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Armed Forces

My Lords, I am most grateful to my noble and gallant friend Lord Inge for initiating this debate. I declare an interest as chairman of General Dynamics UK and president—very much an honorary title—of the Defence Manufacturers Association, although it is certainly not my intention to speak on their behalf today. Perhaps a more pertinent interest is a past one: that of Chief of Defence Procurement in the Ministry of Defence for six years from 1985 to 1991. My noble and gallant friend Lord Inge has spoken most eloquently and with the greatest authority on operational issues. I would like to concentrate on that part of the debate referring to procurement. I do not propose today to indulge in large doses of reminiscences or nostalgia, but I believe that a certain amount of scene setting is necessary. When I took on the procurement function in the Ministry of Defence in 1985, the Cold War was still at its height, new technology was badly needed and we were passing through a period of badly flawed projects: the Nimrod AEW aircraft, the Spearfish torpedo, the Foxhunter radar—affectionately known as the Blue Circle radar because its non-availability necessitated its replacement in the nose of the Tornado aircraft by a lump of cement—to name but three. These projects were overrunning not only in time, with no end in sight, but also in cost. Noble Lords may well ask why there was a huge cost overrun when equipment was not being delivered. The answer is both simple and surprising. Under the infamous cost-plus contractual arrangements then in place, there was, astonishingly, no requirement to deliver in order to be paid. In fact, the absurdity of the arrangement was that the greater the cost incurred, the more the contractor would be paid. His costs were met plus a profit on those costs—hence the terminology. My terms of reference from the then Prime Minister, the noble Baroness, Lady Thatcher, and the then Defence Secretary, the noble Lord, Lord Heseltine, were clear and concise: ““Your job is to procure the best possible equipment for the UK Armed Forces on the best possible terms. If you can buy it in the UK, that’s fine; if you can’t, so be it””. That is a very clear instruction, as noble Lords might agree. The cost-plus system had evolved from the preferred-supplier route. Clearly, it did not work; it had become too preferred and too cosy. Drastic surgery followed—painful but necessary. Over a short period, cost-plus contracts were virtually eliminated, unsuccessful projects were scrapped, large amounts of money on sunk costs were written off, and new contracts were awarded—yes, sometimes in the United States, which at least refrained from commenting, ““I told you so””. At the end of my six years, the National Audit Office reported that of a total of 37 projects started in the last five years, each valued in excess of £100 million, the cost to date was just under 1 per cent less than the department had estimated when the orders had first been placed; 28 of the 37 projects were expected to be completed on time; one was ahead of schedule; and, of the rest, only three had delays that were expected to exceed one year and none of those delays would result in additional costs falling on the department. So then what happened? I drafted what I intended to say today just a few days ago, sitting in the garden of the British ambassador’s residence in Budapest. During my term of office, no senior MoD official would even have been allowed to travel to that country, but today Hungary, like so many other of the nations of eastern Europe, is not only a member, with us, of the European Union, but also a member of NATO. After just 15 years, we regard that as the norm, but 15 years ago it would have been considered a fantasy. There was immediate talk of the peace dividend. Defence budgets were cut, requirements slashed and new projects severely reduced. The result was a shrinking defence industry in Europe, less work to go round, contractors merging or going out of business, and a reduction in competition. That is the first time today that I have mentioned the word ““competition””—a word that my critics have used to categorise the essence of my term in office, and which they have often linked with the word ““confrontation””. I shy away from neither. The only way to break out of the cosy relationship was with the harsh wind of competition; if, at times, that resulted in confrontation, that was inevitable. There are many such issues that are not really party political but present the same problems with the same limited solutions to a Government of any complexion. I mean by that a shrinking market and industry, an increased likelihood of needing to look outside our domestic base and an inherent threat to domestic job prospects and technology. At this point, I must link back to the real concerns so eloquently expressed by the noble and gallant Lord, Lord Inge, and others, many of whom I had the privilege of working with at that time. We must not forget the mission statement that I was given: ““To equip the Armed Forces with the best possible equipment on the best possible terms””. This is the rub that confronts every Administration, whether they wish to state it publicly or not. Most do not. Is the prime purpose of the £10 billion defence procurement budget to equip the Armed Forces or to maintain the domestic industry and its capability? Well, what is the answer? Maybe it is, ““It depends whom you’re talking to””. That may sound cynical, but I am not sure that it is all that inaccurate. Of course the budget is to be used to equip the Armed Forces but, at the same time, every Government wish to maintain jobs and technology at home, as they should. Is there an answer that meets both requirements to perfection? No, but then there never was. The emphasis that swings backwards and forwards over the years between competition to achieve value for money on the one hand, via ““smart procurement””—whatever that meant—and ““partnering based on trust””, which I think is what we used to call ““the preferred-supplier route””, on the other, illustrates the dilemma perfectly. But I say in all humility that if you look at the last few NAO reports on the MoD major projects statement, you will see a less satisfactory outturn, year after year, than that which I mentioned earlier. The question that I just posed therefore appears in sharp relief. The Minister has looked at this through a fresh pair of eyes as a successful industrialist untainted by many years in the defence industry. His approach bears similarities to that of the late Lord Rayner, who was the very first Chief of Defence Procurement and came from the quintessential commercial-cum-partnering stable of Marks & Spencer. The Minister unveiled his defence industrial strategy to us last year. It has a great deal to commend it, but depends in part on the extent to which the industry is willing to be a totally open partner, placing its cards face up on the table. I have spent many years in this industry, first on one side of the table and then on the other. The industry’s leaders are there to deliver successful performance to their shareholders and, of course, good products to their customers. But they are, first and foremost, commercial, entrepreneurial animals, and I say this having been one myself. It would be naive in the extreme to believe that their first thought on waking every day is, ““Am I being a true, even-handed and fair partner to my customer?”” rather than, ““Are the analysts, my shareholders and my board going to be satisfied with this quarter’s results?”” We must always remember that the purpose of being in business is to run a profitable enterprise. As long as we all recognise that and do not persuade ourselves otherwise, then we stand a chance of a reasonable result. But that means tough bargaining, tough decisions, weighing the options and the judicious use of—if I dare use the word—competition. Perhaps, though, our best hope today lies in a dramatic change, both in the way in which industry operates and the way in which the Armed Forces work—I know that the Minister is well inclined towards that change. It means the end of the user buying the equipment up front and then using it, maintaining it, fuelling it, loading it and replacing it. It means, as has been mentioned, the blurring, if not perhaps merging, of the procurement with the through-life maintenance, and even some of the non-combat operating functions. That solution was mooted, I remember, in 1984, but was immediately turned down as being out of the question. It is the equivalent of airlines wet-leasing their assets and relying on trusted suppliers to keep them fully operational, 24 hours a day, 365 days a year. Of course, it can be made to work commercially, and it does so—with the airlines, often with the same suppliers as the Ministry of Defence already uses. There is one crucial difference, however. Today, most airlines are no longer state owned and they contract with one or other of the two major world suppliers, conveniently located on either side of the Atlantic, which—so the theory runs—keep each other honest. Maybe if Governments were permitted to act as impartially as this, we, too, could achieve the perfect solution. But until we can get rid of those awful words ““juste retour””, we will remain adrift from such a solution. There is no perfect solution to the dilemma that I have outlined. We must ensure that we are constantly alert to steering away those charged with the responsibility of procurement from the Scylla of feather-bedding and overfeeding our industry and the Charybdis of driving them out of business.