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Defence Industrial Strategy

Volume 685: debated on Tuesday 17 October 2006

rose to ask Her Majesty’s Government what progress has been made on implementing the Ministry of Defence’s defence industrial strategy.

The noble Lord said: My Lords, I should like to declare an interest as an associate fellow of the Royal United Services Institute for Defence and Security Studies; however, I stress that I am of course not speaking on behalf of the institute or representing its views in any way. I touched on this subject during the Armed Forces debate in your Lordships’ House last June, initiated by the noble and gallant Lord, Lord Inge. Nevertheless I believe that the timing, if not the hour, of this Question is apposite, given that the anniversary of the publication of the defence industrial strategy (DIS) White Paper will soon be upon us. Much has happened since its publication last December, and I hope that my noble friend on the Front Bench will welcome this opportunity to update your Lordships on the progress made so far in implementing the strategy. He has rightly been widely lauded as its architect.

I do not wish to rehearse the points I made in the debate last June. The MoD’s defence industrial strategy and its subsequent implementation strategy have clearly set out a blueprint for delivering affordable defence capability which will at the same time secure the future for the UK’s defence industrial base. The DIS recognises not only the important role of the defence industry in delivering capability but also that industry must change to meet the evolving demands of our Armed Forces and the current£16 billion procurement budget. Britain’s forces face a multitude of challenges in today’s world and are doing their job magnificently, but Her Majesty’s Government must ensure they have the equipment and training to meet threats they may face in 20 to30 years’ time. It is a daunting and complex task.

My noble friend on the Front Bench has made an impressive start with the DIS. The White Paper and his personal commitment to its speedy implementation have received warm praise from industry. As he said at Farnborough last July, there have already been concrete, practical results following on from the DIS. There has been the appointment of the MoD’s commercial director, which should enhance the ministry’s commercial awareness and understanding. The McKane review, Enabling Acquisition Change, looking at through-life capability management, has been adopted by Ministers. The DPA and DLO are to be merged to create one procurement and support organisation, which incidentally will save £200 million. Implementation teams have been established, and a £1 billion strategic partnering arrangement has been signed with Augusta Westland to produce the future Lynx helicopter. In the armoured fighting vehicles sector, a partnering agreement has been agreed with BAE Land Systems.

A “Team Complex Weapons” has been created, with a number of planned programmes in the pipeline. The upgraded Harrier GR9 aircraft has entered service with the Royal Navy, on cost and on time. The MoD has also signed a five-year support agreement with VT Shipbuilding to maintain HMS “Clyde”, the first ship to be built at Portsmouth’s naval base in nearly four decades.

These are all impressive achievements, but like my noble friend we are anxious to hear of yet more progress. The Minister has said that he hopes for a memorandum of understanding signature by the end of the year regarding the necessary transfer of technology before the purchase of the Joint Strike Fighter goes ahead. Can he update your Lordships’ House further on this point when he sums up the debate later?

Noble Lords will be aware of the concerns expressed of late that the DIS is perhaps overambitious in some respects, particularly in its implementation timetable, the necessary change in behaviour required on all sides and the question of affordability. I hope that the MoD will be able to allay these fears when the Minister responds. To be specific, I would like to refer to RUSI’s recently published report on industry responses to the DIS. Although the DIS is seen as a very positive initiative, there was some scepticism about whether the Treasury would make the necessary money available for the MoD’s desired capabilities and equipment plan. Her Majesty’s Government must ensure that the 2007 Comprehensive Spending Review supports the DIS’s aims, especially since through-life capability management requires the commitment of funds over long periods, allowing for future upgrades.

Retaining appropriate sovereignty in vital sectors of the defence industrial base may well involve a premium, and the MoD must be clear about what capabilities and knowledge will be preserved onshore. More worryingly, the Royal United Services Institute report identified that commitment to the implementation of the DIS is not embedded at all levels and across all organisations within the MoD.

There is a strong case for the development of closer working relationships between civil servants in the ministry and their industrial partners, for example by bringing industry and MoD IPT teams together at the beginning of a programme and through joint training and more staff exchanges.

Some disappointment has been expressed about the slow pace of industrial consolidation in the maritime sector and the development of the MoD’s maritime industrial strategy. Can the Minister comment on this—he has himself expressed disappointment—and on the CVF future carriers project, including how the maritime industrial strategy might impact on the Type 45 and future submarine programmes? I think we are entitled to know whether the MoD has a workable plan for safeguarding this country’s maritime capability. Some fears have been expressed that future hulls may be built abroad, a prospect alluded to in the DIS White Paper.

The issue of R&T spending has been raised in a number of quarters, including the Defence Select Committee in another place. The Minister was kind enough to tell me in last June’s debate that the MoD planned for the research budget to rise in line with inflation over the next four years. A recent study found that of 10 leading nations, the UK is second only to the US on the military equipment quality curve. But the fact remains that the MoD invested $4.7 billion on defence R&T in 2004 whereasthe United States research spending alone reached $77.6 billion in the same year. UK private sector aerospace and defence research investment has barely kept up with inflation.

Today we had the publication of a weighty document, the ministry’s defence technology strategy, which I have here—I can see it on the Benches opposite as well. It contains almost 200 pages of interesting material, together with a list of 200 technologies and 2,000 sub-technologies which the MoD wants to nurture. I think some questions arise from the publication of the strategy and, as we are discussing the defence industrial strategy, perhaps the DTS would require a debate of its own.

However, it will be interesting to quote from one section of the report. On page 162, which looks at the joint MoD and industry framework for investment, paragraph C4.2 states:

“Against this background, the DTS is affordable provided both MOD and industry invest together, but there is much work needed on this … The next step is for MOD with industry to agree the principles of joint funding via the National Defence Industry Council”.

I think we are entitled to ask the Minister how the MoD in practice will achieve an increase in investment from industry in the defence technology strategy, and how the technologies outlined in the strategy will be developed. In short, where will the funding come from to achieve the aims in the strategy?

I look forward to the Minister’s response. I can assure him that I for one stand full-square behind the aims of the defence industrial strategy, which is designed to give our Armed Forces the best possible kit, on time and at reasonable cost to British taxpayers, while preserving appropriate technological sovereignty and a vital and thriving UK industrial base.

My Lords, I am most grateful to the noble Lord, Lord Truscott, for providing the opportunity of this debate. I must declare an interest in this topic, apart from an historical one, in so far as I am chairman of General Dynamics UK and president of the Defence Manufacturers Association.

The defence industry has always been a crucial part of the UK industrial base, as well as serving as the source of much of the material used by the UK Armed Forces with great skill and success. The management and direction of the industry has, however, seen many twists and turns, some self-imposed, others imposed by the vagaries of successive Governments and the pressures of international affairs. Overlaid upon this is the way in which the industry has consolidated both domestically and internationally.

None of these elements can be properly considered or examined in isolation from the others. Nevertheless, we are looking at the defence industrial strategy, which needs to be considered primarily in a commercial manner. By commercial, I mean on both sides—by the Government as purchaser and the industry as vendor. For this reason, I believe that the appointment of the noble Lord, Lord Drayson, as a successful industrialist, with experience of comparable issues, has been a real success and the strategy which he has produced has the clear mark of understanding. His task and that of his department is not easy, but they must be allowed to carry it through without being diverted from their clearly stated objectives. Such an outcome would certainly benefit both the industry and the Government.

The UK industry has shrunk in recent years, both in absolute terms through decreased demand and in the number of large companies present. For this reason in particular, it is important to recognise that UK-based subsidiaries of non-UK parents—and here again I acknowledge an interest in this area—should be treated equally with purely domestic participants. We do not discriminate against foreign-owned car makers, which make up the majority of that industry in the UK. So, provided that proper security safeguards are in place, we should behave in the same way in the defence industry. In this way also, we can benefit by not having to reinvent some very expensive wheels and by optimising the use of available technology.

The Ministry of Defence has said that it is keen on partnering, but perhaps a word of caution is needed here. Care must be taken to ensure that its potential partnerships with a very small number of primes do not succeed in excluding the smaller companies from the supply chain. In this country, smaller companies have always played an important part in development and production and must not be frozen out. They keep down cost, encourage innovation and, by virtue of their size, can be much more nimble than the major players. Coupled to the defence industrial strategy, the Minister set out today his strategy for defence technology. A quick résumé of that looks promising. If we can end up with a UK-type DARPA, I hope that we can reap some of the benefits that the United States has done in that area.

More than 20 years ago, I remember producing what I thought was a compelling case to combine the procurement and logistic functions. I have to say that at that time, the then Defence Secretary, the noble Lord, Lord Heseltine, and I found ourselves in a minority of two and unusually, I must admit, we were unable to proceed. I have always believed that thatis the correct solution—and so, again, I must congratulate the Minister on successfully launching this initiative.

Unhappily, today, much of what is in production is needed in action almost immediately. This is a phenomenon to which we have been unaccustomed for some years, so it makes it even more important that we get it right the first time. I believe that the approach of the Minister and his department gives us a good chance of achieving that goal and his efforts deserve our support. I look forward to hearing from him this evening on the further progress that has been made.

My Lords, I am grateful to my noble friend Lord Truscott for this timely debate and for his informed comments. I am glad to follow the noble Lord, Lord Levene of Portsoken, who carries to these subjects an immense authority that I cannot match.

The British economy needs the defence industrial strategy to succeed. There is not much manufacturing industry remaining in our country, not least those few manufacturing industries still awash with skills, training and leading-edge high-technological achievement. Moreover, if our defence industry prospers, then parallel, allied and dependent commercial industrial projects will remain viable. A case in point is EADS in Europe, a huge defence industry concern across Europe and the parent company of the Airbus business which has nationally important production centres in Britain, not least in my own country of Wales.

Will my noble friend the Minister indicate that the A400M military transport will go forward into production with the UK order of 25 aircraft? Where does the A400M stand now in EADS’s order of priority? I say that in the knowledge that Airbus UK has a big interest in that. Will my noble friend report on the prospects of EADS manufacturing the Future Strategic Tanker Aircraft? This will be the largest ever MoD PFI project should EADS carry the day with its Airbus A320 modified aircraft.

But tonight—I declare my interest—my great concern is for the workforce at the Welsh production centre in Broughton, north Wales. There in Flintshire there are 6,500 plane makers. Many have been engaged in making the wings of the A380 superjumbo. They are just about the finest aerospace workforce in the world. That is my belief although I am biased as I still live there. That workforce wants EADS to move in a direction where there is no political interference. They are not responsible for the delays in A380 production. They know that Britain is a multi-million-pound customer of EADS. They know that the British aerospace industry is Britain’s last remaining large-scale skills-based manufacturing industry, employing tens of thousands. Our industry earns annually billions of pounds for our nation through its exports. My own longstanding personal knowledge of the 6,500 strong Broughton workforce is that they have delivered on every challenge for EADS, BAE and Airbus. I want them to continue to produce high tech, world class wings free of the pressures of EADS boardroom crises. I want that for the prosperity of our nation and particularly for my own country of Wales.

In January 2005 I was present at the A380 superjumbo rollout in Toulouse. I saw the President of France, the Chancellor of Germany and the British and Spanish Prime Ministers. Each spoke with pride and passionate conviction about one of their biggest ever investments. That was a moment of European unity and supreme optimism before 4,000 aerospace engineers, technicians and managers. Those national European leaders hailed the most successful aircraft manufacturer in the world. But some 20 months later the company is in massive disarray and is apparently fighting, if not for its life, certainly for its credibility. Tens of thousands of employees throughout Europe, particularly in our country, have an interest in the situation getting better.

I ask my noble friend the Minister to work hard, as he always does, to dissipate the tensions between France and Germany and, as we are a big customer of EADS, to seek to develop better corporate governance so as to shore up its position in the heart of Europe as a global commercial and defence company.

Another look back; as long ago as 1973 I was present in Toulouse at the first rollout of the first Airbus and the first Concorde on the very same day. It was a magnificent and historic day in European aerospace history. The British Minister, who spoke under a cloudless sky in sight of the glistening snows of the Pyrenees, was the noble Lord, Lord Heseltine, who has already been referred to. He spoke effectively, and he represented all those hopes for aerospace and manufacturing in Europe. But now, I ask my noble friend to help to knock EADS into shape, to revitalise Airbus, and to give the Welsh wing-makers of Broughton in Flintshire fresh heart and some certain guarantees.

My Lords, I, too, thank my noble friend Lord Truscott for securing this debate this evening, on an issue that has had a lot of coverage over the past 12 months, including a report that attracted a lot of complimentary statements. The Minister has been complimented this evening already, and I will not add to that. I am sure that he is quite pleased at the response that he has had. I will just say that when we had the defence industrial strategy review last year, most of us recognised running through it the thread of a real hard-nosed commercial management approach, which was very welcome. It was a very important development in our strategy. It is true, as other noble Lords have said, that this sector has in it some of our most highly skilled workers. It is a sector that we are very good at, and which attracts good engineers and good skills of different types. I say to my noble friend Lord Jones that I have not been to Broughton, but I have been to Filton in Bristol and seen the work that people are doing there.

The aim of the industrial strategy was an engagement with the industrial base of this country to meet the Armed Forces equipment requirements on time and at best value. That is a laudable aim, which has never been captured over many years of seeking to do just that. I expect tonight, 10 months after the strategy was published, that the Minister will probably report varying progress. I would be amazed if there were not certain tensions in the MoD and frustrations at perhaps not making some of the progress that had been expected. That is life and that happens. The important thing is that we do not let go of the intentions of the industrial strategy.

One of the areas is the consolidation of the naval sector, including the important discussions that are taking place—although the decision has been taken—on the new carrier for the Navy. We still have not got to the gateway process on that. That is a very important step, and I am sure that causes as much frustration in the MoD as it does to those of us outside it who are following it very closely. I read in the press at the weekend about talks between BAE and VT about possibly coming together. It will be interesting to hear from the Minister if he has any details on that.

I gather that there is also some concern in the sector at the fragility of the nuclear-powered submarine industrial base. Where are we going on that and what is the future of it? The merger of the Defence Procurement Agency and the Defence Logistics Organisation has already been welcomed this evening, many years late though the noble Lord, Lord Levene, may feel it is. It is welcome, and it is the right thing to happen, but they are two very different organisations. They are culturally very different indeed. I seek an assurance from the Minister that we will not be faced with what I call decision blight in the period of the two organisations coming together. That is the worst thing that could happen.

The Joint Strike Fighter is an issue that keeps coming up, and will rightly do so until the issue of transfer of technology from the United States is concluded. I am aware that the Minister put up a robust performance before the Senate committee in the US, and that was very welcome. I just hope that the outcome ensures that when we have the Joint Strike Fighter and it needs attention, the work can be carried out by our technicians here and that we get the transfer of the technology that we need.

The defence industrial strategy specifically mentions autonomous air vehicles. Earlier this year, I and a number of noble Lords visited BAE Systems at Warton, where we saw some of the innovative work being done there. This is certainly an area of great innovation and has great promise. But will the MoD support that type of work and, if so, how? Both progress on the Joint Strike Fighter and the autonomous air vehicle impact directly on the ability to sustain a fixed-wing aerospace capability; they are interdependent and we are looking at the next stages of technology.

Finally, the FRES system is in the defence industrial strategy. It has stalled over a number of years and if I was talking in other circles, I would ask: does it still have legs? Is it still a reality? It is there in the industrial strategy, but I am not sure whether any progress has been made. Has the MoD yet reached a decision on its requirement and acquisition strategy—two important aspects in regard to FRES? My noble friend the Minister will be aware that the issue comes up regularly in questions asked at our meetings with him at the House of Lords Defence Group, which I chair.

It is good that we actually have a strategy that we can discuss, because we did not have one before last year. It is good that we have a robust strategy about our country’s industrial base, with our country’s skills and technologies involved in it. It is a mighty challenging exercise that is at the forefront of technology in so many areas of our lives. I wish the industrial strategy well and I thank the Minister for the work that has taken place in the past 12 months, but it would be good to hear an update on some of the issues that are exercising many people.

My Lords, first, I must declare an interest. I am a consultant to Curtiss-Wright and Leafield Engineering, a small British defence contractor. I have only a short contribution to make to this debate.

When the defence industrial strategy was originally published, it was welcomed by Mike Turner, the chief executive of BAES, who said that it was a very good reason for BAES to stay in the United Kingdom. This came as a bit of a surprise to those of us who thought that BAES was the biggest defence contractor in the United Kingdom and we did not know that it ever had any intention of going.

I have two questions for the Minister. To what extent did the defence industrial strategy change the relationship between BAES and the Ministry of Defence and, if the rumours in the press are correct and BAES is taken over by Boeing, does that relationship then change again?

My Lords, I too thank the noble Lord, Lord Truscott, for arranging this short debate on the important topic of the defence industrial strategy. I declare an interest as a member of a small group of defence specialists known as the RUSI Acquisition Focus. We have taken as our task to follow the DIS and its implementation closely. When we think it is helpful, we publish reports on various aspects as they happen.

The first report from the RUSI Acquisition Focus concluded:

“Implementation is the key. It needs to change the fundamentals, particularly culture and behaviours in both industry and MoD, but however worthy the aims of the initiative, it will fail, as the promising Smart Acquisition initiative failed, unless there is strong commitment and leadership from the top over an extended period”.

As we have heard from your Lordships tonight and in the past, we think that we have someone who can give that commitment and leadership from the top. The question is whether it can be over an extended period.

As I opened the now 10 month-old defence industrial strategy White Paper, I turned again to the photo gallery at the front of all the signatories from the Ministry of Defence, the DTI and the Treasury—all the Ministers who signed up to the strategy. I have to tell the noble Lord that he is the only one still in the same job 10 months later. That is more than a cheap shot about turbulence in Government. It is important that there is continuity for the introduction of this complex and long-term initiative. The problem of turbulence in posts and keeping engaged people who know what is going on is also true at the lower levels. Has the Minister had any success in reducing the personnel turnover within his area of management?

When I responded in your Lordships' House on15 December 2005 to the Statement which launched the defence industrial strategy, I said that I welcomed,

“the strategy’s clear set of priorities; number one: the operational capability and getting the technology to do the job; and number two: value for money”.—[Official Report, 15/12/05; col. 1411.]

It is against those criteria that we must keep judging progress. As the noble Baroness, Lady Dean of Thornton-le-Fylde, said, it has been going only a fairly short time in which to judge progress. We cannot expect to see great changes and there will be undoubted tensions over how it develops. Given that we are in a co-operative mood this evening, perhaps the Minister will share with us in his reply the areas that he thinks are moving less fast than he would have hoped. Where are the difficult areas at the moment?

In that first debate, I also highlighted the potential tension between the desire to give industry long-term planning stability and, at the same time, to meet the near-term operational demands. I happened to choose section B5 on helicopters as my example. As I pointed out then—nearly a year ago—we needed,

“heavy-lift helicopter capacity for Iraq, Afghanistan, for UN operations, for conflict prevention and for humanitarian relief. We cannot provide it if we are putting all our money into attack and maritime helicopters in order to promote an industrial strategy. So what I see is that, even at this early stage, we are shaping the future of our operational requirements around an industrial strategy”.—[Official Report, 15/12/05; col. 1413.]

The Minister’s response was to say:

“We recognise that we must address that within our overall rotor-craft strategy and we are doing so. We are making the extra investment to enable us to do so”.—[Official Report, 15/12/05; col. 1416.]

Yet, as we know only too acutely, the near-term problem is still with us a year later. I do not ask the Minister to rehearse all the urgent work that he is doing to get lift-helicopters for our current operations. It is the wider point that I hope he will address. How does he see a long-term strategy for stability for industry working when the strategic context is changing so rapidly, and often unpredictably?

Of course, it is not just the security environment that is in a state of flux; there is also the question of the industrial environment. Indeed, the intervention of the noble Lord, Lord Hamilton, in the gap highlighted one aspect of that. BAE Systems is very much favoured by the strategy as a repository of national defence and aerospace capability, yet it is an international company. It now has as many employees in the United States as in the United Kingdom. This week, the Sunday Times was speculating, as the noble Lord, Lord Hamilton, said, about the prospect of a takeover of BAE Systems at some stage by Boeing, and there is also the possibility of Rolls-Royce being taken over by an American company. I think that both are unlikely in the short term but they are not impossible scenarios in the medium term. I would be interested to hear how the Minister views his ability to factor in those uncertainties into a defence industrial strategy which has to project national capabilities into the long term.

The noble Lord, Lord Levene, as always, with his great experience, made an important contribution to this debate. I remember his time at the Ministry of Defence, balancing how much we favour particular industries and what that means in terms of their ability to develop into efficient industries.

On the implementation side, the Defence Select Committee identified some areas for further work, some of which have been mentioned already. I am sure that the Minister will update us on how they are progressing. The key area that has been mentioned is research and technology. It has seen a long-term decline in funding, something that everyone involved in this business has worried about.

This afternoon, I was delighted to claim the only copy of the defence technology strategy available in the House of Lords. I went to the Library where I was told, “You will be careful with it, won't you? We have only one copy”. I went to the Printed Paper Office where the staff said “That is very interesting: it has no command number, no reference number and no date, so we cannot order it”. Actually, they said that they would try to order it from the Ministry of Defence. Obviously, we have not had time to absorb everything in this document but its status is a little uncertain. It is not a White Paper; and it is not a dated document from the Ministry of Defence. Is it a pamphlet giving us the thoughts of the Minister or is it government policy? How are the companies that will read this with great interest to take this document? Certainly those in the Printed Paper Office have not seen a document come out in such an anonymous format.

Nevertheless, we have been asking for priorities in terms of research, and the strategy gives us that. I was grateful to the noble Lord, Lord Truscott, for telling me what I did not know: that we have a figure for the funding of the R&T side, which is going to rise in line with inflation. In other words, it will not rise in real terms at all. The funding is too little; it has declined; and we have a problem because we are not investing anything like the amount invested in the United States. How does the Minister think, at that kind of funding level, he will close or stop the gap increasing in relation to United States technology? What thoughts are there for doing more with our European colleagues, in terms of pooling resources—each nation spending little packets of money and not achieving anything very much?

The Defence Select Committee also looked at small and medium-sized enterprises. They are a vital part of the United Kingdom’s defence industrial base, but they have great problems in getting their voices heard in the Ministry of Defence against the big companies. In my quick skim of the technology strategy document, I saw mention of how SMEs will be involved. But in terms of bidding for the main contracts and getting involved, what has the Minister managed to do this year to try to bring in the SMEs?

The Select Committee highlighted the further work required in the maritime sector. The noble Lord, Lord Truscott, also mentioned that. The press has suggested that the Minister has been applying pressure to speed up developments in this area. I hope that this evening he will share with us what progress he has made.

Since we last debated the DIS, as the noble Lord, Lord Levene, and the noble Baroness, Lady Dean, highlighted, we have had the July announcement of the merger of the Defence Procurement Agency and the Defence Logistics Organisation. That is a massive amalgamation. I agree with the noble Lord and the noble Baroness that it is right and overdue. However, we have only just completed the creation of the DLO, where the savings that were assumed were rather slower in coming than had been planned for. I would be interested to hear whether the Minister is confident that the DLO is ready for this next big step change and what assumptions have been made about new savings. One of the problems is that one cannot get this done if the savings are forced too quickly.

Everyone who looks at defence acquisition seems to agree that the key need is for cultural change. Does the Minister agree that that is fundamental and, if so, how does he think he is going to achieve it?

As the noble Lord, Lord Truscott, highlighted, looking ahead, the most important issue is resources. At the moment, funds are needed for urgent operational needs. We hear of them every day: operational bonus payments, vehicles and helicopters. Yet funds are needed to make this strategy work. Is the Minister confident that he will get the funding to support his strategy?

Then there is the balance of the equipment programme. I have avoided using tonight as an occasion to debate progress on particular procurement projects, but the noble Lord, Lord Jones, mentioned a number of them. They are important, but I want to focus on strategic issues for the future. As we look forward, we have the problem of a somewhat unbalanced programme, which now focuses on maritime issues—the carrier programme and the possible replacement of Trident—at a time when all our current operational needs are on the land warfare side. We are buying aircraft that do not have close air support capabilities, but that is what we need. Does the Minister agree that we are at a stage when his colleagues in the ministry need to look at reviewing defence policy so that they can better inform his defence industrial strategy?

My Lords, on a number of occasions, I have suggested to the Minister that we should have a debate in government time on his important defence industrial strategy. Therefore, I am moderately pleased that he has prevailed upon the noble Lord, Lord Truscott, to pose the Question before us that will enable the Minister to give an account of progress. This debate is not exactly what we asked for, but it is better than nothing and I am grateful to the noble Lord, Lord Truscott, for sponsoring it.

I echo the noble Lord’s praise of our Armed Forces and, as he said, they must have the equipment to ensure that they do their job properly. I also echo his point about the vital importance of safeguarding the nation’s maritime capacity, but, unlike him, I did not have the luxury of sight of the defence technology strategy document before this debate. I echo the protestations made by the noble Lord, Lord Garden, and I look forward to hearing from the Minister the good reason why we did not get a chance to consider that very important document before this debate.

The noble Lord, Lord Levene, who has great experience in the defence procurement and manufacturing industry, spoke with great eloquence, and I am looking forward to reading closely his speech in Hansard tomorrow. I also listened carefully to the important points made by the noble Lord, Lord Jones, about the world-class high-tech defence industry in Wales. Like him, I look forward to hearing the Minister’s response on the future of the A400M and the future strategic tanker aircraft. The noble Baroness, Lady Dean, welcomed the hardnosed, commercial approach of the DIS. She is hoping for progress on the carrier project, as are we. I look forward to the Minister touching on that subject and also on the JSF and FRES. As the noble Baroness said, she chairs our defence group, and I would like to put on record how much I appreciate her outstanding leadership of that important group. My noble friend Lord Hamilton asked two interesting questions on BAE Systems, and I look forward to the Minister’s response to them.

I anticipate that the Minister's response generally will refer in some detail both to the McKane report, published by his department in June, and to the defence research report similarly published at the start of October.

I hope, if with rather less confidence, that the noble Lord will also address The Defence Industrial Strategy: An Analysis of Industry Responses, collated and published by RUSI, and I quote:

“An outcome of the Defence Research Report is the ‘wish list’ of technologies which the MoD is said, in Press Reports today, to wish to nurture”.

The most significant outcome of the McKane report is, of course, the proposal to amalgamate the roles of the Defence Procurement Agency and the Defence Logistics Organisation.

We accept the case for big-ticket items such as tanks, ships and aircraft to be handled seamlessly through their operational life by one authority. Nevertheless, the creation of an enormous department dealing with everything from aircraft carriers down to simple items like mobile phones threatens to create a completely unwieldy operation.

It is a superficially simple decision, but the scope for procedural difficulties, and indeed for obstruction, is almost unlimited. We are concerned that attention to the inevitable issues that will arise from this extensive reorganisation will serve to distract attention from the demanding work involved in bringing the core objectives of the DIS into effect—a concern of industry, as expressed in the RUSI report. It would be disastrous if MoD officials devoted the next two years to a fixation with implementing this huge merger.

The proof of success will lie in an acceleration of the procurement cycle to bring it more up to speed with the cycle of technological advance; a direct and effective communication and understanding between the Armed Forces, as users of the equipment, and industry, as the designers and suppliers—or, as the RUSI report which I have mentioned puts it:

“Post-DIS the Front Line must be able to influence acquisition more directly”.

It will also lie in a shorter, quicker and more reliable supply chain and a significant reduction over time in the working capital tied up in the procurement and logistics processes and chain.

There is much else that is interesting and welcome in and arising from the McKane report and the report on Maximising Benefits from Defence Research. But the very limited time available tonight does not allow me to dwell on them, or on the hundreds of technologies identified as meriting nurture, as I want to highlight some of the points in the third document, the RUSI analysis of industry responses, and to invite the Minister’s response to them.

I have already mentioned industry’s reported concerns that the knock-on demands of the DPA/DLO merger should not divert attention from the basic objectives of the strategy, and that the avowed intention to bring industry and the front line together to mutual advantage should indeed be effected.

This will involve very considerable culture changes by all concerned, the Armed Forces, industry and the MoD itself as the clearing house. Industry’s current observation, as reported, is that,

“commitment to the implementation of DIS is not reflected at all levels and across all organisations within MoD”.

Does the Minister accept that this is indeed the fact? If so, how is he and those working with him, rather than those who may not support his ideas, planning to change this?

Industry also sounds a series of warning notes about many of the implications, direct and indirect, of “partnering” as described in the strategy. This is probably the point in the original DIS which causes the most difficulty to me and to my right honourable and honourable friends in the other place.

As the report says, and we agree:

“Long-term partnering with MoD should not be exclusive to a few companies”.

So far, the Minister has concluded agreements with Augusta Westland, in respect of helicopters, and MBDA, in respect of missiles. Perhaps the Minister can tell the House with what other companies he is in negotiation. The report continues—and again, we agree:

“We must fully understand the purposes of different partnering and alliancing models, which may involve more than two actors”.

Of course, such is the case with the prototype allowance to take forward the Carrier project. The report continues:

“The necessarily elaborate contractual arrangements may not be feasible”.

We believe that to be a valid cautionary note.

In the same context, the report is concerned about the position of small and medium-sized enterprises—the SMEs mentioned by the noble Lord, Lord Garden. Again, we share that concern. SMEs are widely and correctly seen as a source of innovation and a contributor to flexibility. Those are qualities that we want to cherish.

The development of the DIS has a considerable way to go if it is to attract our support on that point. When the Minister presented his strategy to this House last December, I warmly congratulated him on producing the document to time and gave a cautious and qualified welcome to its content. In a similar sense, I congratulate him tonight on having sustained the momentum as he has. I am sure that he understands to a substantial extent—not completely—the problems that lie ahead of him and I look forward with interest to hearing what he has to say tonight. Although I cannot assure him of our wholehearted endorsement on every point, I can say that, in general terms, we are, and will show ourselves, broadly supportive of what he is trying to do.

My Lords, I welcome the debate that we have had this evening on the defence industrial strategy and thank my noble friend Lord Truscott for securing it. I also thank all noble Lords for the very constructive tone that they have taken this evening, which they also take in our conversations outside the Chamber, and for their work.

I value the approach of constructive criticism which has described our debate on the defence industrial strategy. That is also reflected in the nature of the wider debate and conversation taking place between industry and the Ministry of Defence in this area. Reports from ongoing studies by organisations such as the RUSI further contribute to that. I wholeheartedly welcome the work that the RUSI has done and note the contribution that noble Lords make to it. It is very important, in implementing something as complex and important as the defence industrial strategy, that we maximise our opportunities to address the challenges. I hope that I can help to move that forward this evening.

The defence industrial strategy aimed to set out a clear vision of the future for procurement to meet the needs of the Armed Forces. For the first time, it gave clarity in terms of putting the needs of the Armed Forces first and setting out a decision structure for the Ministry of Defence to stick to in how we implement procurement decisions. I have aimed in my role as Minister for Defence Procurement to push the department to reform to drive these improvements and, at the same time, to create a virtuous circle of change with industry. Both sides must recognise that that change is rewarded on both sides. Maintaining that momentum is at the heart of what I aim to do.

Several noble Lords, in particular the noble Lords, Lord Astor and Lord Garden, have highlighted the vital importance of small and medium-sized companies; the very largest primes are not the only ones that are important. It is vital that we maintain companies that are global players in the defence industry, but it is as important to ensure that we have the complete value chain of companies—a healthy defence industry—and that we in the Ministry of Defence ensure that we enter into long-term partnering agreements in a way that does not prejudice the interests of small and medium-sized companies. We are putting several initiatives in place to ensure that that does not happen. I will touch on that in a moment.

I shall give an overall update on the implementation of the strategy. The noble Lord, Lord Garden, has highlighted the difficult context in which we are operating. There is no doubt about it. The pace of change is speeding up. The noble Lord, Lord Levene, who has tremendous experience in this area, has highlighted how we are using our defence equipment in an operational context to a much greater extent than we have done for an awfully long time. There has been no need in the recent past for speed in introducing defence technology into current operations, but we need that now to reflect the speed at which the threat changes in operational theatres and the pace of change both industrially, as noble Lords have mentioned, and technologically.

The answer to the challenge facing us is to ensure that we give structure to our defence industrial strategy—and to our defence technology strategy today—which the Ministry of Defence will stick to in the medium term. That strategy should, however, be sufficiently flexible to shift resources, as required, to reflect operational need. To answer directly the point made by the noble Lord, Lord Garden, we have an opportunity in that we are entering a phase with a spending review that involves going through the usual process of rebalancing our equipment programme. For the first time, however, we are doing that in the context of a clear defence industrial strategy, as my noble friend Lady Dean has mentioned, which sets out a framework that allows the Ministry of Defence to look across projects and to look at industrial capability and not simply at projects in isolated silos.

The Ministry of Defence has also developed the ability to look from a commercial standpoint at how we trade off within a capability, and to take intelligent decisions on individual equipment projects with our eyes open to the extent of their impact on our industrial capability. There is no doubt that we have to put defence needs first, but our decisions must take into account the wider industrial context to ensure that we have the strategic capability that we need in the future.

I am grateful to my noble friend Lord Truscott, who has gone over several of the important areas of progress that we have already made this year. I want to highlight the key challenges that remain, rather than the successes achieved. We have shown that today with the publication of our defence technology strategy. To be clear, it is a document of MoD policy that sets out our delivery of a commitment, which we published in the defence industrial strategy, to provide a defence technology strategy this autumn. It clarifies to industry our research priorities and recognises that a key driver of military capability is coming from research. Today, we are living off the fruits of the investment made about 20 years ago in defence research. It identifies the areas of priority for the research community, and it clearly signals a shift in balance. It says that we must move to a more mixed economy in how we incentivise industry to carry out defence research, and we must incentivise by engaging more widely—that relates to the point made by my noble friends and the noble Lord, Lord Levene. We must not reinvent very expensive wheels. We must make sure that we leverage research which is being undertaken in other countries and that our defence technology strategy gives clarity on areas such as the priority for research and the balance in funding that we need to see between early stage research and later development. Frankly, we have put too much emphasis on the late stage development; we have not invested enough in some emerging technologies at the early stage.

Secondly, there is the issue of too much of our defence research and technology being directed by the customer only, with the Ministry of Defence telling industry and the academic community, “This is what we require for the future” without encouraging people to invest in taking risks. We incentivise industry so that where it has taken risks and invested, we provide it with a greater return.

The initiatives that we have announced today are taking us towards a DARPA-like model. There is an awful lot we can learn from the successes enjoyed by the United States with DARPA, given that we have a smaller budget. We have announced three important initiatives. The challenge we have announced is DARPA-like but in a completely different area, which is really important for the Ministry of Defence. We have announced a competition for ideas—a £10 million programme to incentivise a wider engagement of the challenges in defence within the scientific research community. We are trying to engage people who would not normally be engaged in defence research.

These are practical initiatives to change the culture. A number of noble Lords mentioned the importance of changing the culture. That is about the long-term process, and I recognise that whereas it is important to have leadership from a ministerial team, the cultural change will come about only as a result of being embedded throughout the Ministry of Defence organisation. We are, I believe, achieving that.

We are implementing the change that has resulted from the conclusions of the McKane study, and we are meeting our schedule. My experience in business has made me aware of the dangers of dropping the ball in a merger and not delivering the organisation’s performance. However, we have made progress: we have approved and appointed a defence commercial director; we have identified that the Permanent Secretary is the senior responsible owner for the merged organisation; we have a dedicated two-star programme director; we have identified the leader of the new merged organisation; we are clear on the top-level management; and we will, by April, have in place the support structures to ensure that performance and accountability in the merged organisation is delivered.

I will touch on some of the questions about specific programmes. The matters raised by my noble friend Lord Jones about the aerospace industry, particularly relating to EADS and Airbus, have been mentioned in the press a lot recently, and my noble friend needs a response.

The A400M is an important component of our future military capability. We expect the company to provide those aircraft on time under the contract. Of course, a company going through the turbulence that Airbus has gone through leads to concerns about whether there are problems relating to the A400M project itself. We have expressed our views clearly to the management of the company. I have not visited Broughton but I have visited the Filton facility and have seen for myself the work that is going on there. It is important to stress that the Government’s policy is that we wish to see Airbus, as a part of EADS, develop as a global aerospace and defence company with its heart and soul in Europe but without political interference. We know that the future of that company will depend upon it establishing good corporate governance.

I am supporting my right honourable friend the Secretary of State in discussions with the company, and I know that its management is directed toward that end. We are working hard to ensure that, in this time of turbulence for the company, it has the support and clarity from the British Government to help it through that transition. The indications are that it will, but we need to monitor the situation very carefully.

There were specific questions from a number of noble Lords relating to the maritime programme. In essence, the maritime sector is the most challenging within the defence programme. I am more optimistic because of the progress that I have seen being made on the aircraft carrier programme, and the alliance structure working well within it. However, I really need to see progress before the end of this year.

The noble Lord, Lord Hamilton, asked a specific question relating to British Aerospace and Boeing. The latter has said on the record that it is not interested in pursuing that particular acquisition. It is interesting to see that Boeing has, in response to the defence industrial strategy, taken a decision to build up its intellectual property assets here in the United Kingdom.

The noble Lord, Lord Levene, asked whether we see a level playing field for companies whose shareholders reside outside this country. Absolutely; we have the most open defence market in the world and are committed to maintaining that. We are concerned to see that we maintain the intellectual property and skills in this country. That is why we believe the policy is starting to bear fruit in that direction.

I was asked a number of questions about other programmes, which I do not have the time to go into in detail this evening. I will write to noble Lords to answer their questions. I welcome and will encourage further debate on this important area, and will look for future opportunities to further provide the discussion that the noble Lord has requested. I am absolutely willing to engage with him in future on those matters.

House adjourned at seven minutes past ten o’clock.