UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 107-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

DEFENCE COMMITTEE

 

 

DEFENCE EQUIPMENT

 

 

Tuesday 16 December 2008

MR QUENTIN DAVIES MP, GENERAL SIR KEVIN O'DONOGHUE KCB CBE,

LIEUTENANT GENERAL ANDREW FIGGURES CBE and MR AMYAS MORSE

Evidence heard in Public Questions 298- 466

 

 

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Oral Evidence

Taken before the Defence Committee

on Tuesday 16 December 2008

Members present

Mr James Arbuthnot, in the Chair

Mr David Crausby

Linda Gilroy

Mr Dai Havard

Mr Adam Holloway

Mr Bernard Jenkin

Mr Brian Jenkins

Robert Key

John Smith

________________

Memorandum submitted by Ministry of Defence

 

Examination of Witnesses

Witnesses: Mr Quentin Davies MP, Under Secretary of State and Minister for Defence Equipment and Support, General Sir Kevin O'Donoghue KCB CBE, Chief of Defence Material, Lieutenant General Andrew Figgures CBE, Deputy Chief of the Defence Staff (Equipment Capability), and Mr Amyas Morse, Defence Commercial Director, Ministry of Defence, gave evidence.

Q298 Chairman: Minister, good morning. There is no need to introduce your team, unusually, because, apart from you, Minister, they have all been in front of us before. This is a delayed evidence session from last week because of the announcement that was shortly to come out, which did come out on Thursday, and so I hope that we can get some answers that we could not possibly have got last week. Could I begin, Minister, by asking about the short examination of the Equipment Programme, which we were told would be completed "within weeks rather than months" and certainly before Christmas. In view of the Written Statement that came out on Thursday, does that mean that the short examination is now complete?

Mr Davies: Well, thank you, Chairman. Can I first of all apologise for my voice. I hope that it does last the course; I trust that it will. To start off on a slightly sombre note, which I think it is right to do in the circumstances, sadly, we had another fatality yesterday in Afghanistan, bringing to 133 the total losses we have had in that theatre. I mention it both to pay tribute to the individual and to make clear to his family that we are thinking of him, and indeed them, but also because it is the sombre background to all our proceedings and to all the decisions that I take in my present job. To move to the equipment examination, as you know, I have had my present responsibilities since the beginning of October, as has the Secretary of State, and we arrived when the equipment examination had already made some progress through official channels, but I am not sure that it had actually reached the previous set of Ministers, and so it was necessary for us to take a careful look at it and decide what shape we wanted it to have. That no doubt prolonged things a little bit. I believe now that it is an examination which has achieved its purpose, and, as I see it really, there are two essential purposes to this particular exercise, and it is a very useful and indeed necessary exercise to go through. One has been to clarify in our own minds priorities and particularly to distinguish between the essential and the less than essential, what I tend to call internally (and my colleagues will be more than familiar with my use of the phrase) the "must have" and the "nice to have" categories. The second thing is to strike the right balance between the short-term, immediate operational needs that we face with the current threats that we are facing, and the longer term requirements for the broad capability for our Armed Forces that enables us to have reasonable certainty of being able to respond to a range of threats, none of which of course can be predicted at this point. We need to retain that essential element of flexibility and diversification of the means of response for the future, so we do not want to sacrifice that to the short term entirely. We have to strike a balance, which is why you notice that we are continuing with a whole range of programmes, including submarines, combat aircraft, air superiority aircraft, and so forth, which very obviously do not relate to the present needs of theatre, although we have made a number of adjustments which are particularly influenced by the immediate operational needs that we have. The FREZ programme and the rebalancing within the FREZ programme would be a good example of that. To answer your question is it completed; yes, but do understand, and I know, Chairman, that you will know this extremely well and I think members of your Committee will appreciate this immediately, there is no such thing as a definitive, final certainty in this matter. That would not be a responsible way to proceed. We can never be certain of what is going to happen in terms of the evolving threat and we can never be certain what is going to happen in terms of evolving technology, so we have to be prepared to be flexible. The sort of exercise that we have been undertaking will not be the last, and it should not be the last in my view, and we should continue to be alert and flexible and take the responsible decisions that we need to take at any one time.

Q299 Chairman: Okay, thank you very much. I was remiss at the beginning because while you, quite rightly, drew attention to the death in Afghanistan yesterday, and also brought us in mind of the previous deaths that have happened this week and over the course of the entire campaign, and you were quite right to do that, I also should have said at the beginning welcome to the Committee because this is your first appearance in front of us, and to do it so soon after you have got into office may be difficult, it may not be, I do not know, but you have come with a cast of thousands to support your appearance, so welcome to all of you. As you rightly say, this is not the final word in the equipment examination. In the statement itself it said that there would be further announcements made as a result of the planning round 2009. What sort of announcements do you expect to make? Do you expect there to be major changes in the equipment programme as a result of planning round 2009, in the spring perhaps?

Mr Davies: We made that statement to provide, as I say, for the necessary flexibility and to recognise that these matters are uncertain and we have to continue to keep them under review, not because we have in mind any specific new, dramatic announcements.

Q300 Chairman: So you do not at the moment envisage cancellations or delays to be announced in the spring? You were just announcing that to give yourselves some flexibility?

Mr Davies: We made that statement to give ourselves flexibility, and of course when I say flexibility I cannot exclude anything, but there is no hidden agenda here, I am not concealing from you some dramatic decision which we are about to come out with and which we have, for some reason, decided not to include in the equipment examination. The equipment examination is what it says it is: we are engaged in the exercise that I have just described, nothing more than that and nothing less than that.

Q301 Chairman: If industry is in search of clarity, is industry going to be able to get a bit more clarity in the spring or earlier than the spring?

Mr Davies: This is, as I say, a continuous review by us of our priorities, of what we feel we can afford immediately, what we cannot afford immediately, but we would like to have over the shorter or medium term, and what perhaps we think is no longer necessary. There is also this necessary discipline and process. Industry always wants the maximum degree of clarity and we would like to give industry as much clarity as we can, but we cannot give industry clarity at the expense of that essential flexibility and we cannot predict the unpredictable. I think industry understands that and certainly it has been my habit so far in the last two and a half months to try and keep closely in touch with industry and to be as transparent with them as possible about the issues that we face, and the decisions we need to take, and why we are taking them.

Q302 Robert Key: Minister, one of the aims of the short examination was "rebalancing the Equipment Programme to better support the frontline". The Written Ministerial Statement said "the work to date will bring the defence equipment programme more closely into balance". It would be very helpful if you could just explain a little more what you mean by this "balance" and what is "rebalancing"?

Mr Davies: As I have just explained, Mr Key, as I see it, there are two balances that need to be struck. You could look at this, if you were mathematically inclined I suppose, on the basis of a matrix and draw out a matrix, and no doubt you could produce an equation if you wanted to, but I see it really as looking at two balances and the essence of my job is contained in making sure that those balances are optimised. As I say, one is the balance of priorities, what we really must spend money on immediately, what is less essential, what is merely desirable, and of what is desirable what we should plan to purchase at some point and perhaps what we do not need altogether. There are elements of all of these things, as a matter of fact, in the equipment examination. The second is the right balance between the immediate requirements of the operations that we are engaged in and the need to maintain, as I say, the long term and to nurture and to improve steadily the long-term defence capability of the nation so that we are able to meet a range of potential threats, which, by definition since the future is uncertain, one cannot predict. What I do not want to do is put myself in the position of John Nott who decided to focus entirely on immediate Cold War threats and wanted to get rid of the carriers just a few months before the Argentinians invaded the Falklands. I do not think that he can be faulted for not predicting that the Argentinians were about to invade the Falklands; no-one could have a predicted that. I think he might be faulted because he did not sufficiently respect the principle of diversification. He was perhaps too inclined to put all his eggs in one basket. We do not want to do that and I have already explained that we are not doing that and, as you have noticed, we have not cancelled any major long-term programmes which do not have anything to do with the immediate operational requirements. There might have been some people who thought we would do that. There might have been rumours to the effect that we were going to do that. We have not done that and we would not want to do that.

Q303 Robert Key: Coming back to 2008, why did the programme become unbalanced?

Mr Davies: Simply because there are always financial pressures and, as we know, it is inevitable in life I suppose when you are operating at the frontiers of technology that you cannot predict exactly what the cost is going to be of resolving certain technical problems, so you do have the problem of cost overruns because when you are involved in an operational theatre, as you know just as well as anybody in this room Mr Key, it is impossible to predict the evolution of any particular threat. Every armed conflict that we get into - and that has been the case throughout history and always will be the case throughout history - presents its own sui generis kinds of characteristics and particular requirements that we need to meet it, and those requirements evolve, and we analyse the threat better the longer we are involved in it. New requirements emerge, so what you start off with, which you think is a clear document of our defence capability and requirements and you start to put some prices against those, some cost estimates and so forth, you find, even after a few months, that you want to look at it again and you want to see again whether you have got the right order of priorities. You may well find that the cost estimates add up to something rather more than you have in your current budget, so you have to make some decisions, you have to make some arbitrages. That is how the process works and I cannot see any way that the process would work differently from that.

Q304 Robert Key: That is a very interesting answer. What is the process within the Ministry of Defence for ensuring that the programme remains in balance because, presumably, nobody wants to go off in a particular direction and then come to a shuddering halt and have another inquiry into why it has become unbalanced? What is the mechanism for keeping it in balance?

Mr Davies: There are several mechanisms. One is we have a commitment control regime at the present time to try and make sure that nobody signs off a cheque or signs a contract which has the effect potentially of threatening something which might have a higher priority in the programme later that year. We have introduced this new discipline and I think that is a sensible tool to have in any organisation. I come from a private sector background, as you know, and that would be a normal circumstance in any private sector organisation. Then we have had this year, a kind of exceptional thing, the equipment examination, but I am not sure that it should be necessarily an exceptional thing. Though I do not think it needs to be something which is quite so dramatic, or apparently so dramatic and so explicit as what we have had this year, I intend to do something of that kind every year. I think it is sensible to do it internally. I have set up myself a new committee and all the officials and Generals who are on this table with me this morning are part of that, and one or two other people as well, including the Chief of the Defence Staff, which is specifically looking at longer term priorities, so that we are trying a little bit ahead of time now to see how our priorities might be evolving and what kind of new requirements we might be faced with. I did not need to introduce my team because you know them well and you know that General Figgures is in charge of anticipating capability requirements. We are trying to take that into account and look at some of the financial consequences of that a little bit earlier in the system than previously we were.

Q305 Robert Key: That will come as welcome news to the private sector who, in the shape of the Defence Industries Council, complained to us that they believed the Ministry of Defence was focusing too much on the short team. I hope very much that you will be telling the Chairman of the Defence Industries Council all about your new committee and what it is going to do.

Mr Davies: We do keep in touch with the Defence Industries Council and the Chairman comes to see me from time to time, and I see him on various occasions, as you can imagine, and although I have only been doing this job for two and a half months, I feel that I have got really quite a good working relationship with him. He is an extremely experienced businessman, as you know, and always a very interesting person to talk to.

Q306 Chairman: The answer to Robert Key was really yes.

Mr Davies: The answer indeed, with your flair for succinctness, Chairman, was yes.

Q307 Mr Jenkins: Minister, you actually mentioned a mathematical matrix. Does your Department have one and is it possible that we could get a copy because I have been trying for years to get my hands on a copy of this matrix?

Mr Davies: I did not know that it was a concept that anybody else had actually thought of. It was a throwaway line. When you have two balances, you can clearly produce a matrix if you want to. I have not actually produced one and no one else has produced one, and I do not see any reason unnecessarily to mathematise the decision-making process in the way that you have picked up. What I said was really a rather light-hearted kind of remark, not to be taken too seriously, but certainly you could produce a matrix if you wanted to. It would not be a very complicated matrix because, as a matter of fact, it has only got four variables in it.

Chairman: Moving on to the aircraft carriers, Vice-Chairman David Crausby.

Q308 Mr Crausby: In early July the MoD announced that the contracts would be placed for the new carriers, and we assume that the MoD only makes announcements of that kind when everything is in place and all the ducks are in a row effectively, and yet last week, in your Ministerial Statement, only five months later, you announce that the in-service date for the new carriers is likely to be delayed by one to two years. What has changed so dramatically in five months? Exactly when are the two carriers now expected to enter service? Can you tell us something about the lives of the current aircraft carriers and will they be extended, effectively, to fill any potential capability gaps?

Mr Davies: Mr Crausby, there are two questions there and they are very reasonable and very sensible questions. Can I just say first of all that I have been doing this job for two and a half months, as I have just said, and I have not wanted to spend too much of my time getting involved in historical research, so exactly what was in the mind of who, at what particular time in relation to the ordering of the carriers over the last few years is not something that I have actually investigated. There was a time of course when the JSF would have had a potential in-service date, not a formal in-service date because we have not been to main gate on it, and would have had an expected entry into service rather earlier than is currently the case. I pay very great tribute, by the way, to our predecessors and to Des Browne, who signed that particular contract, for wanting to make progress with it at the earliest possible opportunity, and it is enormously important that he did so because these are tremendously important defence assets for the nation and will be for a long team in the future. However, for whatever reason, the particular dates involved in the contract which was signed last July were ones which, when I looked at them, I realised could actually be extended with no loss to the defence capability of the nation at all. If you like, it was a kind of free hit. We find ourselves under a certain amount of financial pressure. The last thing I wanted to do was to delay programmes which are really essential in the short term, either for operational reasons or for other reasons, but this was an opportunity in fact to re-profile our spending plans in a way which involved no defence costs, but simply made the delivery date of the carriers rather more rational, and reduced the gap between both the launching and the in-service date of the carriers and the arrival of the JSF aircraft to fly on them, so that is the decision we took. As you rightly say, what we are doing now is extending it by roughly one year. We have not come up with a formal in-service date yet but we will no doubt be doing that fairly shortly. We have said that we are delaying the first carrier, the Queen Elizabeth, by about one year, so instead of an in-service date of 2014, it will be 2015 and, without me stating what the formal in-service date is, if I add one to 14 I have come up with an unambiguous answer that no-one will contest. Equally, the second carrier, the Prince of Wales, would be extended again by approximately two years, that would have been from roughly 2016 to 2018. The second question you ask is what does that mean for the existing three carriers. The Invincible is already at some notice in fact; Ark Royal will probably be withdrawn from service before too long, in the course of the next few years, and we will need to have Illustrious certainly remain in-service until it is quite clear that the Queen Elizabeth has passed her sea trials and that her aircraft complement, whether they are still Harriers or JSFs at that stage, are fully worked up and operational. The object of investing in two carriers - let me be clear about this - is to make absolutely certain that the country at any one time can launch one of them with a proper force of aircraft on her, so that is the important thing, and that we will always achieve. We are looking again at the issue as to whether or not it is sensible to extend Illustrious's in-service period and, if so, whether that would involve cost of any kind or whether it would not, Illustrious's to provide a slightly greater degree of overlap. I am quite confident that things can be done and the central principle will be preserved and conserved and respected: that the country will always have at least one carrier with a full complement of aircraft which can be deployed in defence of the nation.

Q309 Mr Crausby: Is it still the intention to operate Harrier GR9s from the aircraft until JSF is ready to operate because we still do not know when the Joint Strike Fighter will enter service, do we? Could that mean that there will be further delays to the carriers on the basis of when the Joint Strike Fighter is ready?

Mr Davies: I can give you an unambiguous yes to the first of your questions. It is exactly the intention to carry on with the Harriers until they are replaced by the JSFs. The second point you have raised, will there be further delays to the JSF, you will understand, Mr Crausby, it would not be responsible for me to come here and to give you a personal guarantee that there cannot be any delays to the JSF programme. You would think that I was slightly crazy if I said such a thing. I can tell you that the recent news on that front is encouraging. As you know, basically it is an American programme, and we are an important part of it, in fact we are the most important ally in terms of our commitment to that programme, and we have come up with, as you know, a $2 billion contribution to the development costs of that and we are very close to it. The Americans keep us in close touch and the recent news about the development programme has been encouraging. This is a new fifth-generation aircraft. Of course it is perfectly possible - I had better touch wood with both hands - that something unforeseen could arise, so I cannot give you the kind of personal guarantee that you require.

Q310 Mr Crausby: Will that affect the carriers in any way?

Mr Davies: No of course not because that would mean that we would have to take measures of various kinds to make sure that we extended the life of the Harrier. Anything is theoretical possible in this life, but I really do not think that anybody involved in this programme expects there to be really serious delays of the kind that you might be suggesting which would mean that we would have a real lacuna in our defence capability in this area. The schedule forward for the JSF is that early next year (I trust) I shall be asked to take a decision on the purchase of three operational testing and evaluation aircraft. Of course since I have to take a decision, I have to take the decision on advice in the light of the circumstances at the time. I cannot give you some formal promise that I am going to take a positive decision. You can perhaps draw your own conclusions from what I am saying about our commitment to the programme as a whole. If I sign that contract, we shall then find that a couple of years further down the line we get those aircraft. We will need to test them to exhaustion. We will need to make sure that we are absolutely happy with them. Of course our American allies are doing the same thing, with rather more testing and evaluation aircraft. We will then be able to start placing orders for the production aircraft ---

Q311 Chairman: Minister, can I ask for briefer replies please. I think you have already answered the question.

Mr Davies: The answer to Mr Crausby's first question is unambiguously yes. The answer to the second question, which is do I anticipate some delay and some problem in the JSF programme, is no, in the sense that there is nothing specific that I am particularly worried about at the moment, but I have said already, and I must make that proviso or that reservation, I cannot guarantee the future and I cannot give a personal guarantee that nothing untoward will ever occur; that would be absurd.

Q312 Robert Key: Minister, that is encouraging news but when CDM was last asked how many JSFs there would be, he said it depended how much they cost. Are we building these two aircraft carriers on the basis that we might or might not be able to afford ten, 20, 30 or 40 JSFs? What is the answer to this? How many JSFs do you anticipate will be ordered if you decide to go ahead and order them?

Mr Davies: This is going to be difficult for me to answer in two words.

Q313 Chairman: Something like 53 would be in order.

Mr Davies: Can I say that I start from the other end. First of all, we have to decide what we want these carriers for. We want these carriers to carry as much punch as possible. Therefore, I ask myself how many force elements at readiness we need on this carrier. Let us say we need 36 force elements at readiness on this carrier. We then have to decide how many aircraft we need in our fleet in order to generate 36 force elements at readiness. I cannot give you today an exact answer to that. It depends upon the serviceability of the aircraft; it depends on the operability of the aircraft; it depends on how much flying time we have; how often we have to service these aircraft. We do not know that. That is part of the purpose, by the way, of buying these operational testing and evaluation aircraft. We shall then know rather better. I cannot tell you whether we need to provide for attrition or at what stage. If the production line remains open until 2030 we shall not need to buy any aircraft to provide for potential attrition. If the Americans are about to close the production line, we shall jolly well have to buy rapidly a lot of spares and some aircraft to provide for attrition. I cannot answer your question. In a way, your question, to my mind, comes from the wrong direction. We have said that we do not expect to buy more than 150 aircraft in all and I think that remains a reasonable best guess kind of description of the position for the moment, which is a very early moment in the programme. I do not know how many words that was, Chairman, probably rather more than your limit!

Chairman: Lots!

Q314 Mr Crausby: You said the decision would be at no cost and it was an easy decision in that sense.

Mr Davies: I said no defence costs, Mr Crausby, no costs in terms of our defence capability, that is the point I made.

Q315 Mr Crausby: What about the financial cost then? Has industry been consulted on that? Have they provided an estimate as to what the extra cost would be by delaying the carriers? How much will it cost, if anything, to extend the lives of the current carriers?

Mr Davies: The answer to your first question is they have provided an estimate and we have discussed these matters, but these are purely internal estimates. That is why I am not going to give them to you today because such estimates are not robust. If you publish them in public, they develop an importance which one should not attribute to them, and then you have to revise them after a few weeks or a few months and everybody accuses you of changing your mind or getting your calculations wrong.

Q316 Chairman: As you have actually done with the contract for the carrier itself?

Mr Davies: In the case of the contract for the carrier itself, Chairman, clearly there was a contract, but when you sign a contract, there is a defining moment. What we are talking about now is a series of discussions with the alliance which is producing the carriers, and we have discussed figures along these lines, yes. They are commercially sensitive, by the way, and they might even be market sensitive in certain cases, so I certainly cannot say what they are. In terms of any cost of continuing slightly longer with Illustrious, the point I made earlier on, that is not a matter which we have focused on yet and not a matter I think we need to focus on at this particular juncture.

Q317 Mr Crausby: So it will need a new contract. Is that resolved?

Mr Davies: No, we do not need a new contract because the existing contract provide for a sufficient degree of flexibility, but we will be signing protocols with the ship builder, with the alliance, to implement in practice what we have negotiated with them in terms of a new schedule for delivery times.

Q318 Mr Crausby: Can I ask some questions then about how the delay will be managed by industry, because all you have really said is that the in-service date will be extended. How will that happen? Will it be that the programme will be slowed down or will the carriers be completed and then held up? Has that been considered?

Mr Davies: No, there is no question of completing the work on the existing schedule, and then just stopping everything and downing tools and everybody going away for six months' holiday; nothing of that sort, no. I do not think one can do visual aids on an occasion like this but if you could imagine a kind of graph, with pound signs on the vertical axis and a time series on the horizontal axis, you would find that the fixed costs of ship-building activity, which in this case is in carriers, would be pretty much fixed right across the bottom. There would be design costs right at the beginning of the contractual phase, which would fall away fairly sharply. There would be materials, which would rise gradually and reach a peak, and there would be labour which would reach a considerable peak and fall away. If you contract the process, in other words if you have a shorter time to delivery, those peaks, particularly the labour peak, are quite high. If you extend the period of delivery, then that peak, in terms of labour cost, which is mostly met by overtime and by contract labour or by short-term hirings, it is not the permanent staff or the permanent employees of the shipyards concerned, can be flattened somewhat. If you can visualise flattening that peak, that does not in any way cause any structural unemployment.

Q319 Mr Crausby: So we can be assured that there will be no job losses?

Mr Davies: That has been my concern all along, Mr Crausby, and that has been a fundamental element in our discussions with the alliance, and I am satisfied that we shall achieve it on that basis, yes.

Q320 Mr Crausby: And what about the loss of specialist skills, are we assured ---

Mr Davies: There will not be any loss of specialist skills because, as I have explained, all we will be doing is flattening that peak, which would be met partially by overtime and much more by contract labour or by short term-labour. That is not the sort of labour which carries the specialist skills. I can repeat to you what we are trying to do is to produce a solution which makes sense in financial terms. It has no defence costs to the nation. We are not losing any defence capability. That is very important, and I have already made that point, and it also does not have industrial and employment costs.

Q321 Mr Jenkins: Minister, when you talk about peaks and costs, etc., you and we are quite aware that it is not the peak, it is the area under the curve that gives us the total cost. We are saying at the present time that the area under the curve is growing and the cost is going to grow; so that is the reason we are asking you these questions. Not the exact number of pounds but the fact it is going to grow means that somewhere along the line something else is going to be displaced. That is why we ask the questions.

Mr Davies: I do not know whether that was a question or a comment, Chairman.

Q322 Mr Jenkins: It was a comment, just to let you know that we are aware exactly what the curves represent.

Mr Davies: All I can say, Mr Jenkins, is that it is quite sensible, it seems to me, to make sure that we schedule our expenditures in such a way that we are able to meet our in-year financial restrictions, and if we can do that, as I say, without damaging our defence capability, then that is something which responsibly we should do.

Q323 Mr Holloway: Some of this feels a bit like an MBA master class! In that vein, have exchange rates made any sort of difference to the maths of your major projects?

Mr Davies: Exchange rates are a problem in certain areas of defence certainly, not just in defence equipment and support. In the case of the carrier ---

Q324 Mr Holloway: I do not mean the carrier, I am broadening it.

Mr Davies: I am going to ask General Sir Kevin to come in on this because he of course is managing the Defence Equipment and Support Organisation and sees the impact of these changes in exchange rates the whole time. There are some projects where clearly we have a contract which is nominated or partially nominated or is exposed to dollars or euros, so inevitably we find ourselves in a situation in which we are not immune to exchange rate fluctuations. Indeed, that is one of the aspects of the defence budget, taking the whole budget, the operational as well as the equipment and support budget, which often makes it quite difficult to predict even a few months ahead exactly what our financial position is going to be. Kevin, would you like to say a few words about that?

General Sir Kevin O'Donoghue: That is absolutely right. We try to place contract where we can in sterling and then the contractor/industry bears the exchange rate challenge. Some of them are in euros and some of them are in dollars. You may have seen the second quarter report from the Ministry of Defence for this year. There is a potential cost overrun/cost increase in projects and that is virtually all the exchange rate in this current year.

Q325 Mr Holloway: What sort of figure is that?

General Sir Kevin O'Donoghue: I think it is about 60 million.

Q326 John Smith: Minister, can we now conclude emphatically from your reply on the announcement on the carriers, five months after the original decision on the contracts in July, that the principles of smart procurement under the Strategic Defence Review have been abandoned, because the whole point of the new approach to procurement was that we would front-load investment and we would put much more effort into planning before contracts were announced, precisely for the reason that there would not be changes in terms of cost and in-service dates. You said that because you have come on board with your new team and you are not sure what your predecessor said that you have had another look at this contract. Have you announced a new approach to the procurement process?

Mr Davies: No, not at all, and I think there may be some confusion, Mr Smith, because, as you rightly said, one of the aspects of smart procurement was to spend rather more money on taking the technical risk out of particular projects earlier on during the assessment phase, so one might spend more on assessment and more on design rather than having a nasty shock later on when you had accepted specifications and you had given a contract to a manufacturer or to a lead prime contractor, and then suddenly you ran into technical problems. That remains the position; that remains the philosophy. Exactly how you strike that particular balance is an interesting case in each individual instance, but we are very alive to that kind of trade-off, and we remain committed to the principles that you have just enunciated in the smart acquisition philosophy. There was no element of that in the carriers decision at all. We have not run into technical problems. It is not because we did not spend enough money designing the carriers. We actually produced a very robust design of the carriers. Thales did a brilliant job, I think, and came up with something which, as you know, the French Government also bought because they thought the design was so good. It is nothing whatever to do with that. We have not found that there were any inadequacies at all - is that right, General?

General Sir Kevin O'Donoghue: That is right.

Mr Davies: --- In the design which we carried out. We spent a lot of money at the front end exactly in line with smart procurement, so we explicitly followed the principles that you have just very lucidly set out and reminded us of. It was a quite different issue, the issue that I have described already, where I looked at the whole financial profiling to see whether that was really rational in terms of the optimum expenditure of our defence budget this year and the coming two financial years, and that is the basis on which I decided that we should re-profile those expenditures. It was nothing to do with technical problems at all.

Q327 Chairman: Minister, a final question on carriers. You are talking in terms of re-profiling the money. If you look at it from the point of view of industry, they need to work out how to keep teams together. As I understand it, there were two phases: the design phase and the production phase. Is there going to be now, as a result of last week's announcement, any gap between those two phases and how, if there is, are they going to keep those teams together? If there is not, are those teams stretched out going to be viable?

Mr Davies: Let me try and observe your strictures, Chairman. The answer to your first question is no and therefore the second and third questions do not arise.

Q328 Chairman: Will those teams be viable if they are stretched out in the way that you have explained?

Mr Davies: Indeed they will, and I think I have already explained in my description of the graph that I have tried to project verbally that the core skills will continue to be fully employed. This whole issue has been the subject of detailed discussions between ourselves and the companies concerned.

Q329 Chairman: Okay. I want to move on to FREZ, but I want to do so in the light of your interesting observation that because you have only come on board in the last two months, there is no responsibility for what has gone before. You are answering for the Ministry of Defence here. I wonder whether you could tell us what the initials FREZ stand for?

Mr Davies: Yes, Future Rapid Effect System. I am sorry that it sounds rather complicated. It might be easier to say "new generation of armoured vehicles", but sometimes we have strange names in the defence business.

Q330 Chairman: In view of the decisions of last week, do you think that is an appropriate name still?

Mr Davies: I have inherited these terms, Chairman. I have had a number of things to focus on in the last two and a half months and so I have not regarded it as one of my personal priorities to go round renaming things; it might cause more confusion. I do sympathise with you in the difficulty, which I am sure is not unique to yourself, in understanding why we sometimes have these slightly complicated names.

Q331 Chairman: Can I read a sentence from our report on FREZ which came out nearly two years ago: "This is a sorry story of indecision, constantly changing requirements and delay." That is something clearly with which your fellow minister, the Minister for Veterans, agrees because he was member of the Committee that produced that sentence. Do you agree with it?

Mr Davies: Chairman, I never accept or reject statements which I cannot read in context. I think I should need a little notice in order to be able to read the context in which you say this in order to be able to accept the particular language which you have quoted.

Q332 Chairman: Well, in those last two years things have not got better for FREZ, have they?

Mr Davies: Let me try, as I am trying to do throughout this session, Chairman, and be as helpful to you as I can on that. FREZ was conceived back in the 1990s as - and let me use this perhaps rather more understandable language - a future family of new armoured vehicles. It is family because the idea was that there should be maximum elements of commonalty in the actual vehicles, and that would lead to savings, to financial or economic synergies but also to training synergies, so that someone who had been trained on one vehicle could get into the cockpit of another with minimal additional training and feel happy in operating the systems.

Q333 Chairman: Okay, you have abandoned that maxim of elements of commonalty, have you not, because of the procurement process that has been going on for the last two years?

Mr Davies: Perhaps I could explain what has happened. We had a family of vehicles; we still have a family of vehicles. Initially, we thought that the FREZ utility vehicle was probably the priority, and we proceeded on that basis to first of all go out to tender for design contracts and then to negotiate and to award the preferred bidder, or provisional preferred bidder status as it turned out to be.

Q334 Chairman: Can we come on to that, please. How has that worked exactly? In November last year you down-selected from three to three.

Mr Davies: Three to one, yes. Oh, in May this year ---

Q335 Chairman: No, in November last year you invited three different potential bidders ---

Mr Davies: Precisely.

Q336 Chairman: --- to produce their binding undertakings, I think. You knew that one of them, which was General Dynamics, was non-compliant in terms of intellectual property; is that right?

Mr Davies: Not entirely right. General Dynamics always made clear that they had a different concept than we did as to the role they wanted to play. We made clear that their concept was not ours and their concept was not the basis on which we were going to let the contract. They decided however to bid, making it quite clear that they had a different concept. The basic different concept, as you say, related to the fact that they wished to continue to have the intellectual property and they wished to be responsible, if they got the design contract, for the development and manufacturing, or at least to have a share in that. That is a perfectly understandable business approach and we had complete respect for it. They nevertheless decided to go on bidding when we had not accepted that approach.

Q337 Chairman: So you accepted in November that they were bidding on that basis?

Mr Davies: Yes, that is right. We thought if they get the preferred bidder status maybe they will come round to agreeing to work on the principles of the contract.

Q338 Chairman: What on earth was the basis for thinking that?

Mr Davies: We left it open to them, it was up to them to choose.

Q339 Chairman: But you chose them when you knew that they were not prepared to give up the intellectual property.

Mr Davies: Not at all, we did not, Chairman. What we did was we gave them provisional preferred bidder status, and we made it clear to them that we were making it provisional because confirmation of their status was entirely contingent on our agreeing on commercial terms that would be acceptable to us.

Q340 Chairman: So what were the negotiations that happened between November and May?

Mr Davies: I do not know that there were negotiations between November and May. What happened was the bids came in between November and May and bids were being prepared, and we selected the General Dynamics bid, but we said, "We cannot give you preferred bidder status because we have not agreed on the commercial framework within which we are going to operate with you, so we cannot make you the preferred bidder, we will make you the provisional preferred bidder, and we will see now whether we can agree on a commercial basis for going forward business which is acceptable to both of us." We failed to do that. There were a number of discussions going through the summer with them. I will ask Mr Morse, who was involved in these discussions, to say a few words in a few moments about it to fill in what I am saying, but on the basic principle we were absolutely straight with them and transparent throughout - and they would not for a moment, I am sure, deny that - and they were absolutely straight and transparent with us throughout. I am glad to have the opportunity to confirm that in case there is any doubt in anybody's mind. It is perfectly reasonable for one of two adult parties to say, "We would like to work with you on this basis," and the other party to say, "Well, would like to work on a different basis." You proceed to go through the technical design and so forth and discuss other matters, but leaving aside for a moment the commercial framework within which a contract would ultimately need to be signed. That is the principle. We then spent several months after May seeing if we could reconcile our concept, our perception of how we wanted to go forward with General Dynamics. I can explain to you why we took the line we did if you want me to go into that.

Q341 Chairman: What I would really like to know is why, knowing that they had this issue over intellectual property in November, they were chosen as the provisional preferred bidder in May without that issue having previously been cleared up?

Mr Davies: I think it is very sensible, Chairman. It is perfectly possible, we could have said ---

Q342 Chairman: You think the decision in May was sensible?

Mr Davies: Yes, I do think so.

Q343 Chairman: Even though you have abandoned it now?

Mr Davies: Absolutely, Chairman. It is perfectly theoretically possible for us to have said at the beginning, "Sorry, unless you now sign up irrevocably and say you accept our commercial framework, we will not entertain your bid. We will not look at anything you send us. We will not even consider your design." One could have said that but I cannot for the life of me see why it would have been in the interests of British defence procurement to have taken that line.

Q344 Chairman: Because you have taken it now.

Mr Davies: No, no, no, on the contrary, we have simply said, "Your perception of the commercial arrangements are not the same as ours. By all means, if you want to, go on bidding and then we will resolve the matter later on, but if you do not want to bid now because you know where we stand on these matters, that is your choice as well." They chose freely to go ahead and bid. We respected that decision. We looked at their bid. It was accepted conditional on subsequent agreement on commercial terms. Having postponed the commercial discussions, because that is the way the company wanted to play it (and we saw no reason why we should not play it that way, and everybody was being completely honest and transparent with everybody else) we then tried, in good faith, to see if we could reach agreement with them commercially in the course of the summer, and we failed to do that. Both sides, with no ill-will, in total transparency and with good faith decided then that we did not have a basis on which we could proceed commercially. That is the position we found ourselves in last month.

Q345 Chairman: No ill-will? Are you paying General Dynamics any amount of money to keep their teams together?

Mr Davies: Going forward we have not made any commitments at all, Chairman. We are considering how to proceed with the utility vehicle now. We could not do the deal with General Dynamics, and I think we were right not to do the deal with General Dynamics, on General Dynamics' terms. We have to be quite robust about this in defence procurement. We have to be quite careful about how we deal with people. We have to make sure that we get the full benefits of competition or, if we cannot get competition, we have sufficient cost discipline in the system to protect our interests or protect the interests of the taxpayer, and General Dynamics understand that.

Q346 Chairman: Are you considering paying General Dynamics an amount of money to keep their team together?

Mr Davies: We are considering going forward on a number of possible bases. We are committed to this project. We are committed to providing the British Army with a utility vehicle. It will not come forward in the timescale which it was originally intended to do, that is perfectly true, but we are not abandoning this project. At the moment, in the light of the failure to reach agreement with General Dynamics, we are considering a whole range of possible ways forward. We have reached no conclusions. I am concealing nothing from you at all. It will take a little bit of time for us ourselves to decide how to go forward and to prepare our positions for discussions with eventual contenders for the design and manufacture of the vehicle.

Q347 Chairman: Do you think money rather than work would keep a General Dynamics team together?

Mr Davies: Chairman, I have not had these discussions with General Dynamics. It is premature to ask me questions like that. I do not know how we are going forward. I do not know who we will be discussing this matter with going forward, but we have said to General Dynamics, and I can repeat it now to you for the benefit of the Committee if you like, that if we go forward with this project as we are intending to do, we would welcome bids from General Dynamics on whatever basis we feel we can invite such bids in the future. We have not taken any decision as to such a basis and I cannot predict what that basis would therefore be. Obviously you are very interested in the details of this - and I quite understand that, it is a very important project - and, if I might, I would ask Mr Morse to add anything that he thinks is relevant so as to give you as complete a picture of this matter as we can.

Q348 Chairman: Mr Morse, is this the most disastrously managed programme of Ministry of Defence history?

Mr Morse: I am not in a position to make that relative judgment, Chairman, and you would not really expect me to, I am quite sure.

Q349 Chairman: So that is not a no?

Mr Morse: No, it is a statement that I cannot answer the question.

Q350 Mr Havard: It will be a Christmas number one!

Mr Morse: If you would like me to comment on the discussions with General Dynamics, I am willing to do that, of course. I was involved (not on my own) in having discussions over the last months with General Dynamics.

Q351 Chairman: When did you begin? When did you become involved in it?

Mr Morse: I personally became involved in those discussions in October, I think it is probably true to say. There had been previous continuous engagement with them by our teams, but I became involved with another senior official in October. We met and we had very frank discussions on both sides. I think both sides tried to explore ways of being flexible and seeing if it was possible to make this thing work to our mutual satisfaction. As it turned out, the group had a very clear view of their business philosophy. Did they have such a clear view or was it clear to us just what that view was at the beginning? Perhaps not.

Q352 Chairman: Why was that not clear because had they not been making it clear for several years?

Mr Morse: I think it was really a question of how absolute that position was.

Q353 Chairman: In other words, you thought that you could tell them to do something that they had been telling you they would not do?

Mr Morse: No, I do not think that is a fair characterisation of it; I really do not. I think we had had much more engagement than that, but when it came to the final decision, they took a particular line.

Q354 Chairman: That was the line that they told you they would take in November.

Mr Morse: No, that would be very much overstating it. They indicated a reservation at the beginning. We had good reason from our earlier discussions to believe that it might be possible to develop a solution to our mutual satisfaction. As it turned out, that did not happen, but it was not because we had not thought about it or had not tried to make sure the discussions had a good chance of success; actually we thought they did.

Q355 Chairman: Why?

Mr Morse: And, by the way, I think they thought they had a good chance of success as well. I am not talking around the point at all, Chairman. What I am describing is we had a commercial negotiation with them and we entered into it in a belief that there was some common ground that we could establish. That was not an unreasonable expectation, to be quite frank. I am not going to go into every single commercial detail. I do not think that is appropriate because we are hoping, as the Minister has said, to do business with them in future, but it turned out that, although every effort was made to work out something between us, that was not possible. Sometimes that happens in negotiations.

Mr Davies: Chairman, perhaps I can just summarise this by saying that I am quite confident (although of course I only came on the scene relatively late in the day) that there is nothing whatever in the story to the remotest discredit of either party involved. Both parties had different concepts of what they were prepared to do in terms of establishing a commercial relationship. Maybe both parties thought that the other party might change his mind; that is natural, you cannot exclude that. That actually did not happen and we both recognised that our positions at the end of the day were not reconcilable. As Amyas Morse has just said, we both hope that in future we will be able to do business in different contexts, and if there is some sort of new competition, some opportunity to get involved in the UV, as I trust there will be, we certainly hope that General Dynamics will want to be a candidate for that. I have discussed the matter with Mr Wilson, the Chief Executive of General Dynamics and with Lord Levene, the Chairman of General Dynamics, and I am quite confident that they share my perception of that and they would endorse what I have just said. There is no skin off anybody's nose in this particular context. That is life, that is business. People have different perceptions of how they want to resolve a particular business problem; they cannot resolve it and so they decide to walk away from that particular deal on that particular day.

Q356 Mr Jenkin: Meanwhile, British Aerospace have announced that they are reviewing the existence of their land systems unit, so there is the prospect that we will actually lose the capability of building armoured vehicles in the UK altogether. Does that matter?

Mr Davies: Mr Jenkin, I think you have got to make quite clear what is being suggested and what is not being suggested. What we set some store by is having prime contractors in this country available to us with the design authority for their particular products. We are not concerned really with whether they sub-contract or sub-manufacture particular elements of their armoured vehicles in South Africa, or Sweden, or somewhere else; that is perfectly acceptable to us. We do not take a simple-minded, protectionist approach to that. What we need to have is a relationship with the prime, a relationship with the design authority. We need to have someone who can take responsibility not only for producing the vehicles we want, but for upgrading them, for maintaining them, for subsequent technology insertion, and that we and they (they being directly dependent on us in a contractual relationship) are masters of the relevant technology. That is what we require and that is what I believe we will continue to have going forward.

Mr Jenkin: I think that was a "no, it does not matter".

Q357 Mr Havard: FREZ was going to be a family of vehicles. You talk about the utility vehicle, and that is what you have just been talking about. I need to try and get a picture of what vehicles are going to be available. We have Mastiff, Bulldog and Jackal, we have all these other vehicles being bought, so we are acquiring a family. That is not a family that is necessarily coherent in the sense of spares and all the other things, but nevertheless a collection of vehicles, and within that is Warrior. A lot of these new vehicles are going to replace these things. You talk about the utility vehicle and you were also talking about the specialist vehicles. Apparently they are going terribly well. What is in the specialist vehicles? Is there an engineering variant? Where has that gone? You are talking about the scout vehicles certainly. Where is the direct fire vehicle? Where does Challenger fit in with FREZ? Where is the system of systems? Essentially, a family is a collection of disparate individuals; it is not a system; and it is not a strategic view, in my opinion, so where has the strategy for mobile armour gone in terms of how you are contracting for FREZ?

Mr Davies: Mr Havard, there obviously is some confusion here because I did not suggest, and would not suggest, that all the armed vehicles you have listed - and you have listed about half the armoured vehicles in the British Army - are all part of a particular family in the way in which I defined it. That of course is not the case. It might be an idealised version of something which you might dream of but that is never likely to be the case. After all, Challenger 2 derives from the 1970s; the Warrior derives from the 1980s. It is still a very, very fine vehicle and we are upgrading it, by the way, that is one of our current priority programmes that we are bringing forward.

Q358 Mr Havard: I am aware of that.

Mr Davies: Some of the other vehicles that you have mentioned have been procured with modifications but procured off-the-shelf, very rapidly, because they are best adapted to the ---

Q359 Mr Havard: I am aware of that as well, but my point is how does this make a coherent, strategic approach to all of the other procurement activities that you have in relation to providing armoured vehicles on the ground, maintained in a consistent fashion?

Mr Davies: Right, well, the coherence lies in having the widest possible suite of weapons for commanders in the field to choose from. You have just yourself given a whole list of vehicles, some of which may be five tonne, some of which, if you go up to Challenger 2, for example, go up to 70 or 80 tonnes, and for Warrior perhaps half of that figure, so you have got a very, very wide range of vehicles which commanders can draw on, taking into account the particular circumstances in which they need their operational capability.

Q360 Mr Havard: I am aware of all of that but that brings with it a logistics burden as well, does it not, because you have got to supply a lot of parts and different people and different training and different ways of operating. Where has that gone because I thought this was going to be a system of systems that integrated with network-enabled capability? The strategic view seems to have gone in the bin because of expediency.

Mr Davies: If expediency means rapid reaction to immediate, pragmatic requirements, then expediency is a good and necessary thing and something which I regard as a virtue in this matter. If you like to use the word expediency in the way that I have defined it, we have expediently and pragmatically, and I think very sensibly and effectively, procured off-the-shelf and very rapidly precisely the vehicles ---

Q361 Mr Havard: I am not contesting the fact that we have got operational requirements and we bought these vehicles; that is not my point. You are setting out your view of what the strategy should be and what the procurement policy is going forward for enabling people in the Army to have these types of vehicles.

Mr Davies: Yes.

Q362 Mr Havard: It seems to me that for whatever reason you have not got a plan to actually get back on track with that because all the time all I hear is we are going to patch up what we have got, we are going to buy more operational requirement vehicles and so on; if that is the case then let us do that in a consistent way and let us forget about building a utility vehicle, let us buy somebody else's and let us amend them then, because that is what you are doing day to day.

Mr Davies: Mr Havard, I hope that you are not suggesting, because obviously I would not go along with you if you were suggesting, that when we have an urgent operational requirement in theatre instead of buying the capability which we need ---

Q363 Mr Havard: No, that is not what I am saying at all. You are avoiding the question.

Mr Davies: - as urgently and as rapidly as possible we should go back ---

Q364 Mr Havard: There is no coherent plan it seems to me and I have not heard you come out with one yet. You tell me that the specialist vehicles thing is going swimmingly well, I have absolutely no idea what that means because I was told something similar about the utility vehicle in the very recent past. Is there going to be an engineering variant, when is the Scout vehicle coming along, how is it going to work and when is it going to work?

Mr Davies: Mr Havard, so far I have not been able to finish a single sentence, but if you ---

Q365 Mr Havard: You make them so long you see and you divert first of all - I do not want completeness, I want an answer.

Mr Davies: I am going to try and give you an answer but the main obstacle so far to my giving you an answer if I may say so has been the fact that you prevented me from completing my sentences. But there is an engineering vehicle, which is Terrier; there is a reconnaissance vehicle which is one of the really urgent requirements that we are going forward with as rapidly as possible. From the political and financial points of view we are going to produce this reconnaissance vehicle with the maximum despatch. There are only, therefore, technical issues about the speed with which this can come into theatre and I will ask General Kevin a word or two about that in a second, it is enormously important. We have to strike a balance here; I go back to my business of balances. We have to do what we can for the theatre, for the operational requirements, as rapidly as we can. We have been fortunate enough to find off the shelf, with some modification in some cases, but a very rapid modification, a series of armoured vehicles and protected personnel vehicles which really do correspond extraordinarily well to the specific requirements of this insurgency in Afghanistan. We have purchased them and you know about that.

Q366 Mr Havard: I do.

Mr Davies: That does not mean to say we are neglecting the long term major structural requirements of the British Army and that is why we continue to be committed to the FRES programme as well, so there is no inconsistency between the two, there is a large element of pragmatism and expediency and I think those things are very desirable in the circumstances. Would you like to add anything on that?

Q367 Mr Havard: Before you start, are you going to give us a date for when it will be happening?

General Sir Kevin O'Donoghue: We are almost ready to go out to industry to seek bids for the Scout vehicle. I cannot give you a date because until you go out and ask industry what sort of timescale they will require to deliver something I cannot give you a timescale.

Q368 Mr Havard: But you are about to offer it out soon.

General Sir Kevin O'Donoghue: Soon.

Q369 Chairman: Minister, can I read out a sentence that you have just said to us because it struck me as so extraordinary that I want to pursue it. You said, in answer to Dai Havard's point, "The coherence lies in having the widest possible range of weapons that commanders in the field can rely on." Surely that wide range of weapons is precisely the thing that destroys the coherence.

Mr Davies: Coherence is not something we pursue for its own sake, just for the sake of neatness and having a nice inventory that looks good on paper, coherence is what we want to have where the capabilities of the various vehicles are complementary so that you can move across a spectrum, going from heavier to lighter, going from greater firepower to less firepower, going from faster to not so fast, for difficult terrain, less difficult terrain, so that you have the widest possible scope for choosing the vehicle that you really need for that particular operation. That is what we are trying to give commanders in the field and that is what I mean by coherent so that each particular platform relates to the others in the sense that it is complementary, it is not if you like duplicating the capability of the other one, it is expanding the full range of capability available to us. I would like if I might, Mr Arbuthnot, just to ask General Figgures to say a word about this whole issue - because he is responsible after all for equipment capability - and how we see our future requirements in the armoured vehicle and protected vehicle area.

Q370 Chairman: General Figgures.

Lieutenant General Figgures: Thank you, Chairman. If I could perhaps address my remarks to this question of the family of vehicles; yes, Mr Havard is quite right that when we set out on the concept phase of this we anticipated that we would have one common chassis on which we would build our various subsystems to reflect the requirements for each function. Further work suggested that this perhaps was not going to be the solution, but we would perhaps have to run with two chassis types, we would achieve our commonality and the logistic coherence that he describes through having common subsystems and this would be part of a network-enabled capability. Whilst it is treacherous sometimes to use analogies, effectively the network-enabled capability is rather like the nervous system in the body, so if we were thinking about teeth, it would be the nerve in the tooth, so we would have the common network which would be implemented right across these "FRES" vehicles although they would have different chassis systems. We would attempt to have common generators where appropriate, we would have common radios, we would have common electronic counter-measures, we would have where appropriate to reflect the function of the vehicles common subsystems in terms of sighting and so on. So that is how we were going to achieve it, although because the chassis did not look precisely the same did not mean that we were going to give up this original idea but we were going to optimise it, there were trades and balances in this. Coming on to Mr Havard's point about the functions that each of these parts of the family were going to deliver, yes, the utility vehicle would carry an infantry section but there would be a command vehicle, there would be a vehicle in which we would put our communications, there would be a vehicle perhaps in which we would put our electronic support measures, there would be an ambulance vehicle, there would be a vehicle in which we mounted the anti-tank guided weapons and fire support weapons. The question we then had to ask was how much variation was tolerable, indeed affordable, in doing that. Equally, on the specialist vehicles from which we were going to get the reconnaissance vehicles, yes, we would have a close reconnaissance vehicle, we would need a formation reconnaissance vehicle - they may look very similar but their internal sensor fit and so on might be different, there would be a command variant, there would have to be an ambulance variant to support it. That is how we propose to do it, so whilst it may appear without the necessary supporting detail that we have thrown all our good ideas out of the window, we have not and of course it is not without some difficulty that you can get people to supply all this. I hope that clarifies it.

Mr Havard: They have not got a clue what they want.

Q371 Chairman: This difficulty has been going on for decades now. One of the main issues is getting the Ministry of Defence to decide what it actually wants.

Lieutenant General Figgures: If I may, Mr Arbuthnot, capability (which I plan) is a relative notion; you cannot stand still in time because the enemy has a vote in this and I think in a previous session with this Committee we have addressed this issue of how capability has to change, the fact that our original view with respect to FRES was that perhaps it had to be proof against kinetic energy rounds in preference to chemical and improvised explosive devices. Our experience in Iraq and Afghanistan has demonstrated that we have got to shift that balance. That is an increasingly complex requirement to meet, and we have found - our allies have found - that you cannot necessarily buy these things straight off the shelf and, indeed, these urgent operational requirements to which the Minister refers have had to have some considerable modification to what comes out of the factory gate.

Q372 Chairman: Okay. We ought to move on from FRES because we have probably spent quite enough time on it. Vector: is Vector unable to take the weight? Is it unable to operate on rough terrain? Does it keep breaking its axle?

Lieutenant General Figgures: I will pick that up if I may. Vector was introduced as you know, as an urgent operational requirement. Yes, we have had some problems with it, yes it is a combination of all up weight, cross-country performance and, like many of these things, you do not get a perfect solution, and so that is why we are constantly looking ahead in terms of protected patrol mobility and the utility vehicles necessary to support it to see what other options there are. Some of these solutions have not been perfect.

General Sir Kevin O'Donoghue: You produce a solution for the requirement of the time; the requirement changes as the threat changes, as the security architecture changes and you need to produce something else. Quite rightly, Chairman, there is only so much weight you can put on a particular chassis and when you reach that weight limit you either have to have something bigger and more powerful or you have to have a different form of protection, which it would be inappropriate to go into, but things change.

Chairman: Moving on to the Future Lynx programme, Adam Holloway.

Q373 Mr Holloway: Minister, with reference to the capability that is being filled by Future Lynx you referred earlier today to "simple-minded protectionist approaches" and also to the "full benefits of competition". Do you think that you are getting the full benefits of competition in this particular programme?

Mr Davies: This is a partnership programme, Mr Holloway, as you know. These are two broad categories and there are hybrids between them.

Q374 Mr Holloway: I can understand that.

Mr Davies: It is reasonable to distinguish between classic competitive contracts - where we simply go to the market and say this is our requirement, we get in bids and we negotiate the price and sign a contract - and partnership arrangements where we actually agree with a particular group of manufacturers, or perhaps one manufacturer in certain cases - and probably this is appropriate in areas where there is quite a high technical risk - that they will work on reducing the risk, they will take some of the risk, we will take some of the risk, we will typically have a target price with incentives for doing better than that, penalties for doing worse than that, so that we share the risks right the way through. This falls into the partnership area. I did actually look at competitive solutions and you might be interested in this since you raise this matter. Maybe I horrified certain people when I asked for a study on this subject, but I did say do we really need Future Lynx, is there perhaps an off-the-shelf solution here. I asked for a small study to be done looking at Black Hawk - Black Hawk of course is a workhorse for the US Army that has been around for a long time - because I wanted to have a check as it were against the other proposal that we should go ahead with Future Lynx. I was dissuaded, Mr Holloway, and that actually Future Lynx was the right solution. First of all I was persuaded that we needed the same helicopter, the same basic structure of helicopter for the naval and battlefield roles and, secondly, I was persuaded that actually we did have a good deal. I was actually quite surprised at how expensive the Black Hawk solution would actually have been. Like other people coming fresh to this particular field one tends to think that as the Americans have these very long production runs automatically their prices are going to be cheaper, but I am not sure that actually American defence procurement is always quite as efficient as it is sometimes made out to be and sometimes what you might think plausibly would be the position does not turn out to be. I am therefore very confident that we have gone down the right road here and that we are going to get the right capability, and it is one that of course is directly engineered, really specified for the particular requirements of the Royal Navy and the British army.

Q375 Mr Holloway: Your written Ministerial Statement referred to the even greater operational capability; how many of these aircraft are you settling on, what will they cost and when will they be ready?

Mr Davies: Let me take those questions in order. The answer to your first question is about 60, the answer to the second question is that we do not know, we have not decided, we are discussing this matter with the company. We do not produce in service dates until we have actually got through main gate and we are some way away from doing that, so I cannot answer that.

Q376 Mr Holloway: Roughly.

Mr Davies: We do not want to lose any time on this but there are some technical issues to be resolved. I do not know, Kevin, whether we could have a stab at that. As a matter of principle, Mr Holloway, we either have in service dates or we do not; we do not have in service dates until we have been through main gate and I am always very reluctant to give my personal estimate as to what an in service date might be before we have even looked at main gate because we do not necessarily know all the variables which are going to determine the answer to that question. I am cautious about it, but if General Kevin wants to make a stab at something I am very happy for him to do so.

General Sir Kevin O'Donoghue: We are through main gate, Minister, on Future Lynx.

Mr Davies: We have not placed the contract yet.

General Sir Kevin O'Donoghue: We need to now discuss with the company exactly when these aircraft will come in.

Q377 Mr Holloway: Roughly.

General Sir Kevin O'Donoghue: I need to come back to you on this.

Q378 Chairman: Could you explain this principle of not giving in service dates until you have gone through main gate?

Mr Davies: The point is that until we have gone through main gate we have not had the negotiations with the company, we have not fixed on the price, we have not fixed on the terms of the contract so we are in a very bad position in order to be able to say what it is. We are hoping it is 2014, January 2014.

Q379 Chairman: The principle of not announcing in service dates until you have gone through main gate obviously does not apply in this case where you have gone through main gate, but if it is to reduce the uncertainty - which we saw remained even though you did go through main gate with the aircraft carriers - what is the point in preserving this principle that you do not give industry an idea of when they need equipment to be in service by?

Mr Davies: We may well give industry that idea; when we are having discussions with industry about almost any project the timing comes into that because we need to take into account the technical risk, we need to get their assessment of what the technical risk is, of how long it will take to resolve it. We obviously tend to have a requirement that means we want the capability available as soon as possible but there is a dialogue on that matter, Mr Arbuthnot. It is not always very sensible, while we are having that dialogue with industry, to make a public statement about these things because it pre-empts some of the discussion with industry. There may also be cases where there is a trade-off between price and delivery time and we do not want to lose the flexibility of our commercial negotiations.

Q380 Chairman: But that is precisely what you did with the aircraft carriers.

Mr Davies: In the case of the aircraft carriers it was not a competitive contract of the kind I have just described, it was one of these sort of partnership contracts.

Q381 Chairman: That makes a difference, does it?

Mr Davies: It can make a difference, yes; it can certainly make a difference.

Q382 Chairman: We will move on to one other set of aircraft issues, the A400M aircraft: are they going to have full defensive aid suites?

Mr Davies: The answer is yes.

Q383 Chairman: All of them?

Mr Davies: The ones that we are employing in theatre, certainly, because we make it a principle that we do not fly troops, personnel, indeed civilian personnel - even ministers, though that may be controversial - into theatre without defensive aid suites. The only aircraft we fly into theatre without defensive aid suites would be aircraft not owned by us and carrying freight not human beings.

Q384 Chairman: So you might be buying some A400Ms that do not have full defensive aid suites on the basis that they would never fly anywhere into danger, is that right?

Mr Davies: Mr Arbuthnot, we need to take that decision nearer the time. We are sadly -sadly - some way from an in service date for the A400M. That itself is a difficult matter at the moment on which we are focusing, so we are some way down the road from deciding that. I have just given you the general principle and it is a very important general principle. In so far as we were clear that some A400Ms would not need to fly into theatre maybe we would not need to fit the defensive aid suites, but we would have to take a view as to whether it would be sensible to have some aircraft, maybe just for training purposes, where we did not need that. It is a decision we have not taken yet.

Q385 Chairman: So the answer to you might be having some A400Ms without defensive aid suites is a yes.

Mr Davies: It is possible.

Q386 Chairman: The fuel inertion system that is currently being fitted to the C130s and others, is that going to be put into the A400Ms?

Mr Davies: The same principles apply to the fuel inertion system and also to - because you are probably about to ask me about that too - to the explosive suppressant foam.

Q387 Chairman: I was.

Mr Davies: Yes. The same principles apply in all three cases because obviously the three cases are very analogous and the same issues arise.

Q388 Chairman: What about the Chinook helicopters that have just been made available to go to Afghanistan, will they have fuel inertion system?

Lieutenant General Figgures: They have the pannier tanks, the piano hinges and they have got self-sealing tanks so the business of catastrophic failure through fire would appear not to be the same as on a large fixed-wing aircraft; there is a balance of risk there, but we constantly review where to strike that balance. If we felt as a result of this constant assessment that it was necessary to do it we would have to do it, although again we may not do it in quite the same way. Currently we believe we have reduced the risk sufficiently through the self-sealing tanks and the fact that they are on panniers outside. When you have an enforced landing the tanks fall off and so reduce the danger of a catastrophic fire.

Q389 Chairman: Was it a balance of risk that decided the Ministry of Defence not to fit explosive suppressant foam into the Hercules that came down?

Lieutenant General Figgures: I think that was the judgment of those concerned - and I cannot speak for them because I was not there when these things were considered.

Q390 Chairman: What makes you think you have got this decision right?

Lieutenant General Figgures: Because I am certainly conscious of the requirement to review this and carry out the necessary risk assessments and carry out the necessary trials to see that we have reduced it to as low as reasonably practicable.

Q391 Mr Havard: Before we move on can I just ask briefly about the A400M. If it is not known as to when the A400M is coming we have a problem with heavy lift in the meantime. Are we going to see substantial refurbishment of the C-130Ks, are we going to buy more C-17s, are we going to bring forward the air tanker programme, have you got any clue what we are going to do?

Mr Davies: Mr Havard, you are asking a very pertinent question, a question which is very close to my heart and which I reflect on every day. We do find ourselves in a difficult situation with the A400M, I cannot tell you exactly what the latest delivery schedule is - they were expecting it more or less daily from OCCAR and we do have a big problem, we do have a big gap in the air bridge. As I said, I cannot even say how long it is going to last because we do not know what the delivery schedule for the A400M is. I have had conversations with Monsieur Gallois and I have expressed myself as forcefully as I know how on this particular subject, but that does not necessarily produce any aircraft overnight. The answer to your question is that all of the options that you mention are real ones that we will be looking at. There may be one or two others which you have not mentioned which we are also looking at, and the air bridge is an absolute critical imperative for us. That is my attitude to it.

Q392 Mr Jenkin: Looking at the overall affordability of the equipment programme you will be aware that we have had numerous representations suggesting that the Government's stated programme is actually unaffordable, but now that you have completed this short equipment review can we take it that all the capabilities set out in the Strategic Defence Review - the additional new chapter, the 2003 White Paper and so on - this is now an affordable programme?

Mr Davies: Yes, the equipment programme is an affordable programme. We have had to make an adjustment about exactly the pace with which we are bringing certain things forward and, as I have already explained, some of the priorities are being increased and others are being set back a bit. We will always have this, Mr Jenkin, we will never have a situation in which everything can be afforded today, of which there are no changes in year - that just would not be a natural situation to be in - but I believe that the equipment examination exercise has relieved an awful lot of pressure, let me put it that way. As I said right at the beginning of our proceedings I am not conceding from you any decision that we have taken which is a dramatic major decision in which we are about to announce some further delay or cut or indeed any cut in a programme, so I would hope that we would only have to cut programmes if we really decided they were not really necessary, really essential, in the defence interests of the nation.

Q393 Mr Jenkin: In the Winter Supplementary Estimates you did reduce the net provision of defence capability by UOR1 by 950 million. That is a cut, is it not?

Mr Davies: No, it is not a cut. The defence budget and the defence control environment equipment and support budgets are increasing in real terms the whole time so we are spending more money in real terms. There is no suggestion at all - you look surprised but I assure you that is the case, there are no cuts at all here, no cuts.

Q394 Mr Jenkin: No cuts at all?

Mr Davies: No, we are not cutting defence expenditure, no.

Q395 Mr Jenkin: That is not what I asked. I asked in your Winter Supplementary Estimates - this is presumably what rebalancing means, that we are cutting investment in future capability to support current operations. That is the new mantra is it not?

Mr Davies: The word "cut" is the word that I am resisting.

Q396 Mr Jenkin: It is in brackets, it is negative, there is the number, 950 million.

Mr Davies: If the word "cut" appears there it would (a) surprise me very much and (b) it would be some sort of mistake because it would not be an accurate description of the position. Rebalancing means changing the priorities; bringing some things forward; pushing some things back. That is what we do, that is what we will continue to do the whole time I am sure.

Q397 Mr Jenkin: The Government's defence policy has not changed.

Mr Davies: The defence policy has not changed, no.

Q398 Mr Jenkin: Can you explain - I am looking at the out of service dates and in service dates of helicopters over the next ten years - at the moment we have 520 helicopters in the Armed Forces overall, including the US helicopters; according to your Parliamentary answers, by 2020 we will have nearly 215 helicopters in the British Armed Forces. How possibly would we be able to support the tempo of operations that we are currently supporting on less than half the number of helicopters?

Mr Davies: Mr Jenkin, you are a considerable defence expert and known for that in the House and you know the answer, I suspect, that I am about to give you. It would be absolutely crazy to equate numbers of helicopters with helicopter capability. A lot of the helicopters we have got in that list which you have just mentioned will be old helicopters, Gazelles and so forth, whose moment, with great respect to that particular airframe, has passed. Some of the new helicopters we are bringing on stream are vastly more capable than their predecessors. Compare the Apache, for example, with the previous battlefield helicopters we had. There has been an enormous increase in our helicopter capability. I am glad to say that in Afghanistan from March last year to the latest figures I have seen, which would have been in October or November, we increased our helicopter capability in Afghanistan by 37.5 per cent and there will be another 25 per cent increase in the coming year, so this is what we are talking about.

Q399 Chairman: Do you know how you did that?

Mr Davies: Capability and firepower, number of hours available.

Q400 Chairman: So you flew the existing helicopters harder.

Mr Davies: We are bringing them into service - no, not at all, we have introduced a lot of new helicopters. Another thing which has not come out so far - I am slightly proud of it because it is something which I took initiative on in my first week or two in my present role - is that we are re-engining some of the existing Lynxes so as to make sure they are available in Afghanistan on a 24-hour, 365-day basis, which they have not been up to now. That is very important and that is going to come through as an urgent operational requirement to be delivered in the course of next year. There is a whole range of areas where we are increasing genuine helicopter capability. The stories are very upwards and onwards ones, the story is getting rid of old-fashioned helicopters - quite rightly - obsolete helicopters, helicopters that are much less performing and replacing them with the latest helicopters and helicopters with the specification that we require to do the job.

Q401 Mr Jenkin: Helicopters are also essential for protected battlefield mobility.

Mr Davies: Yes.

Q402 Mr Jenkin: Commanders in both Iraq and Afghanistan have consistently complained they are not able to get enough helicopter hours, not for hitting things, just simply for flying people around. By 2020 we will have a total of 14 Chinook helicopters in the entire British Armed Forces. How will that possibly be enough unless we are going to cease to envisage conducting military operations on the scale at which we currently conduct them.

Mr Davies: Mr Jenkin, I do not recognise your figures but we are introducing an additional eight Chinook helicopters which have been specifically refurbished to provide for the lift role for which we want them, the battlefield tactical lift role which you just identified correctly as being so important. We have just bought six Merlins from Denmark and we will be deploying those in the most useful fashion possible as soon as we possibly can. We are bringing in a lot of highly capable helicopters, we are investing in helicopters the whole time and I have just given you the figures.

Q403 Mr Jenkin: How many helicopters are you planning that we have by 2020?

Mr Davies: I do not know that we have an actual figure for that but if we do I dare say my colleagues will help me with it. Have you any idea what the figure will be?

Lieutenant General Figgures: You mentioned Mr Jenkin Chinook and you mentioned 14.

Q404 Mr Jenkin: 14 by 2020.

Lieutenant General Figgures: I think we shall have 48 by 2020.

Q405 Mr Jenkin: That does mean considerable life extensions beyond the out of service dates that you currently announced.

Lieutenant General Figgures: Indeed.

Q406 Mr Jenkin: So we are going to be flying older and older airframes because we will not order any new helicopters.

Lieutenant General Figgures: Chinook is a robust airframe and we have plans to upgrade the cockpits, we have plans to have a universal fleet so we have 48 of a similar standard, we have plans to up-engine it and of course to keep its defensive aid suites, communications, weapon fit and so on to match the threat. Chinook actually is a very good example of the through life capability approach which we have taken to get the most out of the fleets we own.

Q407 Mr Jenkin: I have put down questions to ask for straight answers on this and it is only by piecing together a jigsaw that I am able to put together any figures at all. Could I ask the Minister in future, if I put down a question, to maybe provide the Committee with the information that you have there and maybe we would have a more intelligent discussion about what these capabilities are.

Mr Davies: Mr Jenkin, I appreciate your questions and we do try to give the correct answers. I am quite confident that I have never given you an answer, never given you an answer - let me say this twice now ---

Q408 Mr Jenkin: You the Government.

Mr Davies: -- which suggests that we will only have 14 Chinooks in 2020. I do not know where that came from; it cannot possibly have come from any answer which I gave because I can assure you that if somebody presented me with a draft answer of that kind there would be an immediate inquiry in the MoD as to how we could possibly be proposing to do any such thing. I do not know where that figure came from but it certainly did not come from us, it certainly did not from me in a Parliamentary answer.

Q409 Mr Jenkin: I think you will find that in order to get more than 14 helicopters you will need to adjust some out of service dates that you have already published. The General is nodding.

Mr Davies: You are making all kinds of assumptions.

Q410 Mr Jenkin: I am making assumptions on the basis of answers the Government has given me.

Mr Davies: You are making assumptions that we do not either refurbish or upgrade or buy a single new helicopter between now and 2020. I have no idea why you think such an assumption is correct.

Q411 Mr Jenkin: What is the lead time on buying new Chinook helicopters?

Mr Davies: Mr Jenkin, I repeat, I appreciate your questions and I repeat there is always a well-informed interest in our proceedings and it is extremely valuable for us to have people who take a close interest in things like that. There is, however, clearly a mistake involved in the assumption of 14 and I think you have had that confirmation now from General Figgures. General Figgures has been able to give you a very different figure - the difference between 14 and 48 I am sure you will agree is a material difference.

Chairman: Moving on, Linda Gilroy.

Q412 Linda Gilroy: Minister, following the Pre-Budget Statement the chief executive of the SBAC said "It is a disappointment that the Chancellor has neglected to include an injection of much-needed funds for the UK defence industry. This oversight is disappointing given the contribution that this industry will make to the UK's economic recovery, a contribution that could be even greater still if the Government had included it in the stimulus package." How disappointed were you that there was no injection of funds for the UK defence industry in the Pre-Budget Statement?

Mr Davies: First of all, Mrs Gilroy, I have to say that I think the Government very adequately indeed is funding defence, and the effort we have made has been most impressive, not only the core defence programme which is increasing the whole time as I have already said - the defence budget as a whole is increasing by one and a half per cent, equipment and support are doing extremely well in that context, but also there is the UORs and, as you know, we are expecting to have UORs of 635 million in the course of the coming financial year and that is in addition to the very substantial amounts of money we have provided for the latest batch of protected vehicles, for 700 new PPVs for Afghanistan, which was announced last month. That is a record we can all be very proud of. What I think you are questioning is about the fiscal stimulus package. Let me go into that a little bit because there may be some misunderstandings here. It goes without saying, Mrs Gilroy, that like every defence procurement minister in the world I imagine I am not in the business of turning down new money; if it comes to me I am very happy to put it to very, very good use.

Q413 Linda Gilroy: Did you actually make the case for more?

Mr Davies: Let me explain to you about that. If you want to go in for a fiscal stimulation package, which of course the Government is - and I think you and I agree - doing entirely the right thing about, then we really need to achieve three criteria. First of all you need to have spending which feeds through very rapidly into consumption - in other words you cannot use Crossrail, for example, because by the time you have all the planning inquiries ---

Q414 Chairman: Minister, I wonder if you could do your utmost to answer Linda Gilroy's question, did you make the case for more defence spending, rather than talk about Crossrail?

Mr Davies: I have to say that you need to achieve three things, Mr Arbuthnot. One is you need to bring forward this money rapidly into consumption, and defence is not necessarily ideal for that purpose because the lead times in defence are quite long between you signing a contract - because we are very often at the frontiers of technology - and when the money actually flows through in the pay packets of the people who are being employed by contrast to other sectors of economic activity. That is the first thing that really needs to be said.

Q415 Chairman: It sounds as if we are building up to a no.

Mr Davies: Perhaps I could be allowed to just answer the question.

Q416 Chairman: That would be good.

Mr Davies: The second thing is that ideally to use your money for maximum impact you need to spend it on goods and services which are labour-intensive rather than capital-intensive in their manufacture so that the benefits flow through into pay packets rather than into rewards for providers of capital - banks and shareholders and so forth who would inevitably have a very high propensity to save and a low propensity to consume. Ideally you need those wages to flow through to people who are relatively low-paid. That is not the case with defence; defence is capital-intensive rather than labour-intensive.

Q417 Chairman: Minister, can I suggest you please do your utmost to answer the question and to say then "I will explain why that is" if you like. In this case, when Linda Gilroy asks you "Did you make the case?" you can say, "No, and I will say why it would have been a bad case to make" or "No, and I wish I had", or some other answer but do please try to answer the questions that we put rather than explaining everything all around the houses before you actually answer the question.

Mr Davies: Mr Arbuthnot, I am trying to enable the Committee to understand why actually defence is not an obviously efficient target for counter-cyclical fiscal stimulation, which is the question I was asked by Mrs Gilroy. The third factor is leakage into imports. There is quite a high leakage into imports in defence, inevitably, and that is not the case, for example, if you are repainting schools or putting new roofs on schools.

Chairman: I think you have answered that question. Linda Gilroy.

Q418 Linda Gilroy: Can I just take that up, based on the region that I represent part of, where we have one of the biggest aerospace industries possibly in the whole of Europe in terms of defence employment, estimated to be about 40,000 with 100,000 indirectly dependent and a very long supply chain reaching right down into Cornwall from the more obvious places where the aerospace industry is sited in the region with a presence from all four primes. Are you saying to me that before the Pre-Budget Statement - and people are still trying to work this out - there is sufficient in the way that you have reconfigured the defence budget to enable that supply chain to be maintained?

Mr Davies: Yes, I believe there is.

Q419 Linda Gilroy: That is a very straight answer and a short answer. Can I move on to research spending then because that puts the other angle on it. I am sure you will have read the exchange that I had with the Permanent Under-Secretary on the fears about the cuts in the defence research spending and the way in which that can impact on the long term capability and keeping ahead in that capability. Has defence research spending been cut; if so by how much and in what specific areas?

Mr Davies: We have not made an announcement about that in the equipment examination. The matter is under review. I would say, Mrs Gilroy, that we obviously do not spend money carelessly, we spend money on research spending because we are very conscious of the benefit we can get from that particular research programme and, like everything else, we have to look at it from the point of view of priorities, so I am not in a position to give you any assurances about that particular matter.

Q420 Linda Gilroy: There are obviously tensions and you set out at some length earlier on how you were seeking to balance that, but the Defence Technology Strategy said that the military advantage achieved at any one time depends upon the research and development investment being made during the previous 25 years. What estimate are you making of the impact on the UK's future military advantage from the cut in defence research spending?

Mr Davies: I cannot quantify that. The important thing is to use the defence research spending as intelligently as possible, for example to try to make sure that as far as possible it is co-investment, so we provide a certain amount of money and we persuade perhaps the private sector to provide some more money, and we therefore leverage our own particular budget. Clearly, some expenditure on research is absolutely vital; no one is suggesting we should get out of the research business but, equally, we cannot say ab initio a priori that spending money on research is more useful than spending money on anything else, I do not think that would be a fair thing to say. This is something which cannot be immune from our examination from time to time as to whether we are getting the priorities right.

Q421 Linda Gilroy: Can you confirm to the Committee that you are making some estimate of what the impact is - whether it is a seven per cent cut or not - of whatever cutback there is in the defence budget?

Mr Davies: Let me put it more positively: we always try and make an estimate of what the value is potentially and what the return may be from any particular defence research spending that we make. If we have to cut something then we obviously decide what is a negative return, what are we sacrificing, we try to be as robust about these things as we can.

Q422 Linda Gilroy: When do you think we can expect to have greater clarity about what exactly will be in the defence research budget?

Mr Davies: I once again say, Mrs Gilroy, there is no hidden agenda here and it is not as if I am withholding some announcement which I am conscious of but for some reason I do not want to make it before this Committee. That is not the case at all, I am simply saying that we will be reviewing our defence research spending. When I say reviewing that does not necessarily mean cutting, but we are looking to make sure - as we will be doing on all our equipment and support programmes - that the current spending accurately reflects our present notion of what the priorities ought to be.

Q423 Linda Gilroy: You would not at this stage agree with the chief executive of SBAC when he told us that defence research spending has been cut by seven per cent - it has been cut.

Mr Davies: I do not know what the baseline is on which he is making that statement. If you actually look at research spending over the last five or six years you see it is an up and down figure, sometimes it goes up and sometimes it goes down. It has been roughly in the area of 550-650 million for a number of years.

Q424 Linda Gilroy: In real terms that is a cut.

Mr Davies: In real terms, Mrs Gilroy, the rate of inflation is not very great and depending on what baseline you take you can see that there was a real growth in spending over a particular period of years and it may well be that over that period of years there would be a real terms increase in research spending, so since you have got this peaks and troughs picture what sort of trend you deduce and whether it is a positive or a negative growth rate really depends upon where you take your baseline. If you take your baseline at the low point you will find that there is an apparent growth trend over the subsequent period.

Q425 Mr Holloway: I was always pretty useless at corporate finance but can I just pick up on Mr Jenkin's thing here. You have a table that says "Changes in Resources and Capital Expenditure in the Winter Supplementary Estimates and it says that net provision in defence capability is down 950 million and obligations in peacekeeping going up by almost the same amount; surely what you are doing is your are robbing Peter to pay Paul so you are going down on your future capability in order to fund what you are doing out in Afghanistan or wherever else, so it is a cut.

Mr Davies: No, Mr Holloway, we are not making cuts; as I said we are making changes in our priorities from time to time and I repeat, we have not cut any of these long term programmes and we are very much committed to these long term programmes. So we are not robbing Peter to pay Paul.

Q426 Mr Holloway: What is that then? Sorry, I must be really dim, what is that?

Mr Davies: Let me put it this way - we have already been over this ground - the major re-profiling exercise in the equipment examination was the carriers. We have re-profiled spending on the carriers. I have explained to you already once there is absolutely no element of defence capability cut involved in that at all, it has been possible to re-profile expenditure to take the strain off the coming two financial years without paying any price in terms of the nation's defence capability. It may seem to you paradoxical that we can achieve such an effect, apparently a free effect, because we have not incurred any cost to our defence capability, but that is the case, that is what we have been looking at. Under no circumstances could you characterise such a thing as a cut.

Chairman: I want to move on to the Defence Industrial Strategy, Vice-Chairman David Crausby.

Q427 Mr Crausby: Who has the overall responsibility for the Defence Industrial Strategy?

Mr Davies: I do as a Minister and Mr Amyas Morse who is here with me as an official.

Q428 Mr Crausby: I would not have needed to ask that question when Lord Drayson was in your position. It was generally accepted that Lord Drayson drove the policy forward and did a tremendous job on it, yet I have to say that the general impression, right across industry and politics, is that the impetus has been lost and the Defence Industrial Strategy has been effectively parked on one side. What do you intend to do about regaining that impetus?

Mr Davies: First of all, Mr Crausby, I think it is a fair characterisation of the last three years since the Defence Industrial Strategy was first promulgated that we have been implementing it; we have been implementing it - I hope you will give us credit for that - in a rather impressive fashion. All these contracts that we have been talking about, the new contract for the carriers, for example, the contract for Future Lynx which we have just been talking about, are all a manifestation of that, so the best thing that can happen with the Defence Industrial Strategy I should have thought was that it should be implemented, it has been implemented and is being implemented and will continue to be implemented.

Q429 Mr Crausby: What about the Defence Industrial Strategy 2? As you have just been saying we understand that Mr Morse is in charge of the Defence Industrial Strategy; can you help us on progress on this, please?

Mr Morse: Certainly. Is that all right, Minister, shall I do that?

Mr Davies: By all means, I will come in in a second.

Mr Morse: The answer is that we have not produced a Defence Industrial Strategy 2 in the timescale we originally planned on doing, and that is largely because industry has said "Look, if you cannot be clear about the sector or the strategy and give us some indication of your spending plans we do not want to move forward with policy and the other aspects of it, we want to wait until things are as clear as possible. So it is not a question that we have held it up and industry did not know what we were doing; we have constantly talked to them. Since DIS1 we have also been in joint working with them on quite a number of policy issues in developing positions on those and also looking at some sectoral issues with them, so there has been quite a lot of continuing work. As to the question can we produce a composite of the whole thing, sectoral as well as policy, they very clearly said they do not want to produce the policy for us and we have gone with that up to now. I agree it has led to rather more of a delay in producing that than we planned originally, but that is where we are. The only other comment I will make is that I do conduct, with other colleagues, a number of discussions with industry - sometimes on easy and sometimes on difficult subjects - and we do so on a very frank and business-like and open basis as far as we possibly can. We call a spade a spade when we have to, and industry increasingly does that as well, and we talk to industry before we do things about what makes sense. We are trying very hard to put this into effect and work with industry more closely. I personally very strongly believe in that close approach and as much joint working as we can manage, coupled with a very tough, demanding regime on showing value for money.

Q430 Mr Crausby: I hear what you say, Minister, that progress has been made on the Defence Industrial Strategy but when we met industry their argument was that the principle behind the Defence Industrial Strategy scheme was "magnificent" but because of the funding problems it was effectively "on hold". Do you believe that, are the funding issues in these circumstances limiting progress on the Defence Industrial Strategy?

Mr Davies: No, the two things are quite separate, as I have explained. We remain committed to a very wide range of equipment programmes, we have not cut any essential equipment programmes, and I trust we will not, and industry understands that. They also understand that we have looked again at the priorities and so we discussed that with them in the context of the Defence Industrial Strategy and our partnership with our major defence suppliers. We talked through our views about this during the equipment examination and there were no shocks or surprises for them as a result of that examination. So far as the Defence Industrial Strategy is concerned I repeat, I am completely committed to the principles of that Defence Industrial Strategy, the Government are completely committed to those principles, we are continuing to implement the Defence Industrial Strategy. Whether it makes sense to have a second version of that, Defence Industrial Strategy 2, is a matter on which I am open-minded and I have expressed myself along those lines with industry. In so far as Defence Industrial Strategy 2 gave a greater degree of clarity, a greater degree of investor confidence to industry, in other words in so far as it was more explicit on the sectoral information, on the budgetary information and so forth than the existing one, industry would no doubt be pleased to have it, but if it did not achieve those things - and it might be difficult for us to achieve those things - then there is a great danger having too frequent a re-issue of the Defence Industrial Strategy because it is supposed to be a long-term framework. Lead times in the defence industry are very long so if you suddenly say every two or three years we are going to change the Defence Industrial Strategy that might have a very negative effect on confidence. We are discussing this with industry, I am completely open-minded about what we do about producing some new document or when we produce a new document and I certainly do not exclude doing so.

Q431 Mr Crausby: Let me tell you what the Defence Industries Council said in its memorandum to us. They agreed that steps have been made towards upholding the principles set out but they said "However overall progress has been much slower than industry would have wished." It is clear that industry are disappointed in the progress that has been made; is industry wrong to be disappointed, are you satisfied with the speed of the progress that has been made?

Mr Davies: Mr Crausby, I come from a private sector background and one is never satisfied with the degree of market that one has, one always wants to have a bigger market, one always wants to have a bigger market share. It would intensely surprise me if the customers of the MoD at any one stage said "Thank you very much, we are quite satisfied with the flow of orders, we are quite satisfied with the defence budget, we do not want any more." That would not be a natural state of affairs, so I regard it as a very natural understanding of the state of affairs. When they say they would like a bit more money that is perfectly reasonable but they recognise realities, they are getting more money all the time but not, obviously, at the pace that they might conceivably be asking for.

Q432 Mr Holloway: Minister, listening to you it would seem that everything is going brilliantly, particularly in the two and a half months since you took over, but are there any areas where you might think you could have done a bit better or is everything just going marvellously.

Mr Davies: We are always looking to raise our game, of course we are, we are always looking to raise our game in defence procurement, we are always looking to do things better, we are always looking to do things cheaper, to get the capability we need more effectively. We are always looking at new contract mechanisms, new financial disciplines and so forth of that kind. If you ask me if I have any concerns about our ability to deliver the capability which the military need and deserve, then I think my main concern is the one that we have already touched on, which is the air bridge. It is a matter of honest considerable concern; there are no miracle immediate solutions available, this is very, very difficult territory for us but it is something that we are certainly all working on and spending a lot of time thinking about. I do not mean to just leave the issue there, I do not mean to just say there is nothing we can do, that is it. We will I trust be taking some measures and in time of course, as soon as we can announce them, we will announce them.

Q433 Mr Jenkin: Can I just point out that your predecessor but one originally promised us the Defence Industrial Strategy 2 by last Christmas, and then your predecessor promised us in the Spring. Now we have a new doctrine that it might not be necessary to have DIS2 at all, at least it is not necessary to have these documents nearly as often as was originally envisaged. Can you explain what Government policy now is?

Mr Davies: Government policy is as I just enunciated it, which is that we are totally committed to the Defence Industrial Strategy as it exists. That document dating from 2005 is still a very valid document, indeed it is in many ways our sort of road map and that continues to be the case.

Q434 Mr Jenkin: Why did Lord Drayson think it was going to be very necessary to produce a new one and you have decided that you do not need one?

Mr Davies: I cannot answer questions on behalf of other people and I certainly cannot answer questions three years afterwards because contexts change, things change. I am trying to give you, Mr Jenkin, a very frank response and I certainly do not exclude having a new document. As I say, I am open-minded about when that should best be and I am very conscious that there is no point having a document for the sake of having a document, there is no point having a document which is full of general principles and aspirations, the only sort of document that industry is actually interested in - and you will know this as well as I do - is a document which gives a very great deal of clarity and certainty about our purchasing plans.

Q435 Mr Jenkin: What is holding it up?

Mr Davies: What is holding it up is that we have of course had the equipment examination. As I have said, the exercise of looking at our priorities and so forth is not something which is just finished once and for all, there are a number of uncertainties still in the future, there will be for some time, we are engaged in operations where the requirements we have for the front line change and evolve quite rapidly, so we need to maintain ---

Q436 Mr Jenkin: What you are saying is that short-term considerations are dominating Ministry of Defence thinking and long-term planning is going out the window.

Mr Davies: No, on the contrary, we have just placed some very long term commitments, long term orders: Future Lynx and the carriers would be two very good examples there.

Q437 Mr Jenkin: Future Lynx went through main gate two years ago.

Mr Davies: We have just confirmed Future Lynx, as I have just explained, and that has now given industry a great deal of clarity in that particular business. Mr Jenkin, if I see my way to be able to produce a document which achieves the desiderata of industry then my instinct would be to want to go ahead with it. That is the most I can say to you for the moment.

Mr Jenkin: Which is not very much.

Q438 Chairman: Mr Morse told us that it is the absence of clarity that prevents us from having a Defence Industrial Strategy 2; would you agree with that? Am I paraphrasing you incorrectly?

Mr Morse: What I was saying is that we have a dialogue with industry - and you will have heard this from them I am quite sure - about whether or not we should go ahead with the Defence Industrial Strategy and in producing DIS2 and up to now they have been consistent in saying not unless you can give us a clear statement of sectoral plans on a comprehensive basis. As the Minister has said, the equipment examination has made that difficult.

Q439 Chairman: You cannot.

Mr Morse: Not while you are doing an equipment examination.

Q440 Chairman: The short examination has made that difficult and we are told now that the short examination is over, so that difficulty has evaporated, has it not?

Mr Davies: Mr Arbuthnot, the position is this: as I have just said, it would not be sensible to have a new Defence Industrial Strategy every year, it would be crazy.

Q441 Chairman: This is part of the old Defence Industrial Strategy. It was envisaged in the Defence Industrial Strategy that we would have a Defence Industrial Strategy 2.

Mr Davies: I personally do not think that we should have these documents too frequently, you devalue them if you have them too frequently, I really mean that. I do not think we should have one every year, I do not think we should have one every two years, we should not necessarily have one every three years. I think we need to make sure that when we do have one it is at the right strategic moment when we can say something which is novel, which is original, which is arresting, which is detailed, which is full of sectoral and financial information of the kind that industry wants. As and when we get to that position the advantages of having such a document would be greater than the disadvantages. If we cannot agree those degrees of clarity then I do not think that the advantages necessarily would override the disadvantages and one of the disadvantages might be to devalue the existing document.

Q442 Mr Jenkin: Can I put it to you, Minister, it is very difficult to say anything novel or innovative when in fact the only things you can announce are delays, freezing contracts, putting things back. We all know - let us have a grown-up conversation about this - you have a procurement bow wave and the only way you can take the strain out of your programme is by delaying decisions and delaying acquisition programmes. That is not a very exciting thing to put into a strategy, is it?

Mr Davies: Mr Jenkin, that is a very one-sided view because it is just not a reasonable view. Of course we have put back some things but we have brought forward other things. You have chosen not to mention things we have brought forward like Future Lynx, like Warrior updates ---

Q443 Mr Jenkin: That was already in the programme.

Mr Davies: But we have brought them forward. It is very important to get the full picture.

Mr Jenkin: It has not been brought forward.

Q444 Chairman: Do you describe what has happened to Future Lynx as bringing it forward?

Mr Davies: I do, Mr Arbuthnot, for the simple reason that there was very considerable uncertainty about this whole programme, there were all kinds of rumours ---

Q445 Chairman: Why was there this uncertainty? It was caused by the Government.

Mr Davies: I can assure you that when I arrived in my present office there were a large number of rumours that we were going to cancel this particular programme.

Q446 Mr Jenkin: Why would that have been the case?

Mr Davies: I can never account for rumours, Mr Jenkin, you would be as good as I would be in guessing that.

Mr Jenkin: It is not difficult.

Q447 Mr Havard: Can I ask you then what you say to Lord Mandelson and the Department for Business or whatever it is called nowadays.

Mr Davies: Business Enterprise and Regulatory Reform.

Q448 Mr Havard: Thank you; that is this week anyway. The question, however, about looking at strategic industries in the current circumstances we are going through in essentially the next two but probably five years, they are looking at what they need in terms of sovereignty, for capability in industry, in different areas in different ways. They must be asking the Ministry of Defence to make a contribution to that discussion; what do you say to them other than the fact we had a strategy, we published it in 2005, mate, you can read that and that is all we are doing?

Mr Davies: I am saying that that particular strategy foresaw a number of areas of sovereign capability and foresaw key partnerships which we would undertake with the major players in those sectors in accordance with that particular strategy.

Q449 Mr Havard: If we are going to have a Government Industrial Strategy (if I can put it that way) you have a Defence Industrial Strategy which has not been revised during that period of time. You are being asked for a revision, are you not, through that process?

Mr Davies: Mr Havard, of course I am only responsible for the defence aspects of our Industrial Strategy but I repeat we are totally committed to that Defence Industrial Strategy and our partners know that. As almost each month goes by we add to the implementation of that particular strategy but we are far from having achieved everything that was foreseen in that Defence Industrial Strategy. That remains a very useful working document and, as I have already said, one of my hesitations about the Defence Industrial Strategy 2 - although I do not exclude it at all - is that we do not want in any way to create any uncertainty about our commitment to the Defence Industrial Strategy as it exists.

Q450 Chairman: Your partners know that, do they, because when Mike Turner, who knows a thing or two about defence came in front of us, he said the Defence Industrial Strategy is on hold. He said: "Now I think it is in doubt. We are very pessimistic about the future because we have the DIS, we have the principles, we have the strategy; we do not have the money." Was he right?

Mr Davies: I quite agree with everything you say about Mike Turner, he is an exceptionally talented businessman and he certainly knows a vast amount about defence and the defence industry. So far as the last comment is concerned that we do not have the money, I have already explained that it would be immensely surprising ---

Q451 Chairman: No, but he thinks the Defence Industrial Strategy is on hold.

Mr Davies: If he said that there was all the money there that he would like for his defence industries then it would be an extremely surprising comment, I agree. He did not say that and I do not think any of us should be particularly surprised at the line that he has been taking. As for "on hold", that term is slightly ambiguous. It may mean valid, still in existence, unchanged, and if that is the characterisation he was giving it that is the correct characterisation.

Chairman: No, it was not the characterisation he was giving it. Adam Holloway.

Q452 Mr Holloway: How does the unexpected, unplanned-for level of violence in Helmand Province fit in with this?

Mr Davies: That is a matter which does give rise to defence equipment and support needs which are very urgent and which we treat as being of the utmost priority. I think I have explained to you in the course of the proceedings so far some of the things we have done about that, that is the reason why we came up with the new package of armoured and protected vehicles in November, another 700 vehicles. Remember we have about 8000 men and women in theatre so we are talking about one new vehicle for every 12 people or so who are actually deployed there. That is a pretty high number of vehicles, I think you will agree, Mr Holloway. Needless to say not everybody employed there in the course of his or her job goes on patrol so there is quite a large number. Other things, like re-engining the Lynx helicopter, that is something that I set the highest personal priority for and I had asked Rolls Royce for a quote on that within almost a few days of arriving.

Q453 Chairman: I would like to come back to the Defence Industrial Strategy, please. Still on what Mike Turner said to us, he said, "It is extremely difficult for industry to plan as we hoped we would be able to when we had a DIS, but that is reality."

Mr Davies: He said it is difficult to plan when we have a DIS?

Q454 Chairman: "It is extremely difficult for industry to plan as we hoped we would be able to when we had a DIS ..." That explains what he believes about the existence of the Defence Industrial Strategy, does it not?

Mr Davies: Mr Arbuthnot, you and I are discussing what somebody else feels about this.

Q455 Chairman: He is a rather important person.

Mr Davies: He is a very important person and I do actually speak to him about this. I do not know when these quotes derive from by the way.

Q456 Chairman: It was evidence in front of this Committee which is in the public domain.

Mr Davies: When was that?

Q457 Chairman: Two months ago.

Mr Davies: Ah, well two months ago, that may explain it.

Q458 Chairman: Ah, the Defence Industrial Strategy is right back on course now, is it?

Mr Davies: The Defence Industrial Strategy, in my view, Mr Arbuthnot, has never been off course over the last three years.

Q459 Chairman: I am sorry, 18 November, it is one month. You have revived something.

Mr Davies: I have to say that maybe Mr Turner had not had the opportunity of the conversations we have subsequently had when he gave the answers he did. It is always invidious to quote the results of personal conversations, even if one does not go into the detailed content of them, but I have to say, and I say it advisedly, I am sure that Mr Turner would not disagree when I say that he and I have had a number of very constructive conversations on this matter and that he does believe that his views are very much reflected in my thinking on this and that we are not very far apart, certainly not in our principles and our objectives.

Q460 Chairman: He said: "... the primes are suffering on the major programmes. We are not flowing down and are unable to flow down money to the supply chain. We have made the point about SMEs in the defence industrial base. Frankly, I do not think we are being listened to."

Mr Davies: I certainly cannot believe that Mr Turner thinks he is not being listened to.

Q461 Chairman: He says that he is not being listened to.

Mr Davies: He is certainly being listened to by me at the present time and will continue to be listened to. There are a number of issues in the quote you have just given the Committee, Mr Arbuthnot, and one of them relates to how much money there is and I do repeat that Mr Turner would hardly be doing his job as a representative of the defence industry if he expressed satisfaction with the amount of money that is available. I assume that for the rest of time he and his successors in that job will always say they would like to have more money available. It is perfectly natural, perfectly understandable, not a complaint by me at all, it is just a natural state of affairs. So far as the SMEs are concerned, that raises another issue and there are some misunderstandings here. We of course indirectly give business to a colossal number of SMEs and they recognise it, and we often get indirectly some absolutely vital technological inputs from SMEs but we do not actually do in our business that much business directly with SMEs because we tend to work through primes, we tend to work through lead contractors, we tend to want to have one major partner or a consortium of major partners taking the risks as our counterparty to get both the technical and the commercial risks to be borne by someone who has the balance sheet able to bear them. They are responsible for placing sub-contracts and have the subsequent relationship with the SMEs; it does not mean to say that our business is not vital for those SMEs but it does mean that the number of SMEs we have a direct contractual relationship with sounds rather small - it is something like three per cent of our business.

Q462 Chairman: Of course that is true but it is the primes that tell us - you would not because you are not in direct contractual relationship with them - that the SMEs are suffering. Are you aware of that?

Mr Davies: I am certainly aware that there is always pressure on us - and this will be true to the end of time - from our major suppliers to provide more money with more programmes and so on and so forth; that is perfectly natural. But I do not think actually, given that these people are realistic, sophisticated businessmen, that in their heart of hearts they think that either they are being unreasonably treated by the Ministry of Defence or that our defence procurement programme as a whole is other than one which is a very substantial one and one which represents a very good basis for doing business in the defence sector in this country.

Q463 Chairman: Except that Mike Turner himself, when he was in front of us, told us: "I tell you now this industry is in decline and unless people pay attention to the budgeting of defence in this country and the defence industrial base we do not have a future." That may be a bit apocalyptic, but you cannot just dismiss that can you?

Mr Davies: I think everything I have said has reflected what is quite genuine, which is that I have the greatest regard for Mr Turner; he does a superb job as the advocate for the defence industry in this country.

Q464 Chairman: He is more than an advocate for the defence industry, he is a practitioner.

Mr Davies: He is indeed, he has a number of individual roles, but he is actually no longer the chairman of BAe Systems as he was until very recently.

Q465 Chairman: No, but Babcocks would do.

Mr Davies: Yes, indeed. But his main role in which he comes to see me actually tends to be not so much about Babcock business but representing the defence industry as a whole. I am always very interested to talk to him about that but I do understand that the role of advocacy of any particular sector does require putting pressure on the major customer to come up with as much money as possible as rapidly as possible; that is the way the game has got to be played. There is no misunderstanding on either of our parts about the role which Mr Turner plays on behalf of his industry, and he does it extraordinarily well and extremely ably.

Q466 Chairman: Should we treat what he told us as being "He would say that wouldn't he"?

Mr Davies: No, Mr Arbuthnot, in a Committee of this kind where there is a very sophisticated understanding of the sector you make your own decisions about how you discount what is said from the point of view of the agenda of whoever is saying it. I am sure that goes for me too.

Chairman: It certainly will. Thank you very much, Minister, for coming with your team of thousands and for helping us to finish off our report on Defence Equipment. It has been a very interesting session and it has been quite a long one but a very, very important one. Thank you very much indeed.