International Relations and Defence Committee
Uncorrected oral evidence: Defence concepts and capabilities: from aspiration to reality
Wednesday 19 October 2022
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Members present: Baroness Anelay of St Johns (The Chair); Lord Alton of Liverpool; Lord Anderson of Swansea; Baroness Blackstone; Lord Campbell of Pittenweem; Baroness Rawlings; Lord Stirrup; Baroness Sugg; Lord Teverson; Lord Wood of Anfield.
Evidence Session No. 19 Heard in Public Questions 146 - 151
I: Kevin Craven, Chief Executive Officer, ADS Group; Oliver Lewis, Co-founder, Rebellion Defence Limited.
USE OF THE TRANSCRIPT
Kevin Craven and Oliver Lewis.
Q146 The Chair: Good morning. I welcome our witnesses, Kevin Craven, chief executive officer of the ADS Group, and Oliver Lewis, co-founder of Rebellion Defence. Thank you for joining us to give evidence to our inquiry. I remind witnesses that this session is broadcast, transcribed and on the record. I also remind my members that, if they have any relevant interests to declare, they should do so before they ask their questions.
I will ask a general opening question and then turn to my colleagues for more detailed questions. I anticipate that they may wish to follow these up immediately with supplementary questions. If we have time at the end, I will revert to the committee for further questions that may go more widely. I will try to ensure that those who have not asked a question get a chance to at that stage.
What are the key expectations of the defence industry from the UK Government—particularly, obviously, the Ministry of Defence? Putting it the other way around, what should the MoD be able to expect from the industry?
Kevin Craven: Thank you for inviting us; it is a real pleasure. On expectations, we believe that the Defence and Security Industrial Strategy was a good document on the whole, and fully implementing it and all its implications would be incredibly helpful. We have seen a step change in how the MoD interfaces with industry, and that progress over the last few years is much welcomed.
Some things still need to go faster and further. A good example would be a Government-to-Government commercial mechanism to help with exports, for example. The consistency of implementation of the social value model is an interesting development in defence procurement and in how our industry members can add value to UK society. These are not simple, by the way; they require a lot of strategic patience and momentum, which is challenging when interruptions like the Ukraine conflict happen.
In return, the Government absolutely should expect world-leading capabilities and investment from our members in high-value skills and highly paid jobs. We should also strongly support the UK's national security. We deliver that, but could we do more? Absolutely, yes.
Oliver Lewis: I echo Kevin's comments that the strategies are a very good place to start, but as with most things, particularly in the Ministry of Defence, we need to focus on moving from word to deed. Paraphrasing another friend and colleague who gave evidence, the say/do gap is alive and well in the Ministry of Defence.
So expectations are imbalanced, with the Ministry of Defence talking as a software company, and a new generation of software companies. The expectations from the Ministry of Defence are too onerous and great for new companies and start-ups, because they often relate to expectations that one should appropriately attach to the existing defence contractors and defence primes, which are much larger and have considerably larger balance sheets, aside from other advantages within the incumbent market.
Having said that, as a software company and a new start-up that is three years old, we expect the procurement reform that is mentioned in all of these strategies to become real. Like Kevin, we expect a considerable increase in the speed of execution, particularly of contracts that move from research and development, or interesting grants in innovation hubs, through to production contracts, which are the only place where it is meaningful for companies and for the end user, the mission and the war fighter.
From a software company perspective, it gets more specific. We need the Ministry of Defence and the Government to hold all of us to account—legacy companies and new companies—on modern ways of building software: open architecture, open data, common standards and a focus on interoperability between all of our systems, hardware or software. If one achieves that, one has considerably more compensating factors for why it makes sense to do business as a defence software company in the United Kingdom, because it is typically not about the value of the contracts, especially in relation to the power and sense of gravity exerted by the US defence sector.
The Chair: Both of you hit some of the targets that we wish to address today and will go into more detail on. Having received evidence from others, we are aware that one of the difficulties is the time lag: those who are in business because they are innovative and work fast find it difficult to get a response quickly enough in the military supply area.
Baroness Blackstone: Could you put a bit more flesh on what you have said so far about what it is like to work with the MoD? Could you give us some illustrations of where things have gone wrong and why? Perhaps, at the end, you could also tell us whether there is anything you think the MoD does rather well.
Kevin Craven: It is probably worth addressing that question on a couple of levels, both strategic and tactical. Strategically, we have seen improvements in the way the MoD deals with industry. There are now structured professional interfaces, such as the Defence Suppliers Forum, the Defence Growth Partnership and the Strategic Suppliers programme, which work reasonably well. It is probably important to emphasise that those are buyer-supplier relationships. Although there is an improvement in the way the buyer behaves—there is early market engagement, more transparency and more clarity of requirements, for instance—there is still quite a long way to go. Touching on Ollie’s point, upstream early involvement on capability development—R&D and whatever else—is worth looking at in detail.
On a tactical level, it is still quite difficult for people to deal with the monolith that is the MoD, which has some 7,000 commercial officers. The clarity of thought, the intelligent buyer behaviour that we sometimes see at the top of the tree, is not necessarily mirrored further down the organisation, so those interchanges are quite challenging sometimes.
Responsivity remains an issue. When there is a crisis like Ukraine or Covid, where the MoD has responded incredibly well, we see the machine moving quickly and agilely. But this is mostly because it sets aside the normal processes, so things get done rather quickly because of urgent operational requirements and informal discussion of the nature of the problem and how you deal with it, and then a lot of joint working.
The crisis moves on, the rubber band snaps back into place and normal processes resume, which is pretty difficult, to be honest, because quite often the post-crisis moment requires further agile movement. As we have seen in Ukraine, tactics and demand have changed, but we do not necessarily see the processes evolve to match that. We need some thought around how to maintain a channel for agile procurement while recognising the need for the normal standard procurement processes, which obviously have a place. A bit more flexibility in that would be helpful.
There are a few specifics. Scrutiny and approvals processes are sometimes opaque. That increases costs for both the MoD and the supplier. There is sometimes perhaps an overemphasis on the process. An example might be a missile system where there is only one option but it still goes through a cost and approvals process to make the decision, which perhaps could have been done at the beginning of the process rather than at the end.
There is a lack of pull-through in emerging technologies. Of course, the existing contract base and supply chain need disruption, and there should be room for new market entrants, but on the other hand you sometimes get technologies emerging in other sectors that could be usefully applied to existing suppliers, who might be able to industrialise and scale that concept up rather more quickly than building a whole new kind of market entrant.
On SME issues, everything that I have said is multiplied by a large factor in the difficulties that happen, although again it is important to recognise that progress has been made. I would particularly point to the appointment of Andrew Forzani as co-chair of the Defence Suppliers Forum working group. Andrew is a very thoughtful colleague and works well with that industry. It is challenging, because having the capacity to deal with 19 strategic suppliers is difficult enough, but dealing with 10,000 further SME players is very difficult for the MoD. Some work on that interface could be helpful. I will pause there and let Oliver add some colour to that.
Oliver Lewis: A senior RAF officer challenged me at a talk last week that we spend far too much time talking about how bad the MoD is, so, if I may, I will talk about some of the positives first, certainly relative to the United States, and then get back to the bad track. Compared to the US, the MoD is significantly more flexible. Senior officers and officials are more able to use their discretion. It is significantly less legalistic and less bureaucratic than the Pentagon, even if that bureaucracy is not noticeably less complicated when you get into it. The MoD commercial officers that Kevin and I have spoken about, compared to their American counterparts, are far more imaginative. They have the ability to negotiate unique contracts in both capabilities and authority, and they are more willing to engage directly with their business-management counterparts in industry than their US counterparts, who tend to have to follow procedures and paperwork by rote with limited capacity for imagination and deviation.
A critical area for a tech start-up where the MoD is impressive is its early access to users, formal and informal, for workshops about what products could be developed, from war fighters right through to senior officers. That is critical in the early stages of developing new software.
In general, and across the entire organisation, the MoD is far more open and accessible to new companies than the Pentagon is. I think there is a greater self-awareness in the MoD of its significant problems in how it does business, especially with regard at innovative technologies and software. There are not just strategies but many programmes and organisations that it has set up which are valiantly doing good work, from the joint innovation hub through to DASA and notions such as Secured by Design, which is trying to put the accreditation process for secure technologies at the beginning, which is easier than working through the difficult bureaucracy there.
There are some changes to the List X process, the security classification process, which in time will benefit new entrants. Then there are some pretty exciting new activities around commercial X, which is being pioneered by the new Second Permanent Secretary, and Defence Digital. So there is quite a lot of hope, in comparison to the Pentagon. If you remove that comparison, the MoD remains one of the worst customers in the world.
Baroness Blackstone: One of the worst what?
Oliver Lewis: One of the worst customers in the world. Sadly, it takes Herculean patience, specialist knowledge and expertise, trusted networks back into the system and, critically for tech start-ups, significant patient capital. Typically, that is a level of venture funding that is available only in the United States, even if British and European investors are close followers.
Take the companies in MySpace: three of us have raised over $100 million, and even we are finding it extremely difficult to hold on to the UK market, because the revenue is too small and the processes too slow, particularly given the comparable amount of effort that one could put into the US market. Anduril, which is one of those coming from the US, is looking at retreating from the UK market and significantly lowering its number of people. Primer AI, one of the best companies in the world for facial recognition and other neurolinguistic processing and computer vision, announced last week that it has closed its UK office completely.
I find it very difficult, even as the British co-founder of a company that was founded as British-American from the beginning, to hold on when I am looking at contracts in the value in the UK of between $2 million and $5 million and the comparable contracts in the US are between $50 million and $100 million. We are in danger, certainly in the defence, software and innovative technology area, of any company beginning in the UK leaving for the US, while any company that remains in the UK doing so largely because of the talent in software engineering, completely unrelated to the defence market.
Q147 Baroness Blackstone: Thank you. I do not quite know where to start. Could you comment on the fact that there have been numerous reports of extraordinary failures in procurement processes, with vast overruns in both time and cost? There is a whole long list of them; it is not just the occasional one. Where do we start to try to get this right? What are the four or five things that you would say need to be done in order to avoid this happening and some of the difficulties that you have just described continuing to take place?
Kevin Craven: That is a very difficult question to answer in reality, because there are many differences between here and the States. One of those is the size of the market; we are a tiny industrial base compared with the US regarding the defence base. For example, our shipbuilding strategy is for 150 ships over the next 30 years but the equivalent American plan is 350 ships over the next 15 years or so. That is an order of magnitude of difference. The inability to provide consistent long-range certainty about the capabilities needed by the MoD means that we get many packets of orders that require a ramping up and ramping down of industrial capability and capacity. That is a very inefficient way of doing business. Those are the conditions for inefficient and ineffective procurement where both sides of the table, the industry side and the intelligent buyer side, lose experience, knowledge and intelligence during those ramping-down periods.
In recent procurements that you have seen, with armoured vehicles and things like that, the lack of knowledge on both sides has meant that we are effectively starting new programmes, as opposed to building on legacy knowledge. That creates the conditions for procurement to go wrong, which then may be exacerbated by either buyer or supplier behaviours or competences. To be very frank, there are many of both.
Having said that, I should emphasise that the bad news procurements get a lot more headlines than the good news ones. There are many programmes that run to time and to budget and are delivered well. However, that does not excuse the fact that some go horribly wrong, and we could do better at those.
Oliver Lewis: I see some consistency between harder hardware procurement and significantly easier software procurement where there is consistency over time of the senior leaders responsible for them. The Oxford Major Projects Leadership Academy has done a significant amount of research here that shows that having a consistent leader from origin through to delivery improves that delivery process. Some of that agony is related to the HR processes in the Armed Forces—the promotion structures and so on. Rarely are these problems related to the technology itself; they are far more about the cultural and procedural structures, particularly those that are legacy-oriented towards a largely 19th-century approach to the Armed Forces.
So it is about consistency in senior leadership and allowing those people to remain in post, and incentivising them to do so. You can create activities of promotion in post, for example. From the business sector, it is absurd that one cannot promote a decent person doing a good job and that they have to rotate into a more senior job. There are some archaic problems there.
The other issue is the commercial offices. They are much maligned, particularly by industry, and indeed internally by the users of that service, but those teams are significantly underresourced. You have a small number of people who not only are tasked with the major supply relationships but are trying to be imaginative and creative. They simply do not have the time, let alone then the cognitive energy, to do so. There should be a focus on bringing those commercial teams up to strength, remunerating them appropriately and creating a degree of legal, professional and procedural risk taking within them, and even on incentivising them differently: if individual commercial officers save money, reward them with a relative percentage of that saving, or if they bring in new capability that you can attach a monetary value to, again, reward them. A focus on the positive aspects of those commercial teams would make a sea change in a short period of time.
Then there is the tricky difficulty of challenging poor behaviour from the defence industry itself, such as choosing to take them to court. Even if you get to that point of courage, it is often quite difficult to find the barristers or members of the judiciary who have the appropriate clearances to scrutinise the amount of detail that would be necessary to be successful. Then there is simply the practical day-to-day of holding the defence industry to account, and perhaps even cancelling a few contracts.
Q148 Lord Stirrup: I completely agree with your point about the continuity of people in post delivering projects, but I fear that your statement that the procurement disasters have little to do with technology simply will not stand up to examination. I could cite at least a dozen examples right now. We have to be clear on that point.
My question has to do with culture; you have already started to touch on this. The Defence Command Paper, in talking about a new relationship between the MoD and industry, talked about a culture change at the MoD. The phrase “culture change” is always very useful to use in a government publication, because it sounds progressive but no one really knows what it means. If you are going to have a culture change, you have to decide what sort of culture you want. What sort of culture do we need within the MoD in terms of equipment procurement? You have already mentioned a few things. Have you said it all, or is there more? What fundamental change in the approach needs to be made?
Oliver Lewis: On the notion that it is or is not about the technology, speaking only about software, it is not a technical problem. The problem typically is the selection of supplier. If one has a software problem or a software contract within defence and national security, one typically goes to one of the existing defence hardware providers and asks them to field effective software. What one is seeing with the next generation GPS in the United States is that legacy defence industry hardware providers are catastrophically bad at the development of software, particularly if one looks at that relative to the complexity of delivering enterprise-level software across the world, as Apple would do with 10,000 developers and upwards of three billion active users. So it is not a technical problem per se, but the selection of the supplier is incorrect when it comes to software. Hardware I leave to you, Kevin.
Kevin Craven: Culture change is a very difficult thing to do in large organisations. The MoD, with around 250,000 military personnel including reservists, plus 55,000 civil servants, is a very large organisation. It is incredibly difficult to get the change of mindset and consistent shifts of the culture and mentality of “how we do things around here” down the chain. As I mentioned, we have seen an improvement in the way the senior MoD and military folk think about and interface with industry and the requirements they need to procure. However, it tends to a more transactional buyer-supplier relationship. That is sometimes challenging.
One of the culture shifts that I would like to see is more engagement for industry—both large and small, by the way—in the early phase of development of capabilities and requirements, so that the downstream procurement and implementation of those capabilities is better for the early engagement and collaboration upstream. That applies to the actual capability and R&D elements of that but also to the investment, which is probably worth thinking about.
I absolutely agree about the rotation of senior responsible officers. A three-year rotation, particularly at the ideational phase of new capability, is sometimes difficult, where valuable time, collaboration and thought have sometimes then radically changed because of personality differences. That is quite hard to do in an institutional way. There is a tendency, because we have limited resources, that requirements for new capabilities look more like a wish list: “We want this particular piece of kit to do 11 things”, rather than the two or three that it should do very well. That can lead to challenges in the procurement and delivery of these sorts of systems.
I can give you a practical example of the culture change that I am referring to: the MoD’s planned force variation testing, which is a central process that you would recognise. Having industry involved in that early on would allow it to think about early stage investment and changes to capacity, to think ahead of time about how to deal with the consequences of the changes that come out of that process. That is something that Fin Mil Cap is thinking about at the moment, but further progress would be great to see in that regard.
Lord Stirrup: Can I probe you a bit more deeply on this? The current procurement system was put in place by a Government who looked at its predecessor system and decided that it was not fit for purpose. That predecessor system was put in place by a Government who looked at its predecessor system and decided that it was not fit for purpose. That predecessor—. I could go on. Does this not suggest that there is something rather more fundamental here than the actual structure and processes of the procurement organisation in the MoD? If we are looking for a culture change that is going to be effective over the long term, should it not rather be a culture change in the whole system and thought processes behind government procurement in the round?
A great many of the inefficiencies—I agree that there are inefficiencies, and I have suffered from them—are there because of concern about public accounting for huge sums of taxpayers’ money. The competition regime, which the MoD has been trying to move away from to a more co-operative one, was set in place by the Levene reforms of the 1980s because it was seen that there was too cosy a relationship between the industry and the MoD, and the taxpayer was not getting value for money.
Of course, we all recognise that the taxpayer does not actually get value for money because the cautious safety-first regime actually leads to far more costs in the long run, but public accounting seems to take no cognisance of that. Is the problem we are discussing less one of the relationship between the MoD and the industry and more one of government accounting and measuring of value for money in the round? Discuss.
Kevin Craven: That is a very big question. There are some areas where government purchasing—I might get challenged on this—is fit for purpose and works okay. In terms of procuring very complex things, it is less successful; we all recognise that, and we have discussed some of the reasons why that might be.
The challenge is that the transparency of the requirements at a strategic level needs addressing and discussing. If the relationship between industry and the Government—the MoD, in this instance—is too cosy, it is the governance of that relationship that is at fault, not the fact that a closer relationship is required. I genuinely believe, after 30 years in this business with multiple sectors relating to government procurement, not just defence, that those closer relationships result in a better and more cost-effective outcome, but they require oversight regarding the behaviours and the potential for abuse that can occur in any close relationship. We need a change in style, tone and collaboration before we even get into the art of procurement. Why we cannot do it differently bears some challenging and testing.
Oliver Lewis: I fear that the answer to your question is yes, but the characteristic you are describing is a combination of a more general value system within the advanced economies of the world that sees economics as the only value against which we are expected to judge ourselves, and in the military sphere that is particularly egregious. You are also talking about a trend of new managerialism and late-stage mature bureaucracies that makes a degree of this inevitable. To paraphrase C in MI6 recently, we deal with the world as it is, not as we would like it to be. Faced with this reality, which is common in advanced economies outside of just Britain, what are the levers that we can pull rather than reshaping the system? Sadly, the levers that we can pull are few and far between, and they are much more technocratic and incremental. One would hope that they will deliver value over time, but perhaps smaller segments of value than if we were able to remake the system.
Some of that is down to what we have discussed, which is communication and transparency on programmes and projects from early on. That is related to providing the courage and the risk envelope to the commercial officers to engage early on and not fear protest later on. That requirements process is perhaps something that we could focus on, because it does not have to come with this state of the world. The requirements process is more closely related to a military culture that is about doctrine, standardisation and the structured simplification of knowledge. One can begin to tap away at that and create more flexible co-designed requirements processes if, again, you provide the commercial officers with the freedom and defence to pursue that activity.
Kevin Craven: One area that is well-known but is perhaps not utilised sufficiently is secondment. Having the government side of procurement, either at requirement-setting or at procurement itself, aware of how industry works is very valuable, but at the moment I am aware of 150-odd secondments from industry into the MoD, while the number of secondments going the other way is at most a handful. There are some risks inherent in that. I think we are all aware that there is some attraction—
Lord Stirrup: Never go back.
Kevin Craven: Indeed. But maybe, at the early stage of a career, a rotation could be part of that process. Building knowledge and experience of how industry does or does not work is useful.
Q149 Lord Teverson: While this inquiry has been going on, obviously we have had a real-life war taking place not so far away in which we have a major involvement in the supply of weapons. Something that has come across in this inquiry is the importance of the ability to have sufficient stockpiles of munitions, or replacing the ones that we have. I am interested in understanding this issue, and I think it is true of all our allies. What is our capacity to regrow our own equipment holdings, our munitions stockpiles, and what is your assessment of the UK’s defence industrial capacity and how can it be improved?
What I am particularly trying to get at is that we have had conversations in the past about defence procurement and about equipment, systems and all the sorts of things that we have been talking about, but when it gets hot, it is about the rather more boring side of just replicating and reproducing or providing the munitions that feed those systems. Can we do that at the moment? How do we plan for it better in the future?
Kevin Craven: Until the beginning of this Parliament, defence budgets around the world had been reducing as part of the peace dividend. Holding inventory of whatever kind is a very expensive game. You would rather keep people than lumps of people sitting around. Therefore the concept of stockpiles had diminished in importance—until we needed them. That is a challenge that will not easily be reversed, because resources will still be constrained. Having said that, Ukraine has highlighted the need for instant response at very large scales. In Ukraine, I think we are talking about the largest use of munitions since World War Two. So it is a non-trivial problem.
On industrial capacity, the industry has responded well, which has been acknowledged by Secretary of State Wallace. The urgent operational requirements have been met. There have been efforts to ramp up production overnight, increase shifts and cannibalise things—there are perhaps apocryphal stories of computer chips coming out of washing machines to go into missiles and so on. The industry has stepped up to meet that demand. We now have the challenge of replenishing those stocks both on the shelf and in everyday use, as well as building up the stockpiles going backwards.
There is probably a further issue that is not immediately apparent: obsolescence is occurring in those stockpiles. Munitions deteriorate over time, so they need replacing, and more complex systems get overtaken by new variants. Therefore, sometimes you need to not only replace a stockpile but upgrade it.
On the industrial capacity to do that, what has probably become clear from Ukraine is the requirement for more agile production lines that might be better used. For example, for some of the munitions we have had to restart old production lines that had been dismantled, because we have not produced the items for the last 10 or 15 years. So it is challenging.
There are unquestionably some lessons to be learned. Returning to my opening remarks, one lesson was about continuous multiyear investment. A boom-and-bust approach to life is far worse than a drip feed of continuous orders, which maintains the capability and production lines. It is much easier to ramp up an existing production line than to put a new one in place, starting from scratch at very short notice.
Oliver Lewis: Working in software is considerably easier than in military hardware; that is the reality. War will always have an enduring nature, which is physical and requires a degree of munitions. But, in Ukraine, we are seeing a glimpse of what war could be tomorrow in this new character, whether it is algorithmic, hybrid or whatever we want to call it.
On the relationship between hardware and software systems, if one has accessible high-speed broadband—Starlink is a good example—you can mitigate some of the issues with obsolescent hardware if it has an upgradable computer within it, particularly in terms of then relating to more advanced and cheaper drone systems. So there is an opportunity for the co-ordination of dumb weapons with smart ones, which means that having a mature defence software industrial base in the UK could be an advantage on the battlefield and a relative advantage in participating with our allies.
Lord Teverson: Boom and bust is probably a good phrase in this context. One can see it in economies, but in warfare or defence you inevitably have ups and downs that are fairly unpredictable. That is just the way it works; you do not plan your wars 50 years ahead. I come from the logistics business on the retail consumer side, and during the 80s and 90s there was a huge move to just in time. By getting rid of stockpiles, you avoided obsolescence by just producing things as you needed them. I was struck when you said that you have to bring back old production lines. Is there an obligation to do that? Do the defence industries keep those lines dismantled and locked away somewhere so that, when those munitions are needed, they can come forward? How well can just in time work in this context?
Kevin Craven: It is important to say that the deglobalisation of supply chains is a fact, and it will continue. Reshoring and nearshoring of supply chains is therefore a critical activity for most industries, including the defence industries. In that regard, a shortage of raw materials has exacerbated the problem. There is no question that the strategic resilience of our supply chains will be increasingly important. One could argue that the deployment of the carriers was very far-sighted, given that we will perhaps need to protect those supply chains in extreme circumstances.
On whether industry should keep dusty production lines locked up somewhere, industry does what industry does—namely, if something costs money, it probably goes, frankly. There needs to be a degree of partnership and closer understanding of those strategic requirements between industry and government, whereby either there is a commitment to keeping those supply chains or, more probably, given the sorts of advanced manufacturing techniques that are available now, we have the tooling and capability to turn our current production lines into producing whatever is required, with some minor modifications.
So, again, from a contracting point of view, some of that industrial strategy would be helpful in terms of the certainty of supply. The reply to, “Can we have a 30-year order for a particular widget?” might be, “No, but there’s a requirement for this category of capability, and we’ll have a long-term partnership whereby there’s a minimum viable order value available for a 10-year or 20-year period”. Against that backdrop, the British Government are a very attractive investment proposition, and industry will invest in those things to provide the necessary industrial capacity.
Oliver Lewis: There is also the specialist workforce planning dimension of that: the retention of the talent and expertise, even if the factories are not present. There are various emerging employment models, from those around the sponsored reserves through to notions of the civilian reserves, which I think would work, with everything from nuclear and hardware through to software.
Q150 Lord Anderson of Swansea: This is a question on public-private investment in R&D. The Defence Command Paper committed to £6.6 billion in defence R&D over the next four years. By contrast—and I accept that the order of magnitude is different—venture capital funding for R&D in the USA tripled to $10 billion between 2019 and 2021. Are investors in this country interested in providing such capital for defence start-ups?
Oliver Lewis: Generally no, I regret to say. Obviously, there are alternatives to that. The more one has American investors, the more willing British investors at earlier stages are to participate in those investment rounds. But, in general, our experience is that, compared to the United States and the rest of Europe, Britain demands considerably more equity at considerably lower valuations. To generate the level of investment necessary even to forward invest in software, let alone deep tech, one is inevitably drawn to the US venture capital firms, even if one can interact with them through their increasing number of British and European offices. General Catalyst is a good example of a Silicon Valley venture firm that has an office in London and is looking at this space across Britain and Europe.
Our problem is that the venture model is indeed designed to take considerable risks and forward invest in technology and product development ahead of market traction, but one has to quickly demonstrate product-market fit, which is evidenced by user feedback, the number of users, the number of active contracts and then, ultimately, revenue. So what I said about it all being about endless pots of money is not exclusively true, particularly in the early stages of development. That is where Britain could have a competitive advantage, with which more early-stage British investors would see a return on perhaps taking a risk at seed series A and series B.
All venture investing is just looking for pattern recognition, and the problem in this space is that relatively few companies, if any—if one excludes Palantir, as the one that has gone public—have successfully gone public. Either they go bankrupt because of the financial model of government procurement in general, or they are bought by an existing defence contractor in defence prime, so they are unable to become an independent entity that realises the types of return that would provide the patterns that venture investors need to argue for greater investment. We are in a slightly agonising circle that is quite hard to break out from.
I will caveat that, though, by saying that in later stages, particularly when one gets to private equity and institutional investors, British investors are incredibly interested, able and willing to deploy capital into those companies, but that assumes that there are a sufficient number of companies that have not gone bankrupt or been bought out that can then be invested into later-stage rounds.
Lord Anderson of Swansea: What can be done to encourage such risk-taking and investment?
Oliver Lewis: Sadly, this is related to many of the procurement conversations that we have just been having. Set aside the fact that that will take time. Ensuring early access to users through formal programmes and ensuring earlier access to meaningful data, upon which all our modern technology companies are built, can be jet fuel that compensates for lower-value contracts and therefore encourages British investors to go into it. But in terms of pragmatic steps that one could take today, activity such as the National Security Strategic Investment Fund, which could lead early-stage rounds and bring in British investors who are a bit reticent because the Government are taking a risk too, is a good instrument for beginning to show those patterns. The trickier one is trying to provide either capital or informal support for keeping companies private for longer and keeping them in the UK for longer in this space. Worryingly, that is much closer to the types of industrial policy or state-aid conversations that people become quite squeamish about.
Q151 Baroness Sugg: To continue on risk-taking and investment, we have heard from other witnesses that essentially the Defence Command Paper is making a bet on interesting new technologies that might not exist yet rather than on people, personnel and platforms. To what extent do you think the defence industry is also willing to take part in that bet and risk possible failure and loss of funds? You talked a bit about the joint innovation hub and the national security investment scheme. Are there ay other things that the Government can do to support businesses in taking these risks? In comparison to the US, is there anything they are doing over there that we might be able to learn from?
Kevin Craven: It is probably worth saying that the industry already invests in generation-after-next technologies. Having said that, one of the challenges of investing in these longer-cycle R&D projects is risk. To echo some of Oliver’s comments, what is really needed is an ability to share both risk and investment at those earlier stages. There is a stand-off at the moment where neither side is willing to accept that risk. Co-investment in the R&D stage would be a great help in moving that conversation on. It is becoming more and more important. That is even more challenging if you are an SME, because you do not have the resources even to do the shared investment. Those are areas that are quite challenging, but there are some models. The MoD’s Rapid Capabilities Office is quite a good model that does some good work. It could be expanded and developed pretty much instantaneously.
Oliver Lewis: What happens next from those innovation hubs toward the production contracts is what would be most meaningful to justify future forward investment on the tech side, since what happens next is the really quite shocking and opaque administrative burden that is placed on SMEs and start-ups. All the structures are set up for primes, which are full of people who have done it before and who have privileged access into the system. For those of us on the outside, even those of us with knowledge, it is a pretty repulsive barrier that requires significant numbers of solicitors, contracts officers and security specialists, completely unrelated to the technology development itself—and that is if you know who to ask.
We have an example with one of our products with the UK, where an authority to test and an authority to operate are paramount to getting towards a production contract. The paperwork necessary to do so is at OFFICIAL-SENSITIVE. You can access the paperwork on the internet, but we asked for the accompanying leaflet that is referenced, which is also OFFICIAL-SENSITIVE; the MoD uniformed officer said, “I can’t share that with you because it’s OFFICIAL-SENSITIVE”. One then had to send several people to an MoD installation to sit with him to look at the brochure in order to fill in the form that you can access online. The absurdities are significant in the day-to-day practical operations of trying to get through the administration, even when you have a customer champion, a problem and a product.
The Chair: Thank you for revealing to us some of the obstacles that seem at times to be almost insurmountable. You clearly have more patience than some who might not have persevered for quite so long. Your final example strikes home to all of us sitting around the hemicycle today when it comes to how things are perhaps not joined up in the way that information can be shared in certain circumstances.
That takes us to the end of the period for our first session. Thank you very much for sharing with us today the world as it sees the MoD, rather than the world as the MoD sees it.