balanced budget. We were told that it would start from, as you said, being policy-led, which would then lead to what was coined as the 2020 vision where the force structure needed to be, and then it would start to look at the funding implications of that.
Rear Admiral Rees Ward: In fact, what has happened, we hope, is that it is policy led and resource informed. I suspect that the resource informed part is a hard line in terms of the way that this is being taken forward. (end of excerpt)
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