CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 9 -i

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

DEFENCE COMMITTEE

DEFENCE ACQUISITION

THURSDAY 10 MAY 2012

SIR BRIAN BURRIDGE, GRAHAM CHISNALL, DAVID HANSELL and ROBIN SOUTHWELL

Evidence heard in Public

Questions 1–51

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Oral Evidence

Taken before the Defence Committee

on Thursday 10 May 2012

Members present:

Mr James Arbuthnot (Chair)

Mr Julian Brazier

John Glen

Mrs Madeleine Moon

Bob Stewart

Ms Gisela Stuart

Examination of Witnesses

Witnesses: Sir Brian Burridge, Vice-President, Strategic Marketing, Finmeccanica UK and Vice-President, Defence, ADS, David Hansell, Managing Director MSI-Defence Systems Ltd and Chair, ADS Small Companies Committee (SCC) Robin Southwell, Chief Executive, EADS UK and President, ADS, and Graham Chisnall, Deputy CEO and MD Aerospace, ADS, gave evidence.

Q1 Chair: Good morning. Welcome to the Defence Committee’s inquiry on acquisition. Can I begin by asking you all to introduce yourselves please-not that that is absolutely essential, but it will be helpful?

Robin Southwell: I am Robin Southwell, CEO of EADS UK and President of ADS. Good morning.

Sir Brian Burridge: I am Brian Burridge, Vice-President, Strategic Marketing, Finmeccanica UK and Vice-President, Defence, at ADS, the trade association. I chair the Defence Sector Board.

Graham Chisnall: I am Graham Chisnall, Deputy CEO at ADS. I also look after aerospace and space as part of that.

David Hansell: I am David Hansell. I am the Managing Director of MSI-Defence Systems, a medium-sized company in the SME category. I am chairman of the Small Company Committee (SCC) within ADS, which I am representing today.

Q2 Chair: We understand that there may be a defence announcement in the House of Commons later this morning. This meeting will finish at 11 am. Will you bear in mind that we have lots of questions to ask you? I ask the Committee to keep the questions succinct and you to keep your answers succinct.

Let us begin with the White Paper and the question of adaptability. As we know, we face a range of threats that are uncertain and unpredictable. How can we have an acquisition system that is sufficiently adaptable to face that uncertain changing gamut of threats? Obviously, you do not all need to answer every question, but who would like to begin with that one?

Robin Southwell: I will kick off. My own opinion-and I have thought through this for some time-is that the process we have with the various milestones, checkpoints and involvement of the Treasury at the appropriate time is good, fair and proper because we are talking about significant amounts of money being spent, and we need to make sure that it is done by a proper process and in a proper manner.

Let us try to halve the time that it takes in the procurement cycle from the initial identification of requirement to actually entering service with an armed force. A challenge to go through the process and try to divide it by two would do a couple of things. First, it would speed up the ability to put the kit into the field. Secondly, it would, by definition in my opinion, be cheaper because you would have done it in half the time and, thirdly it would empower the IPT leader or the person running the programme to drive forward with some urgency because he had deadlines to hit and targets to meet. That is my personal view. Let us try to speed up the cycle times.

Q3 Chair: Why do you think that that has not happened already? Do you think people have not been trying to get that to happen?

Robin Southwell: I do not sense that degree of urgency in moving from identification of the requirement to introduction into the field. It is probably something that would require a political effort. It is an amazing length of time. It is actually taking longer now. I remember AirTanker. We were measuring it in decades. I am sure that Brian can bring in anecdotes about how long these things have taken.

Yes, there were specific reasons. On the programme I have just mentioned, I remember the importance under the financing structure of making sure that every i was dotted and every t crossed in terms of the arrangements, and that the Treasury was deeply involved. So we go through the process with the finest toothed comb, but by doing it in that manner and extracting every last ounce and squeezing every last pip, it ends up taking such a long time that, for example, every pound of saving that you may get from such comprehensive analysis is probably more than offset by the length of time taken to introduce it, and the service and cost of, say, the VC10s remaining in service for may be two or three years longer than the Tristars.

So some sort of time cost-benefit analysis is useful and, in my opinion, if we can work towards significantly reducing that cycle time and the time between milestones and reviews, that would engender a very healthy and cost-effective culture.

Sir Brian Burridge: May I add to that? What Robin has described is seeking not to embark on a path that closes down options over a very long period. There are two aspects to that. The first is that to acquire a complex system quickly, it is necessary to reduce uncertainty up front and, currently, about 70% of the delay to programmes comes from the MoD’s requirement to re-profile its expenditure and about 30% comes from the uncertainty that is taken into the programme from not fully understanding the technological risk and the degree to which that technology can be engineered. That aspect could be determined much more accurately if we had a propensity to spend 15%, say, of the total budget between the assessment phase and the end of production before main gate. This, as the Committee will well know, is the recommendation that was pivotal in the original Smart Acquisition programme. I am talking about flexibility and adaptability as a result of not closing off options over a long period, but there have to be some options, and those options are what arise out of your indigenous spend on research and development, leading to capability. I feel sure you will want to pursue that in detail, but I will leave it there for now.

Graham Chisnall: I would like to add one extra little bit. Commercial off the shelf acquisition has a perverse implication for the ability to adapt to changing requirements and new circumstances. I was involved with the Nimrod programme many years ago, and when you are dealing with complex integrated systems that have embedded commercial off-the-shelf systems or subsystems and equipments in them, if you want to adapt, by definition you cannot touch those because they are commercial off the shelf. That causes considerable difficulty because you then have to sub-optimise everything around those systems and at hard points. So there is a perverse aspect at the complex weapons system end of commercial off the shelf systems becoming very inflexible.

David Hansell: Obviously, getting to contract quickly is paramount to small companies, to sustain cash flow. So we would applaud anything to promote getting the contracts in place earlier in the procurement phase.

Q4 Chair: Do you think the White Paper provides a national industrial strategy for defence of any sort?

Graham Chisnall: The answer is no. It is quite high level. It does not provide the necessary guidance that industry needs to make its resourcing and investment decisions. It gives guidance in certain areas at a high level. It is particularly useful in relation to security. It says some useful things about SMEs and so on. But as guidance for where the MoD is going to spend its money in the future and on what programmes or even on what broad capabilities, it is too high level for industry to be able to plan much.

Chair: We will come on to that.

Sir Brian Burridge: Can I illuminate that a little more? Chairman, you used the phrase "of any sort". It is true to say that what appears in the White Paper is part of a strategic view, but in and of itself it does not represent a defence industrial strategy. It is a waypoint on a journey. The outcome of PR 12 is the next significant waypoint. The publication of the equipment programme, which we expect at some stage, is another waypoint. There is the elucidation of the key critical technology priorities, which the Government have undertaken to publish. Taken together, they will form an amalgam that we can use for analysis, but the White Paper is merely the start.

Robin Southwell: Graham’s "no", while emphatic, did not represent necessarily a latent or implicit criticism of the White Paper. I do not believe, as we look at it, that the White Paper was designed to be a defence industry strategy. There is an underpinning methodology to the White Paper; it is about the procurement model that the MoD has engaged with. It states that the procurement model is driven by the underpinning criterion of value for money, and the value for money definition precludes any account of manufacturing or industrial impact on the UK. It actually states emphatically and clearly that it has nothing to do with manufacturing or industry in the UK, so it is not a defence industry strategy by definition.

Q5 Chair: Did it matter to you-and if so, to what extent-that it was delayed?

Sir Brian Burridge: Any introduction of uncertainty, from a business point of view, is unhelpful. There is no doubt about that. The fact that these key outputs, which I listed earlier, have taken longer and longer to see the light of day gives us greater difficulty in planning investment and in understanding what our domestic customer base is going to look like. It will be there: when we see the equipment programme, we can put it all together. But the underlying point from this type of marketplace-the defence marketplace-is that we value both visibility of intent and, if we can have it, stability of intent, because that allows us to plan. It is not particularly helpful when these things are delayed.

Q6 John Glen: I want to draw out precisely what you think about the adequacy of the White Paper and what was missing. Some of you have already referred to other things that are about to come through and how, together, they would work out. But the White Paper said that the Government had the intention of providing "a clear guide to industry and to the acquisition community that should endure beyond the next SDSR." To what extent do you think that that has been fulfilled? What would you have had in it? What is missing? What would have been in it if you had written it yourselves?

Robin Southwell: We have already mentioned that it is enduring. We are sure that the Government are absolutely clear that they do not want manufacturing or industry in the UK to be, in any way, a factor in their procurement strategy, so I am sure that it will be enduring. There are maybe two areas that do concern us. I will give the headlines and then pass over to my colleagues to elucidate-one is exportability and the other is supporting the SMEs. We assume that "SMEs" in the report means UK SMEs.

With respect to exportability, in our opinion that is a fundamental dynamic which may make a difference to our industry. Our domestic market is flatlined and our near European market is flatlined and both will maintain that posture for some time to come. If we can export, that may make the difference, and we are absolutely committed to doing that. If we are to do that, there are things that have to happen.

The second thing is on the SMEs. While there are a lot of very fine words and clear effort, in terms of those actually on the ground-people like David, running his business; it is for him to say-there is a degree of disappointment that we have not got some tangibles in place which will make the difference to his company’s survival for another year.

Q7 John Glen: And what would those be? What would you-practically-have wanted to see in the White Paper? Expand.

Robin Southwell: Can I ask Dave? I would love to talk for ever, as James knows, but I will let Dave in.

Q8 John Glen: Yes, of course. I just want to get a clear picture, as a consequence of this question, of what you would have had in the White Paper to address the specific concerns around uncertainty with SMEs or whatever it is.

Robin Southwell: Okay. We will start with SMEs and then maybe we can go on to exports.

David Hansell: There are a lot of good things in the paper that come out in support of SMEs. Coming up through my committee, within ADS, is a concern about the implementation of that. Engagement between the Ministry of Defence and SMEs is encouraged in the paper, and that can only be a good thing. However, getting that policy down into practice is probably going to be quite challenging, because, by definition, those contracts are likely to be smaller than the capital equipment projects. To get that message down into the procurement team will be quite challenging, particularly if there are resource constraints implicit in that as well. That is the message coming out from the smaller SMEs.

Graham Chisnall: Coming back to the export theme, from an industrial point of view, it would have been helpful to have had more clarity on a number of connected issues. Around the R & D appetite, the White Paper sets a very helpful and useful minimum figure of 1.2% of the budget. We worry that that will also be a ceiling. That is a very low level of R & D funding compared with prior years.

Q9 Chair: We are coming on to R & D specifically later on in the morning. What else would you say?

Graham Chisnall: Okay. The other piece I was just going to mention was everything to do with the support environment. There was a lot of input into the Government during the Dragon’s Den period about ways of getting value for money on the support side. It would have been nice to have seen some of those find their way, conceptually, into the White Paper.

Robin Southwell: On the exports theme, to build on what Graham has said, we think that this is a fundamental issue. It is not the get-out-of-jail-free card, but it is the dynamic that does not rely on the euro or on our own issues. We would like to suggest that exportability be one of the value-for-money criteria that the MoD is using to decide whether or not to procure a project. That is a very clear suggestion that we are making to this Committee.

The second thing on exports-I will give you just one, but we probably could give you 100-is that our ability to export is umbilically linked with whether or not our forces use that equipment. It just makes it easier in a challenging marketplace where there are a lot of countries with joined-up strategies and where their forces use, or have employed, these products. If our forces are not using it, it is just tougher. At the moment, a lot of effort is going in to exports. If our forces do not use the equipment already, the effect from that effort is diluted. That is one example that shows why we would like exportability to be one of the value-for-money criteria.

On the SME side, as David has said, another issue is the ability to contract. He has to meet some very onerous-probably quite rightly so-terms and conditions in order to supply directly to the MoD, which may preclude his ability so to do. Secondly, the way in which programmes are developing, and we have to welcome this, means that risk is transferred through life to industry. If you are a relatively small company with a relatively narrow balance sheet, it is difficult to accept that project risk. There are real issues that the SMEs are struggling with at the moment.

Sir Brian Burridge: The White Paper lists the reasons why the UK is an attractive place for inward investment, among which is the springboard it represents for exports. In defining value for money and ignoring the export part, in many ways it rather suggests that the role of the Ministry of Defence is merely to equip the Armed Forces. Of course it is about security policy, alliances, and making friends that you might need on a rainy day, and defence exports are a way of doing that. There is a policy aspect to this that is not really the subject of joined-up Government thinking, but it is axiomatic that if we wish to sustain the type of industrial base that we have in this country, with all that that means for revenues to the Exchequer, advanced manufacturing, the pull-through of talented young people into these high-technology industries, then we have got to be successful in export.

The thing that really stands behind that is our ability to compete with leading-edge technologies on the global market. A country like France has absolute alignment between Government and industry-sometimes we overlook this-over what those leading-edge technologies are and how they will develop, and an absolute underpinning guarantee that they will be pulled through into equipment for the French armed forces. Now, that then plays to what we would term brand UK if we did the equivalent. That is a whole area that the White Paper misses.

John Glen: That is very clear.

Q10 Mrs Moon: May I take you back to some of your earlier responses to the Chair? You pointed out that recent large projects in particular had cost half as much again as they were expected to cost and had taken twice as long to come to fruition. In your response to the Chair’s first questions, you placed a lot of responsibility, Mr Southwell and Sir Brian, on the Ministry of Defence. The MoD has been on the naughty step for a long time, but you ignored industry’s role in these cost increases and the length of time for maturity of projects. What role do you think you played and what changes have you made in your practices to ensure that you are doing your bit to improve this?

Sir Brian Burridge: That is a fair question, if I can start. First of all, a lot of the corporate memory is historical. The major projects report points out that it is legacy programmes that determine the perception of performance. From an industry standpoint, I can speak for our own group. We have 32 programmes with the MoD. All but two are green. We have six major sub-contract-

Q11 Chair: Green?

Sir Brian Burridge: On time, on budget.

Robin Southwell: And, of course, eco-efficient.

Sir Brian Burridge: We have six major subs, which are also all green. The picture 10 years ago might well have been different. The transformation that has taken place has seen heavy investment and a great deal of attention to programme management. That is an area on which we focus, because only by getting that right can you efficiently convert your intellectual property into a product and make it competitive.

Robin Southwell: I obviously concur with Brian. Let’s talk about A400M.

Chair: Not green.

Robin Southwell: It is propellers. I am totally confident that that programme will end up in the RAF. A fantastic piece of kit, which for many decades to come will be exported around the world and bring real value to the UK. However, during the development phase the comments you made about being late and being over cost are absolutely correct. I was not in any way trying to hide-certainly in the comments I have made so far today-our responsibility. We got it wrong. We made mistakes and we have suffered the consequences in terms of a €5 billion write-off. We have done two things to put that right. First of all, we have reviewed our management and management processes. Secondly, in EADS’s case, that part of the business, which was a separate business entity, is now part of Airbus. So we have integrated into a larger organisation for it to have the resources and the integration that was necessary. So we have learnt, to our considerable expense, what went wrong, and we have undertaken a quite drastic and, I think, perfectly sensible management process to ensure this will not happen again.

In the wider context, industry has very much-certainly at this juncture-got risk fatigue, whereas in the past we would say, "Let’s sign up, let’s make it work." By the way, I don’t understand this concept, the conspiracy of optimism-never have done. I say that because whenever a programme starts going wrong, you forget about optimism. You end up not making any money. That is a fact. We never, in industry, aim to enter a programme knowing that it will go wrong, which is what the conspiracy of optimism implies. A400M is a good example of that fact because, when it started going wrong, it cost us big time. So in future-for the rest of industry, this is of interest in relation to Brian’s comments-we will approach new programmes and projects with extreme caution. There is the necessity for appropriate contingencies and risk to be applied. We will not do it any more in any sense in a cavalier-and certainly not an optimistic-fashion.

Q12 Mrs Moon: Are you happy that you have improved the reliability of your cost forecasting? You talked a lot about changing management structures and time management, but what about your cost forecasting? There was almost a sense that the Ministry of Defence became a bit of a milch cow and that you could afford to come in under budget because they were going to throw a project forward and you would get the money back then.

Sir Brian Burridge: Defence manufacturing is a numbers-based business: we live and die by the quality of our data. The MoD and its acquisition organisation is a words-based organisation, and that is where the difference is. We invest heavily in financial systems and we have a universal financial system over the entire business-80,000 people. We have data that are correct, valid and timely. On that basis, we can take-or see-early warning. We can take action and we can use that data in the sense that everybody is quite literally on the same page. So a project manager down there on the Wildcat line at Yeovil worrying about undercarriage can see something going wrong and can-and is expected to-act. Now, one of the aspects of the material strategy is for the MoD to be in that sort of area with the quality of its financial data, but we absolutely live and die by numbers.

Q13 Mr Brazier: If I understood the earlier statements by ADS some of you at least see the Gray and Levene reforms as broadly compatible, but I would like to ask you in turn, starting with ADS, if you have any reservations about them. In particular, I would like to focus on one point, which is the fragmentation of-it keeps changing its name; it was called operational requirements and it was then called systems, but it is now confusingly called the capability process. The Gray report, which was written before he took over, was very clear that having a strong, clearly defined customer was absolutely central to the picture. We then had Levene, in which the capability process almost disappears and he recommends amalgamating with another Department. We now have a compromise in which it has been split between the three Services and the joint capability command, with a co-ordinating body. What are the views on this?

Graham Chisnall: The line broadly compatible in our response basically meant that they are doing complementary things in the main: one is looking at procurement reform and the other one is looking at a broad-based reform of MoD. The reservation in the word "broadly" comes back to a concern that there is the potential for substantial delay while these reforms are worked through and implemented. Delay is something that we cannot afford at this point in the cycle. Coming back to Sir Brian’s earlier point, we are looking for some clarity and a basis on which to make some decisions ourselves on the industry side. These reforms have the potential in our view to delay implementing that stability and efficiency.

Q14 Mr Brazier: But moving on from where they are trying to get to, what about what is now confusingly called the capability stuff? Is there going to be a strong customer?

Sir Brian Burridge: The holy grail in organisations is to align authority and accountability. The front line is accountable for achieving military effect, so it is appropriate that the commander should have his or her hands on the levers that allow that to happen. Defence capability is a pipeline, and where you have a mature in-use system such as Typhoon, it is entirely right that the front-line commander should hold the budget for the support of it and for its spiral development in capability terms, because there is a much more direct understanding of the relationship between the platform and the weapons system and the effect that it achieves at the front line. I think the MoD pretty much sees it this way. It has described to me that, on the one hand, if Typhoon needs a new radar, that is a matter for the front line. They will determine the sort of capability that they require from this piece of spiral development. There is a contract, of course, with DE&S to provide it, and that’s fine.

Conversely, if a decision is taken and we need to be able to get a weapon on a target with a long-range penetrator in 2030, that is a strategic issue, and in those circumstances that will be something for the central MoD capability staff. Nothing about the devolution of this to front-line commands is particularly new. It was, after all, a recommendation in the 2002 Defence Logistics Transformation Study, which was never actually implemented. But it is undoubtedly a method with reduced resources to align authority and accountability in a way that has not been tried before.

Q15 Mr Brazier: That raises two obvious questions. One is how do you prevent problems of fragmentation and lack of inter-operability if you are looking at new systems coming in across the Services as a whole-or the four Services, which we now talk about with the joint command? The other, crucial question then arises: how do you avoid a like-for-like mentality, because, clearly, no one is replacing anything with cyber at the moment, because cyber is not a past concept, so the wholly new steps forward do not have a seat at that table at all.

Sir Brian Burridge: On the inter-operability point, if we just take network enabled capability as the example, the thought police for that is manifest in the joint forces command, so Air Chief Marshal Peach will have the authority and accountability to define what the network is and how you plug into it, otherwise your piece of procurement for spiral development and capability will not be permitted.

On your second point, there is no suggestion that we are throwing out scrutiny. The central scrutineers still have the role of saying that that is within the envelope of what we expect you to do, and thereby prevent the duplication of capability. In a pragmatic sense, the size of the capability that the UK aspires to now actually militates against duplication.

Q16 Mr Brazier: I am sorry; my second question was not about duplication. It was exactly the opposite. It is about the voice for the system that is not in there and that is not replacing anything. Cyber is obviously the high profile example. To take a rather more obscure example, the Americans are now going down the road of these hybrid airships for a whole variety of maritime roles, and possibly wider too. There is no question of like for like. Who is actually going to be the voice for the wholly new concepts, which may be the future of warfare, but are not replacing any existing one?

Sir Brian Burridge: I will use the new nomenclature. The MoD centre will have military strategy and military capability at three star level-two or three stars. Military capability will define that the UK needs to have this capability in its envelope, and this will be led by joint forces command or air command or whatever, but there is no chance that three environmental commands can go freelance on what the capability is.

Q17 John Glen: Can I ask about your impressions of the impact of the cuts in personnel in key roles in the MoD? We have heard concerns from the NAO that the MoD will no longer be an intelligent customer. How do you see that reduction in skills and staff impacting on the relationship that you have and the dynamics of the negotiations and discussions that you have?

Robin Southwell: First, we have noted on a human level, real uncertainty among the Abbey Wood staff, and a sense of loss of empowerment and authority. That is simply because they spend quite a bit of time looking over their shoulders rather than focusing. In the process of transition that has started, at least emotionally, through to implementation, there will be a period where the level of effectiveness that we all pray for will be difficult to secure, because of the uncertainty.

Q18 John Glen: Was it there before?

Robin Southwell: Before, to a large extent it was propped up by the legion of consultants, advisers and individuals brought in to support the system as it trundled along, so we were working on a patchwork basis. That is actually one of the healthy points about this process, where we all stand up and say, "The emperor has got no clothes. Something has to happen." That process, of course, creates these levels of uncertainty, which is having an effect on how we engage with the procurement organisation.

You hear comments-this has trickled through; I don’t know if it’s true-that 180 new commercial people are going to be employed within Abbey Wood. What does that mean? How does that fit in? Lots of questions are being asked in the community. That means that in the process of moving forward, the greater clarity there is in the implementation of clear and quick time scales, the better for us all. My view is that it is a disruptive process, which needs to be managed as effectively as possible.

Q19 John Glen: Forgive me, but your answer has focused on the disruptiveness and uncertainties of the current process, not the underlying capabilities that are in the MoD. The concern I have is where has that been and where do you see it going?

Robin Southwell: I was just giving a flavour.

Q20 John Glen: You have also said there are different consultants and different groups playing different roles. Surely, from your perspective that is an ideal situation, isn’t it? You can then have different conversations with different people.

Robin Southwell: That implies a degree of cynicism about me. Anyone who knows me would know that is not the case, that it is misplaced. All we want in industry is a great buyer. We want the buyers to be intelligent, smart, challenging, effective, clear about what they want and extremely effective in negotiating the best possible terms for the buying community. A great buyer makes you a great supplier. Those are the inevitable facts. It challenges you to ensure that what you are doing is right; it holds you to task; it makes you accountable; and it makes deliverable failure an option that is very expensive.

To be clear, the last thing we want is a fragmented accountability, shared to the extent that we do not know who is in charge or what. We do not want contractual terms that are flaky, ambiguous or particularly beneficial to ourselves. We want a fair, balanced contract that we have to deliver, with severe consequences if we fail so to do. To clear that up, we want a great buyer, because that is the only way we become great suppliers.

Sir Brian Burridge: No doubt, you will want to talk more deeply on the matériel strategy, but essentially the Chief of Defence Matériel is trying to solve three problems: one of budget, one of skills and one of interface with his ultimate customer. In so doing, a soft market test was done to see what the implications might be of potential solutions. None of those solutions is very early-2014 at the earliest. In the meantime, the DE&S-and that is the only area we can speak to because that is our interface-will need to come down to a manpower level of 14,400 from about 19,500 at the moment. In current circumstances, that is pretty challenging. The DE&S boundary includes the Defence Storage & Distribution agency, the dockyards and the information systems area. It is not only the people who form IPTs and do acquisition. Nevertheless, it is challenging. There will be a need for an interim structure in that time. We are unaware of what that structure will look like or the processes that will underpin it, because, for sure, the processes with a slimmer centre at DE&S need to be different from how they are now. As I said, we crave stability and certainty, and this is just an area where there is uncertainty-for us-at the moment; it may well be resolved soon, but right now, there is uncertainty.

Q21 Chair: So there is a problem of uncertainty over the future of DE&S. What are your views about the options for the way in which DE&S could go-for example, in relation to a Government-owned, contractor-operated organisation?

Sir Brian Burridge: The problem that the CDM is trying to solve is, as I said, threefold: a balanced budget, which is an internal matter; skills; and depth of skills-commercial, finance, engineering, legal and so on. Anything that the Government can do to make our customer a great customer, as Robin has elucidated, has our unmitigated support. That is a good thing. How you get there is an untested matter.

Similarly, the matter of an arm’s-length relationship between the procurer and the ultimate customer is, in the Gray report, what sits below many of the problems, where the customer is changing the spec, where there is no stability of requirement and where sometimes technology changes. From all that the management of DE&S say publicly, the need for this arm’s-length relationship, so that you can have a transaction without ambiguity or the cost of change, is quite an important factor in how they go forward. They see that as being best delivered either by an executive non-departmental body or by a GoCo.

That is true, but none of us can say, "Well, is that in the art of the possible?". We look, perhaps, at the Olympic project. The Olympic Delivery Authority used CH2M in an alliance as its project manager-as its strategic partner for acquisition. In many ways, that was successful. The thing was delivered on time and on budget, albeit that that was much more constrained and perhaps easier to take from beginning to end than defence procurement.

Nevertheless, these models exist and show a degree of success, so the notion of a strategic partner bringing in the expertise that the DE&S requires is perfectly plausible. What remains to be seen is how the interfaces work. How does the interface work between us a prime and what is another commercial organisation, which has a balance sheet, a P&L and a bottom line, and shareholders? These are unknowns, and that is what the next few years will bottom out.

Q22 Chair: What are the pros and cons of the two options that you have mentioned?

Sir Brian Burridge: Between the two, in terms of skills, they are broadly similar, because they will give the DE&S, as a non-departmental body, the ability to hire and fire at what we might regard as market rates. In terms of being able to have the flexibility and adaptability to surge particular expertise in finance, for example, if there were a follow-on to PFI, which takes a real horsepower to understand from a customer point of view, it is possible that a GoCo-someone like CH2M, Bechtel or whatever-with global resources, would be able to bring those resources to bear. But it is hard to judge until we know precisely what the framework will be.

We should not forget that right now we are in something of an unusual context for defence acquisition, because the equipment programme for the next 10 years is pretty much fully committed. We will not see the acquisition of new major platforms coming into the programme, which is always a big test for an acquisition organisation. I would say stand fast Trident follow-on, of course, but in general, we are in a particular context that is somewhat different from the historical one.

Robin Southwell: I want to come in and support Brian, in terms of his comment about the interaction. There are perhaps two areas of interaction that will, in my opinion, be criteria for the success of this organisation. One will be the ability to bring in specialist knowledge, often from discrete Government agencies or through people in uniform-for example, if you have a platform where you need urgently to bring in some knowledge on defensive aid suites, or some sort of threat analysis that will allow you to define the requirement. At the moment, given that the agency is a wholly owned part of the Ministry of Defence, it is quite easy to bring those skills in and be part of the team, because they are all working for a common payroll and set of objectives. For us, a programme team that works effectively is one that can bring in specialist skills from within the Ministry of Defence and the Armed Forces quickly, without worrying about how much my colleagues on the team know and do not know, because they need to work as a team to define this.

Secondly, it is not about acquisition as much as it is about through-life acquisition and the ability to have someone involved in that at an early stage, who is committed personally to deliver the outcome through life-because that is where most of the money is-and who feels a sense of passion and engagement. Where I am-maybe I am being a bit homespun here-is to be trying to negotiate a deal with a bunch of people who have a common set of values and objectives, and a similar passion to get this done right in holistic terms, and bringing in those skills are to me the criteria on which success is based. Whatever structure we end up with, that overriding set of factors should be taken into account. Have I explained it?

Chair: Yes, thank you.

Q23 Ms Stuart: Something was sparked off by Sir Brian Burridge’s comparison with the Olympics. Part of the reason why the Olympics is seen as a success is because there was continuity at the top and a united political and practical will, spanning several Governments. As I look at these various models, in your perception, do any of the models provide for something that will give us continuity of political will at the top, to a degree of certainty?

Sir Brian Burridge: Only in as much as none of these models in any way suggests that the MoD and the DE&S abrogate their responsibility for leadership and management. The point is that they represent the strategic core of decision-making. What they need out of these models, as I said to Mrs Moon earlier, is good, robust data so that they can make decisions, and they need the depth of understanding of how to make them commercially viable-to be a great customer-and to make the finance work.

So the strategic partner is a partner, but the executive authority remains where it is. The degree to which the Ministry of Defence might regard continuity at strategic command level is a matter for the Ministry of Defence, but all I can tell you is that I work in a company where the leadership endures for a very long time.

Q24 Mrs Moon: I would like to go back to your comments, Mr Southwell, about the support sector and through-life capability management. I was really taken by the ADS submission in relation to the White Paper, where you talked about how the support sector can have a great contribution to driving efficiency and, I hope, effectiveness in energy expenditure. Can you give examples of what you think you would like to have seen, and perhaps some examples of where the support solutions have been separated from the acquisition programme? Where has it not been joined up?

Robin Southwell: On the latter part, there is Typhoon, and I will bow to Brian to talk about that. A400M is another one where we are in a process now, close to introducing the equipment into use We are involved, even now, in a very strong and sometimes emotional debate internally within the supply forum about who will stand the risk of that programme through life. I am looking at things like providing guaranteed maintenance costs for the engines on the aircraft. That process is in play now, and I think best practice is that that should have been undertaken at the very beginning of the requirement stage-that it would be an underpinning requirement before we move forward that that is addressed. So that is where we have a misbalance.

In terms of the importance of this-I am not at odds at all with anyone on this-I think that the underlying principle that availability-based contracting is good news, that risk is applied where it is best managed, is well understood. If you don’t mind, I will give you a very brief anecdote. In my youth, I was involved in the air-to-air refuelling programme, and I went on a VC10-this must have been about seven or eight years ago-and when we turned up three things happened within about 30 minutes. One was that the steps to go on to the plane were not there, so we had to wait 10 minutes for someone to find the steps. We got on the plane and one of the other planes that we were with could not join the mission because it had gone tech-stopped working-and then, as soon as I went to the toilet, the bulb in the toilet was not working. So, within 30 minutes of me turning up, there had been three incidents. Today, under AirTanker, each one would have cost a significant amount of money as a service credit. By now, AirTanker would perhaps have been over £100,000 out of pocket for that failure to deliver. That is an interesting thing.

At the moment, the Armed Forces are well pleased at make-doing and mending, at getting it going on the day, while you have introduced a wholly different and I believe totally appropriate focus on, "What is the output? If you fail to deliver, you will be punished," because it certainly concentrates minds and gets the behaviours right. There is one view. Another one on this is to do with the amount of money that was spent on what I think were the VC10 wing cracks about 10 years ago. Now, all of that risk would be transferred to industry, in terms of through life-over two and a half decades, if it goes wrong, it is for industry’s account.

In my opinion, the greater engagement with industry in the round on output-based solutions really does make a big difference in terms of effectiveness, accountability and cost-effectiveness. Brian, you have an example on Typhoon, haven’t you?

Sir Brian Burridge: If I may, I will start with Tornado, because this goes back to 2002 and the Defence Logistics Transformation Programme, where it was decided that we would go for an availability contract for the Tornado, run by BAE Systems, based on outputs and with performance incentivised. The NAO crawled all over this in 2006 and determined that £1.3 billion had been saved in that period on Tornado support. The same is true of the Integrated Merlin Operational Support-the blueprint is used throughout all our helicopters. It is not quite reproduced in Typhoon yet, but the area of interest that the White Paper might have done us justice in explaining was the extent to which you should actually extend those boundaries. The nearer you get the industry boundary to the front line, the more you are providing incentives for availability of a combat-ready platform, whatever it is, to be there on the day.

Since the White Paper has come out, or in parallel with it, the Whole-Force Concept is beginning to get flying speed. The Whole-Force Concept, as you know, consists of this blend between uniformed regulars, uniformed reserves and industry, and how you can manipulate that blend in order to provide you even with deployed capability. That is the direction of travel now. Perhaps I would have liked to have seen it given momentum in the White Paper. It was certainly something that we took into the "Dragon’s Den" process of the SDSR.

Q25 Chair: Mr Hansell, can I come to you about SMEs, please? You have said that one of the things that was necessary about the White Paper was getting it into practice, that the implementation of it would be challenging. The White Paper seemed to contain quite a lot about SMEs; it seemed to major on SMEs in general. What would you say are the problems, apart from getting it into practice, that SMEs face?

David Hansell: Bearing in mind that "SME" covers a broad spectrum of people, from one and two-man companies right through to 250-man companies with robust balance sheets, from the trade association and the meetings we have with the smaller of the SMEs, we think that at the lower end of that spectrum engagement directly with the MoD would be helpful for continuity and communication, and so on. Some of the barriers to that, of course, are some of the onerous terms and conditions that naturally flow down in the standard terms and conditions of contracting with the MoD. To that extent, what the trade association has been doing with the MoD is to try to get a smaller set of those terms and conditions that are more appropriate to lower-value contracts, rather like the back of the purchase order terms and conditions you would get in normal contracting between companies, let’s say.

Q26 Chair: How successful is that?

David Hansell: It has been reasonably successful. One of the outstanding things at the moment is the unlimited liability placed on MoD contracts with small contractors-under £250,000. To try to ensure against unlimited liability is very expensive, if doable at all. So that is the dialogue that is currently going on with the MoD to try to resolve the issue, which I think is unique to the MoD in government contracting.

Q27 Mrs Moon: In your responses you have talked a lot about contracting with the MoD, but what about the difficulties of the SMEs contracting, winning contracts and breaking through into contracts with the primes? Is that getting any easier? Can you see this White Paper suggesting that perhaps the primes have to shorten their time scale, in particular for getting on to their approved list of SMEs? Is that improving? Is that an area that needs greater work and greater opening up by the primes?

David Hansell: I think that it depends on where you sit in the supply chain. If you are an integral part of the capability or requirement, historically you have had early engagement. If you are much lower down in the supply chain, contract to delivery-flash to bang, as it were-is much shorter. One of the themes in the White Paper as far as the Ministry of Defence is concerned also applies to the prime contractors, where engagement of the SME community should happen earlier in the process.

Q28 Chair: Have any of you had experience of the Centre for Defence Enterprise?

All witnesses: No.

Q29 Chair: I must admit that I am a bit surprised to hear that. But there remain, according to the ADS paper, concerns about intellectual property and commercial arrangements. What are those concerns?

Sir Brian Burridge: The SME landscape in the defence manufacturing business is potentially 95%, 96% or 97% build-to-print manufacturers-low overhead, high precision, high quality, on time and on cost. Of the remainder, the majority is service, and a tiny part is what we might regard as R and D, or the capability of producing elegant software or some product like that. In that case, the SME owns the intellectual property-quite rightly-and we have found in the industry that there are cases in which the legality of that intellectual property and its copyright is not properly respected by either the customer or the entity higher up the supply chain.

In our business, we actually have a methodology of protecting the intellectual property and we invoke a licence scheme whereby we will buy a licence for an SME’s intellectual property. That is beginning to be more and more understood. That is the first point.

The second point on terms and conditions is the business of unlimited liability that goes with your product that is being embodied by your customer, whether that be someone else up the supply chain where that would not apply because we would not expect a supplier to take unlimited liability in that sense. It is what primes do. That is why we have big balance sheets. But that is not the same for a direct transaction with the MoD. I think the MoD, Graham will correct me, is unique in still insisting on unlimited liability from its suppliers.

Q30 Chair: Are you suggesting by your previous answer that the Ministry of Defence is careless with the intellectual property of its suppliers?

Sir Brian Burridge: I personally would not say that. I can adduce no evidence myself to say that. I can say that that is what I hear in the small companies committee. In fact, in relation to your question on the CDE, the Defence Sector Board is having its next meeting at Porton Down with the DSTL to talk through at board level these matters. The degree to which actually they do have a process in which small companies can have confidence is one item.

Q31 Chair: Mr Chisnall, do you want to add anything to that? You do not have to.

Graham Chisnall: I will not then. I think that is sufficient.

Q32 Bob Stewart: The ADS memorandum suggests that companies spend about 8% on R and D. The question is whether that really compensates for MoD’s R and D spend as it used to be.

Graham Chisnall: R and D has reduced across the board. That is partly because some of the very large programmes have moved transition out of development into a more mature period. But it is of concern. It does not fully compensate.

Q33 Bob Stewart: When you say fully, in what percentage? Can you put a figure on it? How much is missing?

Graham Chisnall: I do not have a figure to hand. We can supply that very easily.

Q34 Bob Stewart: It would be very nice to know.

Robin Southwell: It is big numbers. The MoD R and D budget has gone from 2.4% to 1.2% over the last 10 years, while the defence budget has, if anything, got smaller. So in actual hard terms we are spending under the MoD R and D less than half as much as we used to spend.

Graham Chisnall: It is several hundred million a year.

Sir Brian Burridge: I can give you some figures. The ’97-98 spend was £564 million. If I normalise that with the GDP inflator, at 2009 prices that is £670 million; 1.2% of the defence budget 2012–13 sits at around £410 million. It remains to be seen what the defence budget is. But that is the difference. So it is significant. We need to be careful though because the lexicon around R and D is loose. There are these things called the Frascati principles by which you define what is research, what is development and they are not applied universally. But the defence industry generally across Europe invests somewhere around 8% of revenues. So that includes contracted R and D. In the UK, Finmeccanica for example, 2010, £220 million, of which £70 million was co-investment with the MoD. Last year it was £200 million.

Q35 Bob Stewart: I will try to speed this up as I know the Chairman wants us to get through this. I have three questions, one after the other, and I will cut you if I am happy. Have you any comments on the MoD’s science and technology spending that would be of use to us?

Robin Southwell: Can I answer that question-

Bob Stewart: Sorry, I did not mean to cut you off.

Robin Southwell: No. I have not said anything yet. You were talking about R and D-we say R and T in a purist sense. A lot of R and D is undertaken when a project has been placed with a customer. That is where the real practical stuff really starts to come through. If you have an E-scan radar, you really pile in through the actual building, deployment and integration of it within a platform.

What is interesting, going back to the White Paper, is that, when we look at the criteria upon which the Government is acquiring, it talks openly and quite understandably about wanting to be the most open market in the world through competition, and we laud that. The White Paper also emphasises the growing importance of off-the-shelf. When it talks about off-the-shelf acquisition, one of the key criteria is maturity of product. That is not a defined term, but the White Paper defines it as maturity. Maturity means that it is already in operation somewhere, which by definition, if you follow my logic, means that some other country is using it and has invested the R and D, and we are using that. That process means that we will not undertake that key R and D activity here in the UK, which, by the way, removes our ability to export it because we are not building it here. As much as R and D is important in the pure sense, more is spent through actually building programmes and projects here in the UK with us in the industry. If your acquisition process is to buy mature off-the-shelf, we are precluded completely from that opportunity.

Sir Brian Burridge: The White Paper gives us six critical outcomes from science and technology, and they are all very plausible. The White Paper also tells us that every year the Government will publish its S and T priorities. To me, S and T priorities mean precisely what technology you want to develop, and I immediately think of technology road maps, et cetera. I have a bunch of mental criteria by which I judge that, but the area that is missing here is: let’s just make sure we understand where this technology is generally developed, if it is not developed in the UK, and let’s just make sure we understand what our access will be. We might say, "Well, our major partner is the US." Will that technology be covered by ITAR restrictions? Would we get what we need for competitive military advantage?

Bob Stewart: That is what Robin was alluding to.

Sir Brian Burridge: Yes, or to integrate it into platforms that become commercially competitive in themselves. There are two glaring areas that are missing from here. The most important streams of technology are about sensing-they are about radars, listening to radio frequencies, infra-red detection, etc. They are critical, battle-winning technologies, and they will be until the rules of physics change. That is missing, and that is what we need to see.

Bob Stewart: That is very important.

Q36 Mr Brazier: Sir Brian, you have very nearly answered my principal question, but I just want to be absolutely clear about what you have just said. Are you saying that we need a checklist? "These are the critical technologies that we are going to have to be involved in. Which ones are we going to be looking to the UK for, and who can we trust to provide the others? It has to be an actual list of concrete technologies with an identified basing," is that what you are saying will be the basis of a serious-

Sir Brian Burridge: Correct.

Mr Brazier: That was my main question. I have another small one.

Q37 Bob Stewart: Is this a classified piece of information? When this comes out, is it classified?

Sir Brian Burridge: At the top level of science it wouldn’t be. The fact of the matter is that a new semiconductor material such as gallium nitride will be able to handle wide bandwidth, etc.

Bob Stewart: You have me there, I am afraid.

Sir Brian Burridge: It is axiomatic that, if you want to get into this, you have to be researching the applications of gallium nitride.

Graham Chisnall: You want to engage academia as well in all of that, so you would keep it on a broad basis.

Q38 Mr Brazier: Do you see, though, any prospect of the MoD producing such a list? One of you-it was either you or Mr Southwell, but I cannot remember which-mentioned at the very beginning the fact that the White Paper was only the beginning and there are other documents expected. Do you see any prospect of the MoD producing such a list?

Sir Brian Burridge: They have undertaken in the White Paper, with two Ministers’ signatures on it, to produce their S and T priorities. The degree to which those S and T priorities are useful to a physicist remains to be seen. Bear in mind that the defence technology strategy did just that, and actually in the White Paper it explicitly states:

"In particular for defence technologies, these will replace the on-line Defence Technology Plan and supersede the Defence Technology Strategy 2006."

That is, these priorities will replace them. Will these priorities be accompanied by technology road maps? I don’t know.

Q39 Mr Brazier: Were the earlier ones in 2006?

Sir Brian Burridge: Yes.

Q40 Mr Brazier: They had technology road maps?

Sir Brian Burridge: There were reasonable technology road maps.

Q41 Mr Brazier: Following on from that, in a sense you are the wrong side of the House to answer this question, but it would be very interesting to hear your view, though. There was the recent announcement of the easing of the controls on who QinetiQ-that is, the very strong veto that the MoD has had up to now as to who QinetiQ, which of course controls a very large body of what would have been the MoD’s in-house stuff until it was privatised-can do business with. Do you think that, in those areas that we continue to control, there is a real danger that we could lose it not just to competitors but potentially to enemies?

Sir Brian Burridge: I cannot comment on that; it is a matter for QinetiQ and its customer.

Q42 Mr Brazier: My last question is a rather more specific one. What do you understand by a modular approach? What are its advantages and disadvantages? For example, the Navy say that it is much harder to repair a ship that’s been hit if you are reliant on replacing modules, whereas you could get sailors to make and mend. What is the view on modular approaches?

Sir Brian Burridge: The nearest equivalent to a modular approach is the personal computer that we all take for granted, where it has a veritable open system architecture and you can buy whatever applications you like, and you know they’ll work. You can buy any printer you like and 90% of the time it will work. And you can plug it into a network, and it will work because there is a universal open system of architecture, which is defined as standard.

If we reach this nirvana, say with aircraft, we will have a central architecture into which you as a customer can plug your own bespoke capability, whether that be a certain sort of radar or a certain sort of infra-red sensor, or whatever. If the baseline architecture comes with modules, either stated by you because that is what you want or this is the standard and they can be switched around, that is a modular approach. As technology changes and as you wish to spiral develop a platform’s capability, you substitute different modules. Frankly, the science of armoured vehicles is moving in this direction. The science of aeroplanes is just about there, but not entirely.

Q43 Mr Brazier: There is a physical modularisation too. As far back as a quarter of a century ago, Dutch warships had whole sections you could just pop in and out. We have moved partially in that direction ourselves. What do you see as the pluses and minuses? The pluses are fairly obvious, but what do you see as the minuses?

Sir Brian Burridge: Twenty-five years ago, modular was merely substituting like for like; in other words, it’s damaged or it’s broken and we can shift this in. What we are saying now is that the advantage is that, as technology changes and as the ability to produce a more discriminating radar arises, you can slot that in. The disadvantage is that there is always the potential that, as with your PC and a printer, your aspirations will ultimately be dented, because it just doesn’t quite work in that way. But as a theory, it is unassailable.

Graham Chisnall: There are different degrees of modularity, and clearly armoured vehicles having applied armour on them, and so on, is a sensible approach. One of the other disadvantages is if somebody comes along and invalidates the operating environment that you’re hanging everything on-there’s a new generation, or whatever else. But as long as one goes in with one’s eyes open and you use it intelligently, then it has significant power.

Q44 Bob Stewart: I have just got one quick point. It’s to you, Mr Hansell, really. From your point of view, as someone who represents SMEs, how hard have you been hit by the decline in R and D in the Ministry of Defence? How has it affected your companies?

David Hansell: I think it’s to do with transparency. What are the equipment programmes? In which areas does technology insertion or innovation need to be focused? Because, for a small company, the investment in doing that and the resource it takes is significant. So you don’t want to spin your wheels and try and develop something that’s not going to be required. So I think more clarity in what’s required-what capabilities, or what end state is required-would be extraordinarily helpful to make those investment decisions.

Q45 Chair: Sir Brian, I have a question for you, which is aimed at you not really so much as an industrialist but in your role as a former senior commander. What is your view of the consequences of buying equipment off the shelf on the legality of the understanding of what that equipment does in relation to targeting, for example, various different potential targets?

Sir Brian Burridge: This relates to what I call a body of knowledge. A nation decides what its military power is going to be, and that military power has two elements: an envelope of capability and its intent to use that capability. The UK is somewhat different from other nations, because its intent is very forward-leaning-the notion of standing alongside our allies-the US or whatever; the notion of being there on the first day of war; the notion of a force for good in the modern world, mean that we tend to need to react to the unexpected, react quickly, and get it right. So that capability envelope has to be constantly manipulated, and we manipulate that-as a former senior commander-by absolutely understanding how our kit works and training aggressively. We take that capability to the edge of the envelope and beyond, if combat demands it.

We do that because we have a body of knowledge. That body of knowledge is enshrined in the military memory, the corporate memory of the MoD, the scientific community, including academia, and industry. When it is necessary to go into an operation-and targeting is a good example-it may often be necessary to modify weapons and the way they work, or accelerate the introduction to service of weapons, and in 2003 in the Iraq war we accelerated Storm Shadow into the inventory. It was just in development. In Libya and Afghanistan the role of dual-mode Brimstone similarly was accelerated-changed; and this can be done because you can reach out and touch the body of knowledge. In other words, there are people at MBDA Stevenage who understand how every piece of that weapons system works.

So when it comes to explaining to Ministers that you need to use that weapon to address particular targets-in Iraq, air defence bunkers with 3 metres of concrete on was a classic example-then you have to be able to explain to the Minister, but not in terms of "Well, we’re not quite sure, because it says it will do this, but we really don’t understand it". You have to be able to say with certainty, "The collateral damage implications of this weapon are:" and then the Secretary of State will go to the law officers and say, "This is a legitimate approach." Understanding that legality and understanding how you manufacture that sense of understanding is what we in the UK have been able to do. Other nations do not do it that way-they wait, they use whatever standard they have, and they address only those targets for which they have weapons that are well proven and so on. We could do an analysis of Libya-the Committee is well aware of this-where different nations addressed different sorts of targets, because they were limited by the way their weapons worked. The body of knowledge is what allows you to look a Secretary of State in the eye and say, "This is safe."

Q46 Chair: That is an extremely helpful answer, thank you.

I want to turn to international collaboration. We do not have long-we have 10 minutes. The ADS memorandum says: "UK Industry is at a disadvantage when taking part in joint programmes with industries which are supported by their own national defence industry strategies." Can you give an example of that? Mr Southwell, I suspect that you may have views on this.

Robin Southwell: Most of our competitors have joined-up strategies that combine their defence procurement strategies, their R and T and R and D strategies, what their armed forces use, and what they want to do to export. That is what most of them do, one way or another.

I will give you one example from the US, which has a "buy America" policy, which is protectionist with a small "p", while they are certainly very happy to sell copious amounts to the UK. France has a very joined-up strategy, whereby it has a clear national champion in Dassault, and it has thought through, in impressive detail, how it wishes to drive that political industrial strategy forward in its activities. It looks to our market, which is the fourth largest in the world and which we laud as being the most open market and the most available market, as an opportunity, as their market gets flatlined, to develop their strategy. Good on them-they are very good at this and they have, throughout history, brought their resources together in a very cogent and coherent way. We do not do that. We laud our ability not having these strategies. We regard ourselves as world leaders at pragmatism, ad hoc activity and case by case-that is how we do it.

When those two very different cultures and approaches meet, there will be issues. In our case, because we do not have that type of strategy and they do, we have defaulted to employing their strategy. We are very concerned about this in industry, because of the issue of initiating the Anglo-French accord, which, to an industry, we want to work and want to work well. Certainly, with my EADS hat on, any opportunity to work closely on a European and global basis-that is part of our DNA. We want it to work, but it cannot work, as far as we in industry are concerned, unless the underlying principles of reciprocity, balance, mutual access to each other’s markets and mutual engagement are understood and adopted. That has not been the case to date. I very much welcome the fact that that is now recognised and, moving forward, that it is enshrined in how UK plc will engage with the French moving forward. It is the nature of the beast. The point I mentioned earlier, whereby our lack of something and everyone else having it, means that if we are not careful, we will, by definition, adopt their approach.

I have one more example, if you wish, Chairman.

Chair: I am not sure that I do, actually.

Robin Southwell: It is very powerful and very quick.

Chair: Very briefly.

Robin Southwell: In the States, I mentioned that they did an awful lot to ensure we did not sell 500 air-to-air refuellers-even though we won twice, they kept on taking us back until they ended up winning-but they are very comfortable selling Chinooks and C-17s for cash to the UK. That is a second example of how their strategies seem to benefit them at our expense.

Graham Chisnall: I would like to make one quick addition to what Robin has said. In a context of commercial, off-the-shelf, declining R and D budgets and so on, if we do not have the capability to act as an equal partner in these bilateral or multilateral relationships, you are on an asymmetric footing from the start. To make these relationships work, in addition to what Robin was saying you have got to bring real capability and technology of your own to the party, to make that relationship equitable.

Q47 Bob Stewart: Do our government Ministers have enough knowledge to do the job properly? I am looking at Sir Brian now because he is grinning.

Sir Brian Burridge: I am going to give you the obvious statesmanlike answer: that is a question that the Committee will wish to address with Ministers.

Graham Chisnall: Could I give you a slightly different answer? On the commercial aerospace side we have an engagement process under way with BIS called the Aerospace Growth Partnership (AGP). It involves the Secretary of State and downwards. An extremely large effort is going on and it encompasses more than 80 senior executives from industry and joint working groups with BIS. It is putting together a plan for the next 20 years for how we can stay pre-eminent in commercial aerospace. It deals with what needs to be done with technology and all the other aspects that go into that plan. It is an excellent role model that we would commend, and elements or analogues of it could apply to the defence field as well.

Q48 Chair: How would you characterise the general dialogue that the Government have with industry? Are you consulted enough? Are you consulted early enough? Are partnering arrangements sufficient and are they honoured? What are the discussions like between the Government and industry?

Robin Southwell: We mentioned earlier that the White Paper was a wonderful example of how industry was consulted, and we made some very strong recommendations, including the two that I mentioned. If we are going to place the fundamental emphasis on exports, criteria one is that we have to use the kit.

The second major issue that the White Paper talked about is SMEs, and the requirement to help them in some fundamental ways. That came through in the responses. Questions were asked and we gave the responses, but the trouble is that the White Paper did not actually reflect on them in a manner that allowed us to develop that. I gave you the definition of value for money, which completely precludes any of those things that are the underlying assumptions. There is an engagement and an interaction, but obviously we would like greater effect in terms of how policy is driven from that.

Q49 Chair: Mr Chisnall, or Sir Brian, I had the impression that ADS felt that the input that it had had into the White Paper had changed it quite significantly. Is that an incorrect impression?

Graham Chisnall: I do not think that it is an incorrect impression. I think that the consultation effort was worth while and that the thinking matured, and we can see evidence of that in the final White Paper. We would like far more engagement and involvement in the areas that we have talked about, so one could always do more in that regard.

Sir Brian Burridge: The only thing I would add is that the paradox remains in the White Paper regarding export, off-the-shelf, R and D investment pointing downwards. That was the big strategic issue that we pointed out in the consultation phase, and it remains unaddressed.

Q50 Mrs Moon: I am intrigued to pull all this together in my own head and perhaps you can help me. You said, Sir Brian, that the British stance has always been forward leaning. However, everything that you have said today seems to indicate a reduction in our capacity to be forward leaning. Perhaps there is a mismatch in the desire to economise and what we want to achieve. Am I right that that is the flow you are trying to give us, and that what we use our forces for, and their capacity to achieve Government objectives, is going to be reduced by the alteration in our procurement strategy?

Sir Brian Burridge: Correct on two counts. The first is that the SDSR elucidated a force structure within which the combat power was much reduced. That is the sheer combat power that the UK would be able to deploy in mass terms, and it makes it clear that it is something like 30% less than that which we deployed in 2003. I suspect that in a rewrite today it would be even less.

The second point is that by not understanding, or at least not admitting to understanding, those factors that sustain an onshore defence industry, with all that that means in terms of its intellectual property, R and D, and manufacturing capability, in my view the total capability of the UK’s military instrument will reduce, and with it our stature as a military power.

Q51 Mrs Moon: By how much? Are you going to give us an idea?

Sir Brian Burridge: If I could see into the future-it is things that we have taken for granted such as being there on day one for Libya. This doesn’t happen overnight, but ultimately that is something that a nation such as ours would not be able to do.

Chair: Thank you very much. That was an extremely helpful, interesting and illuminating evidence session before we see the Minister on Tuesday. We are most grateful.

Prepared 3rd August 2012