BAE Systems

Peter Luff Excerpts

Thursday 24th November 2011 Commons Chamber

[The Parliamentary Under-Secretary of State for Defence (Peter Luff)]

It is good to see a constituency Member in the Chair for this important debate, Mr Deputy Speaker, and I will do my best to be as brief as the complex issues raised allow.

May I say how much I enjoyed both speeches that we have heard? My right hon. Friend the Member for Haltemprice and Howden (Mr Davis) seized the opportunity for this Back-Bench debate with his usual skill and aplomb, and he spoke with passion and conviction; and the right hon. Member for Kingston upon Hull West and Hessle (Alan Johnson) spoke movingly and thoughtfully. The company would do very well to listen to the concerns that they both expressed.

I must emphasise, however, the deep regret that the Government and I, personally, feel at the job losses that BAE Systems announced on 27 September. Such decisions, I hope, are never taken lightly by companies, and we fully recognise the very real impact that they will have on local industry and individual livelihoods. I emphasise also—it is clear from the debate so far—that the decision was a commercial one, made by the company, which explained that it was necessary to maintain competitiveness both in the UK and internationally. This debate is testing that rationale.

[Mr Stephen Hepburn (Jarrow) (Lab)]

I share the concerns about BAE that the mover and seconder of this excellent motion have expressed, because we are experiencing similar problems on the Tyne. The shock decision to switch work from A & P Tyne will have a disastrous effect not only on our region through the loss of hundreds of highly skilled jobs, but on the economy. Will the Minister urge BAE to rethink?

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[Peter Luff]

I know the decision to which the hon. Gentleman refers, and it will of course please other parts of the country, because BAE Systems will do the work elsewhere in the UK, but I shall happily talk to him about it privately afterwards if he would find that helpful.

I do not want to labour the point, but we all know how important defence is as an integral part of advanced manufacturing in this country. It sustains about 300,000 jobs, many of which are highly skilled, in thousands of companies of all sizes. Those employed are at the pinnacle of manufacturing and engineering ability, and they do a significant job in helping to keep our country secure. The industry is a key sponsor of manufacturing apprenticeships and training, the quality of which is acknowledged by employers across a range of industries, and intensive research and development programmes also mark out the defence sector as a source of innovation and intellectual property.

The House will also be aware—this was at the heart of the two speeches that we have heard—that defence is a major contributor to export revenues. UK industry has an outstanding record of export success, second only to the US as an exporter of defence equipment and services. Despite the challenging market conditions experienced by many sectors of the wider manufacturing base, the UK has in the last year won almost £6 billion in new defence exports business. That represents an increase in our share of the global defence market from 18% to 22%, and we are committed to continuing that trend with strong support for future defence export campaigns, including the products mentioned by the Members who have spoken.

Within that vital and dynamic sector of the UK economy, BAE Systems has a significant role. It has been the MOD’s largest defence supplier for some time; it is the fourth largest supplier to the US Department of Defence, which accounts for 50% of its revenue; and it is, indeed, the world’s second largest defence company. I should like to pay a tribute to BAE Systems: its speed and adaptability in updating software for the Typhoon aircraft’s radar and defensive aids systems was one of the keys to the success of the recent action in Libya, and we owe all its staff a great debt of gratitude for that.

BAE Systems’ wider involvement, beyond Typhoon, extends to many of the MOD’s largest programmes, including the Astute submarine, the Type 45 destroyer, the Queen Elizabeth class aircraft carrier, the joint combat aircraft, general munitions and support for the armoured fighting vehicle fleet. Overall in 2010, BAE Systems’ revenue from the UK amounted to just over £4 billion, representing 20% of the company’s total revenue. So hon. Members should be in no doubt about the importance that the Government attach to the contribution of the UK defence industry in general and BAE Systems specifically to a rebalanced economy and export-led growth.

Let me turn to the specific programmes that are relevant to today’s debate. In the air, Typhoon, a triumph of European engineering, has really come of age. It is a first-class aircraft and the envy of discerning nations throughout the world. Already in service with six air forces—in the UK, Germany, Italy, Spain, Austria and Saudi Arabia—and at the forefront of the world’s media coverage following its recent exemplary operational deployment in the skies above Libya, the prospects for expanding Typhoon’s user community have never been better, and Ministers are working hard to ensure that we crystallise those opportunities.

Those export prospects meant that some changes were needed to the Typhoon programme. In May 2010, a request was made by the Eurofighter GmbH industrial consortium—I emphasise industry, not Government—to slow down the rate of Typhoon aircraft production in order to free up and sustain sufficient industrial capacity in the Eurofighter partner companies, comprising Alenia, BAE Systems and Cassidian, and to service export orders.

The UK, along with the other partner nation Governments, agreed to the industry’s proposal in July 2011—on the basis that it would not adversely affect the build-up of our own Typhoon fleet. As a result, there is now the prospect of Typhoons being made over a longer time frame, with the production lines open to 2018 rather than closing in 2015 as previously planned.

[Mr David Davis]

Will my hon. Friend give way?

[Peter Luff]

In just a second.

The letter that BAE Systems sent to Members ahead of this debate does not accurately explain the reasons for the slow-down, which in turn is responsible for many of the redundancies in Warton and Samlesbury.

[Mr Davis]

The Minister has answered my question.

[Peter Luff]

I will return on several occasions to that letter, which was disingenuous in several respects, and am grateful to my right hon. Friend.

The MOD has also invested £190 million in shaping a potential future unmanned combat air vehicle programme. BAE Systems has been our partner in that, and it led an industry team formed of Rolls-Royce, QinetiQ and GE Aviation. An unmanned combat air system programme could form part of a cost-effective solution in air-to-air and ground-to-air combat roles. That work includes the Taranis technology demonstrator, which is a world-class project and a testament to the UK’s advanced design, engineering and technology talents. It exhibits UK manufacturing capability at its very best.

We recognise and welcome the investment that the industry is making in technologies for unmanned air systems and encourage it to continue, so that it will have products that meet our needs and those of export customers. I have to say once again that the letter sent by BAE Systems to hon. Members does not appear to do justice to the partnership nature of the programme, because BAE Systems seems to take all the credit for it. The letter refers to the significant funding BAE Systems put in, but it does not emphasise the Government’s funding or the other three partner companies involved in the project. BAE Systems should be a little more modest from time to time in the claims it makes on behalf of the company.

[Graham Jones (Hyndburn) (Lab)]

Will the Minister explain the situation regarding UK air flights of Taranis and unmanned aerial vehicles, because there seems to be a problem with the Government not supporting test flights and not helping BAE Systems?

[Peter Luff]

The whole future of the unmanned combat sector is important for the Government and lies at the heart of the strategic future of aerospace and defence aerospace. We will be considering the matter extremely carefully later in close dialogue with the companies involved. The hon. Gentleman makes an important point. It is vital that the programme succeeds. The matter is complex as it plays into the UK-French bilateral relationship, but we are determined to take it forward in the best interests of UK industry and, crucially, the defence industry.

[Diana Johnson (Kingston upon Hull North) (Lab)]

I listened with interest to that last point about how important the sector could be to the future of the defence industry. As an MP representing a constituency in Hull, may I ask the Minister whether he has had any direct conversations with BAE Systems about how that type of work could help to deal with the issues identified at Brough regarding future work?

[Peter Luff]

The short answer to that question is yes. I have obviously discussed the future of the sector with the company, but I have not done so in specific detail about Brough—in general terms, yes, but not specifically about Brough. If the hon. Lady wishes to make a suggestion to me, I will happily take it forward.

The Government need an efficient defence industry, and I make no apology for saying that. Another line in the letter to hon. Members seems to suggest that we are in some sense to blame for wanting BAE Systems to be more efficient. We want it to be more efficient for the sake of taxpayers and also for the sake of export opportunities. I make no apology for demanding that efficiency of our suppliers.

Although using open competition on the global market is the MOD’s preferred option and its default position for purchasing defence capabilities—I listened carefully to what my right hon. Friend the Member for Haltemprice and Howden said in that respect—in certain situations, the MOD has had to enter into single-source procurement for some of the capabilities we must have in the UK. In these situations, we use the yellow book—it is called that because it is yellow—or “Government Profit Formula and Associated Arrangements” to give its full title. The yellow book covers the pricing arrangements to be used in single-source, non-competitive procurement. That can include reasonable rationalisation and redundancy costs, provided they are associated with a reduction in work related to single-source procurement.

The yellow book arrangements have remained largely unchanged for more than 40 years, which is why in January this year I commissioned Lord Currie of Marylebone to undertake a root-and-branch independent review of it. The MOD is currently undertaking a consultation, which runs until the new year, on Lord Currie’s proposals. No decisions will be made on his proposals until the consultation has been completed.

[Mr David Davis]

The Minister is making a very courteous and informative speech that is very helpful to us. Will he ensure that the response of the Public Accounts Committee and the National Audit Office to my request that they investigate some of the yellow book operations is taken on board in that consultation?

[Peter Luff]

Yes. In fact, there has already been discussion with the National Audit Office about aspects of the single-source regulations. My right hon. Friend makes a very important point and I welcome what he said about that in his speech. It is very helpful indeed to have those remarks on the record.

The scope of Lord Currie’s review covers not just rationalisation and redundancy costs but a whole range of other issues associated with the process. He made his views clear on that in the document he produced, which states:

“We do not recommend moving away from the requirement that the MOD should bear the redundancy and restructuring costs associated with programme curtailment or cancellation. The alternative, whereby the contract bears such costs, would be appreciably more expensive. Faced with the possibility of bearing such costs, the contractor would necessarily need to price in a significant, possibly prohibitive, risk premium into contracts against that eventuality, over which it has little or no influence.”

Let us put those observations on liabilities in a BAE Systems context. The Brough site has historically been used for a variety of purposes, including the manufacture of the Hawk advanced jet trainers. It also has a structural testing facility used for a number of different airframes, and has been involved in the manufacture of some Nimrod MRA4 and Typhoon parts.

Some of those projects were procured on a single- source basis, but many of them were not. In the course of normal business, BAE Systems has approached us to begin discussions on payment for a share of its rationalisation and redundancy costs at Brough. We will ascertain what proportion, if any, of those costs we should be liable for under the yellow book framework. I can assure the right hon. Member for Kingston upon Hull West and Hessle and my right hon. Friend the Member for Haltemprice and Howden that our negotiations will be robust in defence of taxpayers’ interests. I am very grateful for their support in that process.

We also recognise that the Government’s procurement decisions directly impact inward investment and exportability. Our involvement as the only level 1 partner in the joint strike fighter programme has brought significant high-end work into BAE System’s Samlesbury facility and, indeed, to UK industry more widely. That site manufactures the joint strike fighter rear fuselage for Lockheed Martin, in respect not only of the UK order but of orders from the US and other international clients. That production run should continue until at least 2035 and, on current plans, supply 3,000 aircraft. Following that, the UK should be very well placed to win additional competitively placed work within the JSF production support programme, potentially valued at £30 billion. Similarly, Government investment in the assessment phase of the electronically scanned radar for Typhoon will enable a capability leap for the Typhoon fleet. That not only benefits UK armed forces well into the 21st century, but improves Typhoon’s chances of success in the highly competitive, fast-jet market.

One issue that has not been raised is the fact that the letter from BAE Systems to hon. Members alludes to the withdrawal of the Harrier aircraft, but it does not provide the context and detail for that decision. In the bipartisan spirit of today, I shall simply say that we had a very challenging financial situation at the MOD and leave it at that. It is also true that the previous Government took the decision to delete the Sea Harrier in 2006, which is the air defence aircraft. In 2009, they took a subsequent decision to reduce the size of the remaining Harrier fleet, which meant it was not large enough to achieve sustained operations in Afghanistan and maintain an adequate contingent capability for the unexpected on its own. A combined fleet of Tornado and Harrier would not be cost-effective, because retiring an aircraft type delivers significantly greater savings than running two smaller fleets.

Although the withdrawal of the Harrier was a decision we took with regret, it was effectively forced upon us. Despite that sorry affair, we have worked hard to make the most of the situation. I can tell the House today that we have agreed the sale of the final 72 Harrier aircraft frames and associated parts, which will be used as a major source of spares to support the US Marine Corps Harrier AV-8B fleet of aircraft. The value of the sale is $180 million—some £110 million—and represents a good deal for UK taxpayers and the US Government. Added to the savings made from retiring the Harrier fleet from service, that sale takes the total estimated receipts and savings to the Ministry of Defence to around £1 billion. That will enable investment in a more modern and capable mixed fast jet fleet, including the state-of-the-art joint strike fighter, and therefore be good for British jobs.

The Harrier was a marvellous piece of technology and demonstrates the UK’s significant contribution to the development of fixed-wing aviation. I pay tribute to all those who contributed to its design and manufacture, as well as to our service personnel who flew and supported them. Accordingly, I am pleased to announce that we plan to offer two Harrier aircraft to museums in order to preserve the UK’s aviation heritage.

On the points made by my right hon. Friend the Member for Haltemprice and Howden about the overseas production of British aircraft, conditions in the international marketplace do influence commercial choices and outcomes —it is not just a matter of what the Government say. It is increasingly unavoidably the case that export customers are demanding that their orders be satisfied mostly or wholly by means of local production and technology transfer. There is often a need to satisfy that critical condition in order to secure an order. That is certainly a feature of many of the potential Typhoon and Hawk export orders. My right hon. Friend regrets it—I may regret it, too—but it is a fact of life. If we want to win business, this is the way we have to do business.

The insistence on local involvement by the customer becomes even more likely and significant with larger export orders. The choice is to offer that condition or not to compete for the contract at all. That would reduce the viability of the businesses themselves and would be bad for UK employment. Last year’s deal to sell 57 Hawk to India was worth several hundred millions of pounds for UK companies, even though the final assembly was in India itself, so it is good for both sides of a vital strategic partnership for this country.

However, we also fully recognise our responsibility to those whose livelihoods are threatened by changes in the market. Work will continue for some time at Brough and the Skills and Jobs Retention Group and the Jobcentre Plus rapid response service will assist skilled workers there and at the other sites in finding new roles.

[Mr David Davis]

I think everybody takes the point that, in the modern defence market, there will be offset. Everybody has offset; we have offset. As has been made clear, offset arrangements do occur. It is problem when those offset arrangements become the permanent new manufacturing base for the aircraft, which is effectively what has happened with Harrier and seems at least to have been discussed with the head of Hindustan Aviation with BAE.

[Peter Luff]

I agree that when overseas production becomes a source of rival manufacture for export purposes, there is an issue for us. We have to accept, however, that the success of the Typhoon contract in India will depend on significant participation by Indian aerospace industries in the manufacture and upgrading of the aircraft. That is the price for winning the contract, and it is a price that we have to be prepared to pay.

Additionally on the subject of support for those who are sadly affected by these decisions, last month the Chancellor invited strong and viable proposals for enterprise zones in the areas surrounding the sites, with a view to enabling those zones to be up and running by April next year. As the right hon. Member for Kingston upon Hull West and Hessle said, attracting new industry to these existing manufacturing hubs could soften the impact of BAE’s change in structure without undermining the lives of these highly skilled workers.

[Alan Johnson]

We are pleased to get an enterprise zone, but we need to look at other work that these skilled workers can do; many companies would be pleased to get them. Our point is that this requires a new way of thinking. There is no reason why we cannot bring packages of civil aviation work to Brough, where there is a fabulous site and a really good work force. The alternative is that these workers have to move, which is very difficult given the housing market and all the other problems that they face with schools, families and so on. We then find very highly skilled workers ending up as taxi drivers or dropping out because they have to stay in their local area. Will the Minister consider, with Allan Cook, attracting these packages, given that there is such a skills shortage in commercial aviation?

[Peter Luff]

I will do precisely that with the Under-Secretary of State for Business, Innovation and Skills, my hon. Friend the Member for Kingston and Surbiton (Mr Davey); it is very good to see him in his place today supporting this debate and showing the concern for the issues raised that is felt across Government more widely. Of course, I do not have responsibility for civil aerospace. Although I happen to agree with my right hon. Friend the Member for Haltemprice and Howden about the wisdom of selling the share in Airbus, that is a personal, not a ministerial, view. I believe that there are significant opportunities for the wider civil aerospace sector resulting particularly from what has happened at Brough, and I entirely agree that BAE Systems should be creative, thoughtful and active in making those opportunities come to fruition exactly as suggested by my right hon. Friend the Member for Haltemprice and Howden and the right hon. Member for Kingston upon Hull West and Hessle.

[Kerry McCarthy (Bristol East) (Lab)]

rose—

--- Later in debate ---

[Peter Luff]

I will give way for the last time, because I am anxious to conclude and let other Members speak.

[Kerry McCarthy]

Filton airfield is one of the enterprise areas linked to the local enterprise zone in Bristol. Is the Minister aware of concern about the closure of the airfield, which many people think will pose a real risk to aerospace jobs in the area? Does the Department have a view on that?

[Peter Luff]

I am aware of the issue, but the evidence suggests that that concern, although I understand it, is probably not well founded. I believe I am right in saying that today—

[Jack Lopresti (Filton and Bradley Stoke) (Con)]

rose—

[Peter Luff]

I give way to my hon. Friend, who might have more details than I do.

[Jack Lopresti]

I was concerned about the potential impact of the closure of Filton airfield on local jobs and industry, so the first thing I did was speak to local companies such as Airbus, Rolls-Royce and GKN, which all assured me that the existence of the airfield was not in any way consistent with their increased orders or viability in the long term—on the contrary.

[Peter Luff]

I am grateful to my hon. Friend. My understanding is that the Secretary of State for Business, Innovation and Skills is in the Bristol area today announcing additional jobs for Airbus. Although I genuinely respect the concern expressed by the hon. Member for Bristol East (Kerry McCarthy), I have heard other assurances similar to those given to my hon. Friend. However, I promise that I will keep my eye on the situation as best I can, as a Defence Minister, and I am sure that the Department for Business, Innovation and Skills will do exactly the same thing.

The defence sector and, in particular, BAE Systems have a significant role in rebalancing the economy by offering the taxpayer better value for money; and by offering the world the products, innovation and services required to compete on the global stage. However, BAE Systems must also be prepared to take responsibility for its decisions and to understand the debt that it owes to the country and the taxpayer.

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[Mark Hendrick (Preston) (Lab/Co-op)]

BAE Systems is a world-leading manufacturer of defence and security products. It has bases scattered across the globe in places as distant as the United States, Australia and India. However, it is important that the UK remains at the core of its business and its base.

Before the recent announcements, BAE Systems employed 40,000 people directly. When the indirect employment throughout the company’s supply chain is factored in, about 120,000 British jobs are dependent on BAE Systems. To further demonstrate the company’s standing, it generated £9.2 billion in revenues in 2009. It made a direct value-added contribution to UK GDP of £3.3 billion and contributed more than £650 million to the Treasury’s coffers. The Prime Minister has spoken at length about wanting to support British manufacturers. No company has done more than BAE Systems.

BAE has a centre of excellence in the north-west. In 2009, a comprehensive report into the company by Oxford Economics stated:

“The North West is by far the most important region within BAE Systems UK, accounting for about half of all its UK employment.”

That is about 20,000 jobs. The report went on to make a point that has just been made by the hon. Member for South Ribble (Lorraine Fullbrook):

“BAE Systems now accounts for exactly one in eight jobs in knowledge-intensive production within the North West.”

BAE’s concentration in the north-west means that the recent announcement that the company will axe 3,000 highly skilled workers, half of them in Lancashire, is a body blow to the region, as I am sure it is in Yorkshire as well.

The Warton site, which employs more than 8,000 people and contributes more than £300 million to the local economy, will see 822 redundancies. A further 565 jobs will go in Samlesbury, and more than 100 elsewhere in the region. Many of them are in my constituency and the surrounding constituencies in central Lancashire. That is a tragedy for those employees, their families and the region. We have heard a great deal about Brough today, but to put the matter in context, more jobs are being lost in Lancashire than exist at Brough as a whole.

Contrary to some fairly derogatory remarks about the standard of the work force in Lancashire, Warton and Samlesbury are highly confident that they are capable of doing whatever work is required on any aircraft if the company asks them to undertake it. The north-west is where BAE Systems has placed the bulk of its operations, and it is where the company’s future lies. The north-west centre of excellence exists at Warton and Samlesbury, and it will be a major contributor to this country’s gross domestic product. Coming when they do, however, the changes are a particular problem for families on either side of the Pennines.

The Typhoon jet is a huge success story, which we want to be continued. As the hon. Member for South Ribble mentioned, the jet undertook its first major combat missions earlier this year, providing an invaluable service in the skies of Libya. Production of the Typhoon has taken place in three tranches, and although the previous Government signed up to tranche 3A, it has sadly been subjected to the coalition’s ill-thought-through and rushed strategic defence and security review. Rather than producing a carefully constructed industrial strategy, the Ministry of Defence is now planning to halve the UK’s tranche 3 order, and BAE will cut its annual production from 61 to 36 jets.

Last week, the Minister made the point that much of what was happening was due to the slowness of ramping up work on the F-35. Nigel Whitehead, the group managing director, has made it plain in a letter to me and other hon. Members that the main reasons for the decision were the cut in the Typhoon, not the F-35, along with the withdrawal from service of the Harrier and the decision to scrap the Nimrod. That is what the company is saying about the facts.

[Peter Luff]

rose—

[Mark Hendrick]

I am happy to take the Minister’s intervention, because I have only 16 seconds left and I shall get some extra time.

[Peter Luff]

I am very grateful to the hon. Gentleman. Whatever the rights and wrongs of his argument, the letter makes it clear that that decision was taken in 2008.

[Mark Hendrick]

Which decision?

[Peter Luff]

The decision by the four core Typhoon nations not to acquire the full quantity of Typhoon tranche 3 aircraft was taken in 2008. I do not think I can take responsibility for the last Government’s decisions.

[Mark Hendrick]

I think the Minister is talking about tranche 3, not tranche 3A.

It is important that people get the matter into perspective. For each of the 1,500 BAE Systems jobs lost in Lancashire, four other jobs will be lost in Lancashire as a result. It is a huge blow to the region, to Lancashire and to many hard-working families from Preston.