Government Procurement Policy

Lord Davies of Stamford Excerpts

Thursday 24th November 2011 Lords Chamber

[Lord Davies of Stamford]

My Lords, I fear I must start by refuting and rejecting, I hope definitively, two very unscrupulous pieces of propaganda. They are complete falsehoods in both cases but they get mentioned far too frequently. One of them was mentioned this morning by the noble Lord, Lord Lee. I am sorry about that, because he is a man whose judgment I greatly respect and who knows a lot about this subject. It is absolutely not true that we in the Labour Government left a legacy of a £38 billion deficit—a so-called black hole. It is complete rubbish. You can only get to that figure if you assume that over 10 years, we would not have increased defence expenditure even in nominal or cash terms.

In other words, for 10 years you would have had a real-terms reduction in defence, year-on-year. Obviously, we were not planning to do that; we were increasing defence expenditure at 1.5 per cent in real terms. Even the new coalition Government are not doing that. Disgracefully, they are freezing defence spending in cash terms at the moment while saying that in the latter half of this decade, from 2015, they will be increasing it by 1 per cent per annum. On nobody’s assumption would you get £38 billion. That is absolutely untrue and fanciful. It is a disgraceful figure.

The second thing that I want to nail is the suggestion that we did not do everything we could to equip our troops in Afghanistan properly. That is a particularly unscrupulous suggestion. As history shows, at the beginning of any campaign you do not have the right equipment because the enemy, the terrain and the tactics are new. It takes a bit of time to get your act together, but we did that. We were 100 per cent committed to doing the best for our Armed Forces there. Gordon Brown asked me to do that and supported me 100 per cent.

I had a meeting every month in my office on counter-IED. We looked at a whole range of detection techniques, electronic countermeasures and protection systems. I invested deliberately right across the board in any and all of them that had any chance whatever of success. I think that I ordered nine types of armoured vehicle in my time as Defence Procurement Minister, several of them specifically conceived for Afghanistan: Mastiff 2, Jackal 2, Ridgeback, Coyote, Wolfhound, Husky and Warthog. I saw them all working extremely well last weekend in Afghanistan. My first decision was to re-engine the Lynx helicopter so that it could fly 365 days a year; that was done within a few months. I ordered the Wildcat, which I see in the latest NAO report is 100 per cent on time. I ordered 22 Chinooks, and this Government have cancelled half of them. They blame us for not equipping the Armed Forces properly, which is a bit rich when they then cancel half of the Chinooks. That shows the kind of basis on which these untruths are, I am afraid, being promulgated.

I want to make four points—or five if I have time—drawing the attention of the House to some aspects of defence procurement which are insufficiently appreciated. The first concerns buying off the shelf. I had the discipline in my time, which I hope is continuing, that whenever we looked at early requirement we looked first to see whether we could buy it off the shelf. If we needed to develop it, we looked to see, secondly, whether we could collaborate with another country and, thirdly, whether we could incorporate characteristics to make it exportable to third markets. Indeed, on some occasions I cancelled developments in favour of off-the-shelf solutions—for example, I cancelled the future helicopter project and spent the money on the Chinooks.

In many cases, however, that is not the appropriate thing to do because, by definition, in buying off the shelf you are not buying tomorrow's technology and may not even be buying today's technology. You do not necessarily have complete control of the technology that you are buying. You will not necessarily get all the source codes and will not be able to integrate new sensors and weapon systems. You will not be able to modify the goods in the way that you hoped you might and you will not necessarily have the long-term support, so it is not always the right thing. We in this country must, absolutely fundamentally, always make sure that our fighting men and women have the best that money can buy, or that can be found. That means we have to fight a capital-intensive war, never a labour-intensive war, so we have to go for the best and that often means development.

My second point is that if you go for new development, it is absolutely impossible to know in advance how much it is going to cost. By definition, you are at the frontiers of science and technology and no one can tell you how long it will take and how difficult it will be to solve those problems. Clearly, you have to have a budget for disciplinary reasons. You could put in an enormous contingency provision but you can end up putting in so many of those that, if they had a chance of being sufficient, you would have half your defence budget consumed by those provisions. That would not be sensible. You just have to accept that in defence procurement you will have uncertainty about the costs of development programmes. The first of its class or type will be a prototype. It will not be called that because you cannot junk a £1 billion destroyer or a £100 million fighter aircraft; you have to use it. It becomes a serviceable system but, nevertheless, you are inevitably treating it as a prototype.

The third point, which emerges from that, is that in order to develop new projects and technologies you need to have a long-term relationship of confidence with an industrial partner. You need to be able to work on an open-book system, to have flexibility with them and to have complete commitment from them to make sure that the system or weapon works in practice, over the long haul. That means an industrial strategy. We had some very good relations with the industry in my time; I shall just cite BAE Systems, the Astute class submarine, complex weapons and our relations with MBDA, Talis and Finmeccanica, which were ideal. I am very sorry to see that the present Government do not seem to want to continue with the industrial strategy that we had, although they do not say what kind of industrial strategy they want. Incidentally, we are talking here about what is, next to the pharmaceuticals, the greatest and most internationally competitive aspect of British manufacturing industry.

Because of time I shall pass to my last point, which is an important one. I see from the NAO report that the Government are wasting half a billion pounds by extending the production schedule of the Astute class submarine. As everyone knows, we had to do the same with the aircraft carriers, although I have to say that as a result of my intervention the delay and the cost were much less than they would have been if we had adopted the original Defence Board advice. If you extend the production schedule, you extend the fixed costs for your suppliers for a long time, which is extremely expensive.

That is a very stupid way of running a railway—no private business would do that. A private business would budget for and appraise investments on the basis of present-value comparisons. Present value would also enable you to seize current market opportunities. For example, I inherited a budget of well over £1 billion for six naval tankers. I discovered that I could buy them commercially on the market—the market being very depressed in 2008—for something like £50 million each, saving £500 million or £600 million. I could not do that because it would have meant bringing forward that expenditure into an earlier year. Equally, I could not lump all the systems for Astute boats 4, 5 and 6 together because that would have meant bringing those purchases forward, but seizing a market opportunity in that instance would have saved £300 million or £400 million a year.

We ought to have a present-value system of accounting. I made quite a lot of progress before the election in persuading the NAO of that, and some progress in persuading the Treasury. Obviously, under a present-value system, if you bring something forward it costs you more in the short term because you increase the present value, so using up more of your budget. The budget should be on a present-value basis and the Defence Procurement Minister should be able to bring things to operate within that strict net present-value budget, seizing market opportunities and ensuring that the taxpayers’ money is not spent wastefully, as too often it has been.