Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 120 - 136)



  120. I think that is a very useful way of presenting it. Would I be right in saying then that in these circumstances while we strike one set of balances between the defence, the costs, the political implications, it is entirely possible that our European colleagues strike a completely different set of balances and that they are prepared to incur much greater costs to themselves in order to achieve political advantage or political gain or political progress? I ask that in the context of these paragraphs being written all in the context perhaps of a Europhile perspective. I do understand that there are Euro sceptics that exist in this country. Were you looking at the political gains from a Euro sceptic perspective, you would take a somewhat different view, would you not?
  (Mr Tebbit) Can I come in on that because the fact is that by and large European procurement expenditure is so low that I do not care what the reasons are for them to be improving it: they need to improve it by so much that there is so much to be done in order to get the military capability there that the issue of whether they are just doing it for political or industrial reasons does not arise. Long before that consideration is the first factor: there is a military gap to be made up. There are large capability gaps in the European defence posture which are now being addressed through the European Headline Goal process. Some European countries are beginning to increase their defence expenditure but essentially we all need to do more in order to meet the obligations we already have. In a way I do not mind what their original motivation might be. The more they put into defence industrial co-operation the better.

  Mr Davidson: I appreciate that. I was absent at the beginning of this meeting on matters to do with the election. We take a different perspective on some of these matters.

  Chairman: Several different perspectives.

Mr Davidson

  121. Indeed. Self-preservation is common to us all irrespective of party. While appreciating the point that there are gaps to be addressed in the European stance, the fact that there are a variety of ways of filling these gaps and one of them has political implications is clearly an issue that it seems to me is not being adequately addressed by yourselves. Would it be right to say that if we were really going to have combined European forces then common equipment provision would be essential?
  (Mr Tebbit) Since that is not the objective I think the question does not quite arise in that form. I am not trying to be evasive but you may be driving rather further down the particular direction than is the reality. For example, I would expect there to be wide European interest in the Joint Strike Fighter. It is not just the United Kingdom that is interested in that. There are a number of European countries which are also becoming partners in that project.

  122. I do not want to go down that road. I just want to be absolutely clear. You spoke about gaps in our provision. Is it not correct that with the forces and the money to be spent in Europe, if there is going to be a European force, whether it is an army or anything else, it would make much more sense to have common equipment provision? Common equipment provision is obviously a step which makes that aim much more likely or possible.
  (Mr Tebbit) This is where I just have to say what the Government's policy is. The Government's policy is that it is not going to create a European army or support the creation of a European force. It is supporting the strengthening of European capabilities that could be available essentially to NATO within the framework of the Alliance and which could also be used by the European Union to underpin ESDP, European Security and Defence Policy. You know the policy so we are not at the point—I am not going to march off with a European army.

  123. Yes, yes, yes; not in front of us anyway. I understand that. Could I ask about the gains of collaboration because it does strike me that in terms of Britain having collaborated with a European partner on Airbus, the fact that it is built in Toulouse has resulted in enormous benefits to the French aerospace industry because of the concentration of industry that then went on in a roundabout way and people were attracted in and there is really a centre of excellence now. What guarantee have we got or what awareness is there within your own organisations that we need to make sure that we are not always losing out in these circumstances? Collaboration is fine, but collaboration has to take place generally somewhere and if all the final delivery points, the assembly of the aircraft, are somewhere else, then while we might get a cheaper aircraft than might otherwise be the case we are not necessarily going to get the spin-offs that other people are getting. What steps are we taking to make sure that we are not being robbed blind?
  (Sir Robert Walmsley) That, if I may say so, is where juste retour comes from. Every country in Europe is determined to make sure they are not being robbed blind. That is why you end up with work shares being calculated to the second decimal place. If you do that the article that you are trying to procure will cost more than it should do, and that is a tax on defence. The purpose of OCCAR is to get away precisely from the precision about work shares that have bedevilled collaborative work for years. In order to recognise the reality of life, that unless there is a reasonable return to each nation in relation to their expenditure, OCCAR is trying to set up this arrangement called global balance where you take swings and roundabouts. If you do not get your share on one programme, the next time you are in a programme you so to speak arrive with a credit point. We have got to get away from the precision of juste retour that was applied to the frigate programme. It results in everything bigger than a biscuit tin being made in those percentages. It is hugely inefficient.

  124. I understand the concept of juste retour. Indeed, in Pollok they speak of little else.
  (Sir Robert Walmsley) Not when I was there.

  125. That is not quite the point I was making. It is not just a question of work sharing. It is also a question of the development of centres of excellence and so on, which is much more difficult to define, much more difficult to measure, because it is the spin-offs. I am not entirely clear from what you have just said, nor from what I read here, that we are getting our fair share of returns. It does seem to me that, like so many things European, we contribute and others do not quite play the game in the same way.
  (Sir Robert Walmsley) We are getting our share on Eurofighter of the high end technology work. You only have to visit Warton, which I very much hope some day you will have the opportunity to do, to understand that.
  (Mr Tebbit) The only other thing I would add is that if you look at what is the profitable bit of Airbus you will find that British Aerospace, with 20 per cent of the interest, is the one with by far and away the largest profitability and that does matter, especially when we have got low unemployment. It is going to the areas where they are making the best return.

  126. I would like to pick up two further points. The first is the question of multinational companies. I recognise the extent of national collaboration but, having had some discussions over a long period with Rolls Royce and seeing the pattern of risk and reward that they developed, what lessons have you learned, or are there other lessons that you believe we can still learn, from the way in which many of these multinational companies are striking the same sorts of balances that you are seeking to strike, not necessarily on juste retour, but on risk and reward which is basically the sharing of costs and so on and sharing production?
  (Sir Robert Walmsley) I think they are hugely important to collaborative procurement. What governments need to do is to keep their fingers out of the detailed workings of the companies and insist that we get a good price, and make sure that the companies are not hindered by government regulations from delivering an efficient outcome. Matra BAe Dynamics is a very interesting example of a company that is doing just that.

  127. The final point I would like to raise is on RO-RO's which was raised earlier on and the PFI and the complexities of European procurement. Then I noticed in the press recently that the six-ship order having gone to Weir who are going to build four in Flensberg and two in Harland and Wolff, lo and behold the MoD are just now buying two directly from Harland and Wolff, which seems to have torn up the whole concept of PFI. If you have that flexibility in these circumstances does that mean that much of what you are telling us about the rigidity of the rules and the rectitude of the programme on disposal is unnecessary?
  (Mr Tebbit) No, we are not saying that. Firstly, it is not a collaborative programme. I take the point that that would be a narrow and churlish way of trying to answer your question. The service is I think for 20 years and so the element of these two ships that you refer to is but a tiny fraction of the totality of the service that Weir are going to be delivering for the Ministry of Defence.

  128. So that is all right then to change these rules in an environment of procurement directly?
  (Mr Tebbit) No. I was just answering the point about undermining the PFI. It still is very much a PFI project. Ministers took a decision as to which way they would go based on their own judgments of value for money and on speed of delivery. One of the key elements in this for us was to be able to get the ship in service as fast as we possibly could. They judged that it was desirable to go down a route which funded the two ro-RO-RO-ROS that had already been, by fair and square competition, won by Harland and Wolff, rather than to go down a different route which would have caused more delay.

  129. Could I just clarify this point? I recognise your generosity, Chairman. It seems to me that a PFI was established with a complete set of structures with financing in place and all the rest of it, an assessment was made, but it then was discovered that that did not work because it was going to be delayed unless it was changed, and it was changed, and the whole deal effectively was unpicked. If I understand the ministers who took the decision, they took the subsequent decision because the first decision obviously was not working. Is that not somewhat unfair on the other bidders and does that not demonstrate that there is a rare degree of flexibility when it suits the MoD?
  (Mr Tebbit) I am not sure there is a rare degree of flexibility but ministers were satisfied that this was the right way to go in order to deliver the final outcome. I think the Chairman will understand.

Mr Williams

  130. I want to go on to the matter of exploring generally the macro background for the policy you are operating over the next four to eight years which coincides with the term of office of the US President. Most of these projects are long or very long lead projects and therefore very vulnerable to political whims in participating countries. You made the point that the US has been more helpful in recent years. How far until this helpfulness had we been obstructed in developing joint ventures and co-operative ventures with the Americans because of the US law and US policy?
  (Mr Tebbit) We have always had very major collaborative programmes with the United States but the trade as it were has been rather heavily in the United States' favour. We have certainly been able to acquire a great deal of equipment from the United States through those routes and the report sets out in some detail a lot of that. The main point is where we are going to be going in the future with the United States. As I say, the Declaration of Principles is an important milestone in providing a more balanced playing field. British companies in the United States should get exactly the same treatment as American companies get in Britain.

  131. When was that signed? I have forgotten.
  (Mr Tebbit) The Declaration of Principles was signed last year in about March at the Wehrkunde Conference in Munich. I remember being there at the time. It was one of the great moments of history of signing ceremonies. It was signed between the Defence Secretary and his US counterpart. That will help. What also will help is the way in which industry has moved. I am not sure if you were here when I was explaining earlier that 30 per cent of BAE SYSTEMS' profits last year came from US customers, bigger actually than the Ministry of Defence in the United Kingdom. The way in which trans-national movement has occurred in big defence companies is also locking us in a transatlantic two-way street much more firmly than we have in the past, and it is British companies that have been most successful in the US—Rolls Royce, BAE SYSTEMS and indeed Smiths.

  132. One of the things which concerned me and obviously would concern you is that the agreement you are referring to on which you are basing so much was signed towards the end of the Clinton administration and we now have the Bush administration which has very different emphases.
  (Mr Tebbit) We have had confirmation that they intend to continue the process with the new administration.

  133. That is what I want to explore further. Has there been any change in emphasis at all that you have seen in relation to approaches to co-operative development?
  (Mr Tebbit) I cannot answer that precisely because of course the new administration has come in and is doing a review of all its programmes. They have not yet produced a result so it would be wrong for me to say that I can be absolutely clear about how it is going to go in the future. But there has been no evidence that they intend as it were to weaken their interest in co-operation with the United Kingdom; quite the reverse. I was in Washington last week with Geoffrey Hoon when he met Don Rumsfeld and the rest of the administration and there was positive commitment to moving forward, although we have not got agreement on individual projects at this point because they are all part of the review that the US Administration is conducting.

  134. The American delegation to the NATO Parliamentary Assembly circulated a document before the election in the name of the Republican leader, in which they said that the general trade disputes that were developing between Europe and the US were actually now reaching a stage where in their view—and this document is on record—they were threatening the coherence of NATO. That seemed to be a rather overheated statement but it has been returned to on several occasions, on almost every occasion that they have had an opportunity to raise it. Do you see anything at the administration level which suggests that there are concerns to that extent?
  (Mr Tebbit) Not as extreme as that but I think you are absolutely right that we need to worry about the possibility of trade disputes between the European Union and the United States, not beginning in the defence field at all, but clearly those sorts of things can sour the atmosphere. Bananas is a real problem.

  135. Of course they are so much more vulnerable there to industrial lobbies than we are in this country. A congressman is elected for two years. On day one he wins the election; on day two he sets up his fund raising committee and he has a target that he has to achieve each week, otherwise he has got nothing to fight the next election, so they are beholden to their industrial lobbies.
  (Mr Tebbit) But I cannot remember a time when we have not had a trade dispute between the United States and the European Union and, as I say, the recent co-operation was developed during the height of the banana war, if I can call it that, and other problems. These are constant frictions in the relationship and we need to make sure that the defence collaboration survives through it.

  136. The other questions I have it is probably too early as yet to have any answers on.
  (Mr Tebbit) I cannot answer on the outcome of their review on JSF, for example.

  Chairman: In that case it remains for me to thank you gentlemen for coming again and giving evidence. It was a very interesting area which will no doubt become more important in the coming year.

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