Speech

Defence and Security Equipment International

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

Speech by Philip Hammond, Secretary of State for Defence

The Rt Hon Philip Hammond MP

I’m delighted to be attending what is, after almost two years in this job, my first DSEI.

It’s a great privilege to see the fantastic kit and equipment on display here.

And it’s a great reminder of the vital part that the defence industry plays, both in supporting UK defence, and in supporting the UK economy in the global race.

I want to kick off with a couple of pieces of good news.

The first is that, following the completion of the assessment phase, I can announce today the award of a new £250 million contract for the manufacture of the new Sea Ceptor missiles in the UK by MBDA.

These missiles will play a vital role in protecting first our Type 23 Frigates, such as HMS Sutherland, which is in London for DSEI and in the future, the new Type 26 Frigates.

This contract will sustain around 500 jobs in MBDA and its supply chain, helping to maintain the UK’s sovereign capability in complex weapons, and our leading position in export markets.

The second piece of good news is that I don’t intend to make a long speech.

However, I want to use this opportunity to set out: how we are reforming the way in which we procure defence equipment in this country; why I believe it’s in the interests of both the government and the defence industry for us to make those reforms; and the wider challenge we face, in common with our European counterparts, of how to develop the next generation of exportable, battle-winning platforms.

Reform to maintain battle-winning capabilities

So, let me start by setting out the context for the reforms we’re making.

The defence of this country rests on three pillars: the brave men and women in our armed forces, both regulars and reserves; the civilians who support them in the Ministry of Defence and its agencies; and the defence industry that provides and sustains the equipment, capabilities and, in many cases, training that our forces need.

As a result of the dire fiscal situation we inherited in May 2010, we have had to make radical reforms under all three pillars to ensure that we will have the agile, adaptable, battle-winning armed forces we need for the future.

In the 2010 SDSR, the subsequent three month exercise and our blueprint for Future Force 2020, we set out the future size of our regular armed forces, smaller, but more agile, adaptable, better equipped; and crucially sustainable.

In the Ministry of Defence, we have committed to far-reaching changes, including cutting the civilian workforce by a third to make the organisation leaner and more strategic.

And on the equipment programme, which had become synonymous with massive time delays and cost overruns, we had to take some particularly tough decisions to make it affordable, cutting unaffordable programmes, such as Nimrod, retiring certain capabilities early, such as the Harrier and reprofiling others.

The combined result was that, in May last year, I was able to announce that we had eliminated the black hole and balanced the Ministry of Defence budget for the first time in a generation backed up by the publication, earlier this year, of the forward equipment plan.

But essential though those reforms were, they are not enough to ensure the success of our armed forces in the future.

Perhaps the hardest challenge of all is to secure lasting change to third pillar of defence, the way in which we deliver, with the defence industry, the equipment and capabilities our armed forces need in the future.

If we are to deliver the programme we have set out, on time and to budget, while continuing to make the efficiencies we need to contribute to deficit reduction, we need to entrench a better method of working together, with a fundamental reform of our defence acquisition processes and structures.

A more commercial DE&S

A vital part of ensuring we work better together is to make Defence Equipment and Support (DE&S) more commercial, better able to negotiate contracts with industry partners, and then to manage delivery of them.

Bernard Gray’s report on the acquisition process, written for the last government, set out the serious structural and cultural problems in the way in which we procure defence equipment; and the white paper I published in June, “Better defence acquisition”, sets out how we intend to address them.

Our preference is to transform DE&S into a government owned, contractor operated organisation, a GoCo.

This model is the one we believe is most likely to embed and sustain the significant behavioural change required to transform defence acquisition.

But, as I’ve said before, belief alone is not enough, and we are in the process of rigorously testing this proposition through a commercial competition and against a public sector comparator, which we call “DE&Splus”, which will explore the limits of what we can do within the public sector in terms of commercial freedoms and flexibilities.

We expect to reach a decision point in the commercial process next Spring.

If, at the end, a GoCo is assessed to be the best value for money option, a private sector partner will be appointed to manage DE&S and we would expect that to happen in late 2014 or at the very beginning of 2015.

I accept that this would be a radical change, a first in defence procurement.

But one thing is clear: whichever option we select, there will be radical change, a GoCo or DE&S+ operating much more like a commercial company handling the forces’ procurement needs.

And on the other side of the equation, a Ministry of Defence which is an effective and intelligent customer, delivering the best value for taxpayers’ money and the best equipment for our armed forces.

A better deal for the MOD under single source procurement

Those twin objectives are also the driving force behind our reform of the single source procurement rules.

We remain committed to procuring through open competition, whenever possible.

But in some cases, there is realistically only a single provider of a capability we require, or the need to maintain critical national industrial capabilities requires us to place contracts without a competitive process.

Single-source procurement typically accounts for about 45%, about £6 billion a year of the total MOD spend on defence equipment and support and is likely to remain at that level for the next decade.

So it is vital that we ensure we get the most out of this budget for our armed forces and for the taxpayer, while providing a fair and reasonable price to our suppliers and supporting the UK’s strategic defence industry.

The current framework of rules has remained largely unchanged for the past 45 years.

The Currie Review found a number of serious shortcomings, centred on the information disadvantages suffered by the MOD when negotiating prices, resulting in insufficient challenge of suppliers’ costs and inadequate protection for the taxpayer.

Lord Currie also found little incentive on suppliers to reduce costs and a weak governance regime.

In short, the current framework does not serve the best interests of the MOD and neither does it help industry to maintain the competitive focus that will allow it to succeed in export markets.

The Defence Reform Bill, currently before Parliament, sets out in detail a new framework to address Lord Currie’s concerns.

At the heart of the new approach is the principle that industry gets a fair profit in exchange for providing the MOD with timely and adequate information to allow both sides to work together in alignment to drive out unnecessary costs, saving the taxpayer money and making the industry more competitive in export markets.

Greater data and information will allow us better to align the industrial capacity the MOD is paying for with our long-term capability requirements.

And different profit rates for different levels of risk carried by suppliers will improve economic efficiency by allowing risk to be carried by the party best able to manage it.

A stronger governance regime will be vital to the success of our new approach, and will be delivered by a new, independent Single Source Regulations Office.

The SSRO will monitor adherence to the statutory framework and keep it under regular review.

It will be a source of expert advice and will act as expert adjudicator in disputes between the MOD and our single-source suppliers.

Crucially, it will take on the role of recommending the profit rates for single-source contracts, ensuring fairness for taxpayers and suppliers alike.

The old framework failed to evolve to reflect changing circumstances and did not incentivize industry, leading to a lack of competitiveness and a lack of affordability.

The new regime will incentivise efficiency in operating costs and the minimisation of overheads.

It will align much better the interests of the MOD and its suppliers, and support the competitiveness of the UK defence industry in both domestic and foreign markets.

Supporting growth and exports

Taken together, the reform of DE&S and the Single Source Procurement Rules represent a significant challenge to our industry partners, but also a significant opportunity.

By making the MOD a more intelligent customer, we are putting the onus on industry to make itself more efficient.

To reduce its overheads, streamline processes, invest in the latest equipment and facilities and continually bear down on cost inflation.

That will not, I know, be a pain-free challenge.

But the opportunity is to ensure that at a time when defence budgets in the developed world are constrained and realistically, that is not going to change any time soon, the UK defence industry is lean, efficient and globally competitive able to compete and win in open competitions for the rising defence spend of the emerging powers; focussing as much in the future on export opportunities and winning business overseas, as on retaining contracts at home.

And across Government, we are determined to support you.

Yesterday, Michael Fallon, launched ‘Securing Prosperity’, the vision and strategy for the Defence Growth Partnership (DGP) between government and industry.

With the explicit aim of promoting a highly competitive and innovative sector, focused on delivering battle-winning capabilities for the UK armed forces, our allies and defence partners around the world.

Later this week, I will chair the first meeting of a new cross Whitehall Ministerial Working Group on Defence and Security Exports.

This is not about picking winners nor old-fashioned protectionism; it’s about playing to our strengths for the good of defence and to support economic growth.

This government is not ashamed of British companies’ successes, or of promoting responsible defence exports.

Those companies are here in force at DSEI this week and I and my ministerial colleagues, not just in the MOD but across government, will be working hard to assist them.

European industrial competitiveness

Of course, the need to boost competitiveness and increase exports is not just a challenge for UK industry and government; it’s a challenge being felt across the Continent.

I’m sure everyone here is familiar with some of the propositions that have been put forward to confront it, for pan-European industry mergers or greater industrial consolidation.

In Brussels, the European Commission has been developing its own proposals.

In July, in a communication entitled ‘A New Deal for European Defence’, it set out its plans for a more competitive defence sector.

Some of those proposals, we can welcome, such as improving competition in the internal defence market, and supporting SMEs.

But others, such as interference in the export of defence equipment and government to government defence sales; or the creation of top-down “regional smart specialisation strategies” or “specific European standards for military products” represent a significant potential extension of the Commission’s role and are not necessarily in the UK defence industry’s best interests and we will resist them.

In the UK, there is a genuine debate about how we respond to this wider competitiveness challenge, because it lies at the heart of the question of how we are going to develop the next generation of platforms and capabilities.

Should UK industry go it alone?

Do we have the technological edge to do so?

If so, do we also have the financial means to develop that technology into cutting edge capabilities?

Or can we collaborate with potential customers who will provide the funding we need?

Should we be looking to pan-European industrial partnerships?

How would such a strategy impact on our IP relationships with the US?

Or should British industry, in fact, be looking across the Atlantic, to our closest ally for our future industrial partnerships?

Whatever the answers and they will be principally for industry to decide a leading role in the development of the next generation of platforms will be essential to the future success of the British defence industry and the maintenance of our share of defence exports.

Conclusion

Successful domestic procurement reform, a more open and better-aligned relationship between the MOD and its suppliers, a greater focus on exportability, and a very careful eye on potential interference from Brussels these are the challenges we must address to ensure that we get the battle-winning capabilities we need for our armed forces, to the specification agreed, delivered on time and on budget and to ensure that the UK defence industry maintains its position in export markets and remains a significant contributor to the UK economy in the future.

As we develop a more transparent, better aligned relationship with industry, I will do everything I can to protect you from unnecessary regulatory and bureaucratic burdens, whether home-grown or made in Brussels and in return, I hope that you will embrace the new collaborative culture we seek.

This exhibition is an excellent example of the opportunities we can create by government and industry working hand-in-hand to a shared objective, and you will have the government’s full support in generating the contacts and the sales you seek in the next few days.

Good luck, and thank you.

Published 30 September 2013