INDUSTRY AND THE 2015 SDSR
Speech

Speaking at the Royal Aeronautical Society, 20th October 2014

Famously, at the 2010 election, Liam Byrne, the outgoing Chief Secretary to the Treasury, left a note to his successor – ”I’m afraid there is no money ”.

How right he was!

So what message would I leave to the new Min (DEST) in May 2015?

“Welcome to the best job in government.

“There’s not enough money to do all you are being expected to do.

“Argue for more but be prepared to choose wisely.”


As Professor Michael Clarke of RUSI has said,


“Any SDSR that is honest will be turbulent as it will have to confront some very difficult decisions.”


Those decisions must be driven by the new security environment, technological change and the choices about Defence that this nation has been ducking for too long.


Today I will address the second two drivers and say just a little about acquisition reform and possible improvements to the SDSR process.


But as I do I wonder what will really change. The new Secretary of State, Michael Fallon, has already said when referring back to the 2010 review,


“…. a lot of the basic logic still stands so we should not be preparing for a review which tears everything up”.


WHAT THE SDSR 2010 GOT RIGHT


In many ways the 2015 SDSR will be easier than the last one.


Ahead of the last SDSR there was an almost perfect storm - the equipment programme was wildly over budget, austerity was – necessarily - writ large in Whitehall and an election brought a fresh set of politicians - including me - keen to see change.


Despite this, not enough work had been done to evaluate real options to give us politicians real choices.


Inevitably, the end point was an SDSR that effectively said carry on as before but do it with less, and with an axe to some particularly visible programmes.


So I acknowledge that the outcome in 2010 was painful and disruptive for many, in a timeframe that made mitigation difficult.


The 2015 SDSR must be more honest about our national aspiration and strategic ambition than we were in 2010.


And the downward trend in defence spending set in train in 2010 must – as promised -be reversed.


The 2010 decisions do, though, mean:

• The department is no longer seen as spendthrift and incompetent.
• Its finances are under control.
• The acquisition process has improved


And after a thirteen year gap to 2010, there is a new baseline and a more recent experience of reviews to draw on.


Crucially, from both the industrial and security perspectives, the very special US-UK defence relationship was protected.


There will be new issues to resolve flowing from the new strategic challenges we face, but the Augean Stables have been largely cleansed.


Overall, whoever conducts the next SDSR will be in a much stronger position than we were in 2010.


THE SDSR PROCESS

But one systemic weakness remains.


The current timetable for SDSRs is far from the most effective for the development of strategic coherence.

As it currently stands, with fixed term parliaments likely to remain a fact of life, each review will be held in the first year of a new administration by new ministers and against the deafening drumbeat of the Comprehensive Spending Review.

The long-term nature of most defence equipment and capability decisions, often stretching over decades though, means we should do our very best to build consensus.

So I remain very disappointed that there appears to be no public dialogue about the SDSR in advance this time round – something that was partly addressed by the last government’s green papers ahead of the very belated SDSR.

I can see why some view any public consultation as an invitation to industry to lobby for their own cause, but MoD is clever enough to see through that.

We need to be more open and inclusive in advance of SDSRs.

THE ACQUISITION PROCESS

A brief word about the 2012 Acquisition White Paper.

To its critics I say simply that it was just more honest about current practice than government had previously been. It represented continuity of thought, no radical break, in many, perhaps most areas.

I count that a major victory against those who sought a more dramatic policy shift that would have undermined our defence industries.

It did, though, crucially chart a different and better course in three vital areas: on science spend, on exports and on relations with SMEs.

So here is a plea to any new administration of either political hue – maintain support for all three and ensure the recommendations of the Defence Growth Partnership are taken forward, particularly to maintain robust support for defence exports and on skills.

One caveat. I hear murmurs that the pure doctrine of competition by default is holding a little too much sway these days. The concepts of operational advantage and freedom of action generally demand a more sophisticated approach, as the 2012 White Paper made abundantly clear.

KEEPING THE M IN SME

In the context of support for SMEs, we must also make sure we remember the importance of the large but still sub-prime defence suppliers – companies such as Marshall Aerospace and Defence Group, Cobham, Meggit, Ultra and Martin Baker. Most of these companies are completely British and the value they generate flows directly into the British economy and exchequer

Too much of the debate about the defence aerospace industry revolves around the Prime Original Equipment Manufacturers (OEMs) on the one hand and smaller SMEs on the other.

Discussion of the Primes usually focuses on pursuit of new programme investment in the case of purely indigenous companies, or the methods by which non-indigenous companies can be persuaded to invest in the UK, to embody original IP in the minds of UK employees, and to deal with the constraints of the US ITAR regime.

Discussion of SMEs quite properly tends to concentrate on increasing their market access and on the innovation they offer.

What this debate tends to ignore is the industry layer below that of the OEMs but above that of the smaller companies.

The 2015 review should take account of the Large Sub-Prime Suppliers and their major contribution to UK national security, the economy, innovation, skills and training.


THE STRATEGIC CHOICES

My major concern is whether the 2015 SDSR will have the courage to make the big strategic choices.

For me defence is the defining purpose of the State and of Parliament.

Protecting the nation is why we have a government.

Everything else, from the NHS to education and housing no matter how important, is secondary to securing a safe, free world where our nation is defended, where freedom and liberty prevail and where international law and a rules-based trading system are both upheld robustly.

Probably only macro-economic policy, foreign policy and criminal justice share defence’s fundamental importance – keeping the citizen safe in the fullest sense.

Safe from enemies abroad, from crime at home and maintaining the citizen’s liberties.

But this view is not as popular as it was. Elections are not now won and lost on defence, or even law and order.

Parliament now does much, much more than vote money for the sovereign’s wars; indeed it’s often very reluctant to do that at all.

On the other hand, at times of crisis, the nation still has a proper sense of the importance of its role on the world stage. Although there is a greater reluctance to intervene after Iraq and Afghanistan, the nation still expects its armed forces to be able to do whatever we ask of them.

The strong public support for air strikes against ISIL shows this.

The political reality, though, is that the two percent NATO target, which to me is the minimum we should spend, is far from safe.

The figures announced in the 2013 spending review showed that total MoD Departmental Expenditure Limits (DEL) will fall by 11% in real terms between 2012/13 and 2015/16.


RUSI’s recent examination of the figures shows defence spending falling to 1.88% of GDP in 2015-16.


As the IFS recently asked, with all parties committed to further austerity beyond current plans, where could the necessary budget reduction come from, given that the protected elements - health, schools and aid spending - account for 46.9% of resource Departmental Expenditure Limits?


Defence spending certainly isn’t going to rise much, although the Prime Minister’s carefully crafted advocacy of the 2% rule might offer some encouragement.


His words after the recent NATO summit, though, were well short of a UK commitment:


“… every NATO member not spending 2% will halt any decline in defence spending and aim to increase it in real terms as GDP grows, and to move towards 2% within a decade.”


Michael Fallon’s apparently unscripted comments in his speech at Conservative Party Conference suggest we have a strong advocate of the 2% target.


But I cannot see the Treasury accepting 2-3% real terms growth in the defence budget as the economy grows.

So the red line for any new administration of whatever hue should be to insist on the planning assumptions agreed with the Treasury and Downing Street being sustained – one per cent real growth in the equipment budget and flat real for the rest.

For too long now, though, we have been living a lie – that we can avoid strategic shrinkage while cutting defence spending.

Even with the budget planning assumptions implemented, the 2015 SDSR must face up to the fact that avoiding strategic shrinkage is impossible.

That means choices that might make the ones we made in 2010 look easy by comparison.

TECHNOLOGY AS THE PRIORITY

As Min (DEST) I came to the view that understanding and using modern technology was the overriding priority.

It is consumer markets that now drive many technologies on which defence depends. And that technology is changing fast.

It is a commonplace to observe that the threats we face are now asymmetric, with proxy and non-state actors quickly adjusting doctrines to exploit weaknesses in our defences.

This means conflicts will happen differently, more unpredictably.

What will matter is being able to gain the upper hand through the rapid evolution of our technology and our doctrine as the conflict develops.

So understanding technology, spinning it in rapidly, testing and evaluating it, integrating it into complex systems will be increasingly vital skills.

Inevitably concern about technology means a particular focus on cyber security – and offensive cyber capability too. The next SDSR must include a proper examination of how this fits into the UK’s capabilities, doctrines, and broader military thinking.

The SDSR must offer the prospect of a less fragmented set of roles and responsibilities for cyber across government - and must encourage further action in the private sector too.

If the 2015 SDSR correctly prioritises technology, logically the department must spend more on science and technology.

For years, scandalously, and in a desperate attempt to balance the books, the Department has treated S&T as the cash cow of each spending round. Year after year spending fell, reaching dangerously low levels.

I fought hard to put a stop to the rot and to get a minimum figure agreed for the first time – that spending on S&T must never fall below 1.2% of the department’s budget.

This figure, though, is far, far too low. It should be at least 2%, probably higher.

Put bluntly, new wars demand an understanding of and access to rapidly changing technology more than they need tanks.

Of course spending the money is not enough. It must be spent collaboratively and in an open collaboration in which newer technologies are embraced, not one in which old fiefdoms are allowed to cling to the past.

To assert the need for choice is easy. To make the choices is much more challenging.

We cannot long duck the question, though, of whether we can sustain a full spectrum of capabilities at current levels of spending.

If, as I believe, we can’t, then we must choose technological understanding as a vital part of the future of our defence. And there is mounting official support for this proposition.

The Defence Scientific Advisory Council report on MoD S&T spending in December 2013 recommended…

“…a repositioning of Science and Technology research, from the current largely neutered activity, effectively corralled at the early stages of requirement-driven supply chains, to becoming a strategic, influential and essential activity in its own right, mitigating future risks within uncertain futures and being agile in exploiting opportunities whether foreseen or not.”

Perhaps more significantly, this is also one of only two specific broad capability areas identified as a priority in the 2013 annual report on the last National Security Review and SDSR.

THREE SPECIFICS


There are three specific items that the 2010 review did not properly resolve:

1. CROSS-CUTTING CAPABILITIES
The Defence Reform report by Lord Levene found that some cross cutting capabilities were not organised and managed as coherently and effectively as they could be. There are real complexities involved in delivering some of these capabilities. This shortcoming was inevitably reflected in the SDSR.

The next SDSR will have the benefit of the input of the new Joint Services Command.

So, for example, when it comes to Air and Maritime ISTAR, where there are potential benefits from operating existing military assets in different ways, the next SDSR should be better informed.

Interestingly this is the other of the two specific capability issues highlighted in the last annual report on the NSR and SDSR, offering a strong clue for one conclusion of the 2015 review.


2. CARRIER STRIKE


The aircraft carrier and F35 variant change issues were, to put it mildly, not well handled in the SDSR itself – and they did, very unhelpfully, tend to dominate the defence aspects of the review.


I welcome the Prime Minister’s announcement last month that both carriers would be commissioned – a decision we had expected to wait until the 2015 SDSR.


That means that large parts of the carrier question have now been settled - although the precise number of F35Bs is an outstanding decision for the SDSR.


Having said that, the carriers are major assets and there is a range of existing and new capability options that could be considered in the 2015 review that would significantly enhance the range and effectiveness of the strike capabilities they can deliver.


3. MARITIME PATROL AIRCRAFT

The capability gap we took on maritime patrol aircraft was the one with which I was least comfortable, but which I still support today.


We simply must have a long range hunt and kill maritime patrol capability if we are to protect two enormous carriers and a submarine based nuclear deterrent.


The Nimrod 2000 programme was, sadly, not the answer. After a ten year delay and a massively inflated budget, there was still no real likelihood of them ever being airworthy.


Now the important decision is not the airframe – it is the technology they use to fulfil their mission.

There is a powerful, probably overwhelming case for maintaining UK operational advantage and freedom of action and for sustaining essential skills in this vital technology. This should rule out simple off-the-shelf purchases.


PARTNERING WITH INDUSTRY

I take as given that the 2015 review will express strong support for the Defence Growth Partnership. We do, though, need to ensure all the right partnership arrangements are working – in particular the Defence Suppliers Forum and the SME Forum.

What I am about to say, I said in 2012 too. It just wasn’t all off-the-shelf!

The practical contractual partnerships which have delivered real advantage to industry and defence alike must be sustained.

They have proved beyond doubt that there are many circumstances in which these different forms of contracting bring greater benefit and deliver a more sustainable supply relationship for the MOD than would the default position set out in the White Paper.

A prime example is Team Complex Weapons – which has also proved the worth of the Franco-British agreements.

And in the fast jet sector, innovative approaches to output based contracting have driven out costs while enabling surges to meet operational needs.

There are others, such as the maritime sector Terms of Business Agreements, the Long Term Partnering Agreement for test and evaluation or the Submarine Enterprise Performance Programme.

They all enable the private sector to invest, improve efficiency and meet cost reduction targets for defence while delivering the capabilities the nation needs reliably.

We also need to see a further extension of contractor support to operations – making the best use of limited military manpower in combat operations.

PRIORITY TO EQUIPMENT SUPPORT

For too long now we have all talked about the need for scrutiny of the Equipment Support Plan to be given at least the same priority as the Equipment Plan itself.

Tough financial choices make this increasingly urgent.

Acquisition activities, in particular those falling within the scope of the MOD/NAO Major Projects Review process, inevitably attract a high profile. The big controversy always swirls around the procurement of new systems and kit.

Support activities attract far less attention and significance - but they are by far the largest element of the lifetime cost of the hardware.

For example, within the naval sector, the acquisition phase typically represents 30-35% of the total through-life cost of a platform, with the remaining 65-70% being spent on in-service support.

Through-life support is the major influence on equipment affordability and it is vital that its importance in the overall procurement debate should be better understood.

Against this background, the MOD would gain financial and operational benefit from placing ever more responsibility with industry for improved availability.

Support contractors also have an important role to play in new procurement programmes to ensure that the equipment design is optimised to reduce through life support costs through improving maintainability and reliability.

Cost and capability make this an issue whose time has surely come.

Of course cynics will claim that the long-term contracts needed to enable partnership feather-bed industry. This is a concern but I don’t agree. Experience shows that the benefits outweigh the risks and apart from anything else a more robust DE&S should prove a more demanding customer in the future.

Additionally many of these contracts will become subject to the new Single Source Regulations to guarantee the taxpayers’ interests are protected.

DOMAIN STRATEGIES

In the meantime there are some key platform issues to resolve.

The Government’s continuing commitment to the Type 26 and Successor will be crucial to the sustainment of the UK’s maritime capability.

Mercifully one source of uncertainty for both – Scottish independence - is resolved. Now both of these will proceed, the Type 26s in yards on the Clyde and Successor at Barrow. All that remains is to ensure that we build at least the planned thirteen Type 26s and the four Successor boats, to which both main parties are firmly committed.

The recent Scout contract, coming after it does after Foxhound and the plethora of UOR vehicles that will be take into core, seems largely to settle the industrial future of the land sector.

The position for the air sector is much less certain.

Indeed, we have de facto industrial strategies for complex weapons, for the surface ship and the submarine sectors and, I would argue, for the land sector too. But we have no such strategy for defence air technology.

More export success for Typhoon will, we all hope, sustain production for some time yet. The development of the capability of the platform will mean that some key engineering skills and capability will be maintained throughout the supply chain.

UK manufacturing capacity is also likely to ramp up with the increase in F-35 production.

But, beyond Taranis - a demonstrator programme which has been a great success, and should be celebrated for the extent to which it represents a significant advance in UK aviation - the picture is not clear.

The Franco-British UCAV work will take two years to complete.

The many different views in the MOD and RAF about UCAVs will make it difficult to shape a consensus on what is required for the future.

This all means that we do need to be cautious about the prospects for Taranis. It is undoubtedly keeping British aerospace skills up-to-date but is the combined European and probable export market big enough to sustain a move to production?

It was decided the F35 would be built collaboratively with the Americans. Is our best strategy actually to try to buy into an American UCAV programme with our strengthened UK skills offering a strong bargaining position?

I remain a strong supporter of the Franco-British agreement, but it has to be asked if any French administration could ever bite that particular bullet. And the rejection by Germany of the BAE Systems/EADS merger setback the possibility of rationalisation of the defence air sector in Europe unnecessarily and wrongly.

We need to answer these questions soon; I was beginning work on a strategy for the air sector as I left the department. More than two years have elapsed since then and I have seen no signs of progress.

It is too much to seek a resolution by next year but the SDSR must set a clear and rapid timetable to establish a credible air sector strategy.


And then there’s Tornado. Since the decision to support the air strikes against ISIL, there has been a lot of public comment about the over-commitment of our fast jet fleet and age of our Tornado fleet. So decisions on F35 numbers are needed soon. But that’s not enough.

The next SDSR must explicitly commit that Tornado will not go out of service until full weapons capability - Paveway, Brimstone and Stormshadow - is proven, worked up and fitted to both Typhoon and JSF.


SKILLS

Everything I have talked about so far is for naught unless we do something about the alarming engineering skills shortages we face.

This issue continues to rise up the political agenda and developments such as the Perkins’ review of engineering skills have really helped.

This is the area of the 2012 White Paper with which I am least satisfied. The ingredients were all there, but the urgency of the issue was not properly articulated and opportunities were missed. For example, I am concerned we have not worked closely enough with the trades unions on this vital issue.

Applying the concepts of operational advantage and freedom of action and then understanding the centrality of technology should make a better approach possible.

We cannot protect all the skills we would like on current budgets and hard choices again will be necessary.

The Defence Growth Partnership is an important beacon here.

I was delighted to work alongside Allan Cook as a member of the skills group of the Defence Growth Partnership.

As the group’s skills survey showed, there is much we all agree that the industry and government could do, working through the DGP mechanisms and elsewhere.

From MoD we need:
• The clearest possible requirements and technology road maps to help industry forecast demand
• And a clear commitment to build, retain and nurture specific advanced engineering capability in the UK.

From all of us we need:
• Positive promotion of the engineering in general and specifically raising the profile, breadth and attractiveness of working in Defence
• And action to widen the demographic within engineering – attracting more women and minorities.

So the next SDSR must be address the skills gap in defence engineering as a long-term concern.

It must do that in a coordinated way; there is significant overlap between the Aerospace and Defence sector skills requirement.

That’s why we need a combined AGP and DGP Skills group.

The DGP skills survey highlighted the existence of too many mechanisms and initiatives – from industry and government - intended to attract new entrants.

This complex maze of schemes is difficult enough for industry to navigate through and virtually impossible for schools and young people.

That’s why I continue to work with the Royal Academy of Engineering, Engineering UK, STEMNET and many others to simplify and increase the effectiveness of the schemes and initiatives on offer – and to create a more compelling and attractive image of all forms of engineering, encompassing but not restricted to aerospace and defence.

The higher profile for apprenticeships is very welcome, but industry must provide the actual places, making its own commitment to developing skills.

The 5% Club is a shining light in this regard, driven by Leo Quinn at QinetiQ, but now reaching far beyond the defence sector. The momentum must be maintained on supply - of bright young people who want to work in defence engineering roles and of companies willing and able to play their part in training and developing them.

CONCLUSION

So the new Min (DEST) in May 2015 must:
• Refuse to accept less than 1% real increases in the equipment programme
• Be prepared to make hard choices
• Prioritise science and technology spend: set a target 2% of departmental spend
• Develop a Defence Air Sector Strategy
And above all
• Address the skills issue

I am conscious that, having said we must make hard choices, I have offered few if any areas where we could reduce expenditure. Indeed I have called for much more money to be spent on understanding and developing new and emerging technology.

As Bernard Gray put it recently,

“The key question is, of all the desirable things in the world which are the ones you can afford?”

But my plea in mitigation is that we should be spending more on defence, not less, and we should persuade the British people of this.

This is the fundamental issue for all of us - the justification for the armed forces and defence capability in the UK.

We must all do everything to we can to sustain the national understanding that we maintain peace through strength, not weakness.

I acknowledge that the anger and frustration about recent conflicts is making this more difficult, but the support for action in Iraq shows there is still a national will to protect our interests when they are threatened.

There are siren and cynical voices in the UK who say we are impotent and unable to have an impact in world affairs. And then comes the deeply worrying suggestion that this does not matter very much.

Unless we continue to argue the case, we risk an erosion of support for the use of armed forces and a consequent erosion of budget and capability.

That’s why it is so important that the next SDSR is well argued, persuasive and properly funded. And why the political leaders of our nation show their deep personal commitment to it.

In 2015, the year when we celebrate the 800th anniversary of the foundation of our freedoms, Magna Carta, it would be depressingly ironic if an intellectually feeble SDSR and the next round of austerity combined further to weaken support for effective defence at such a dangerous moment in our history.

ENDS


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