20
Examination of witnesses
Kevin Craven and Andrew Kinniburgh.
Q1 The Chair: Good morning, and welcome to this meeting of the Industry and Regulators Committee. I am Dianne Hayter. We are delighted that you are here today as we commence our work on a new inquiry, which is looking at the relationship between the Government and the defence-related industries. We will shortly be issuing a call for evidence on this. We will be looking at how—in the light of the strategic defence review, the “Defence Industrial Strategy”, a new defence finance and investment strategy, and the forthcoming defence investment plan—that government-industry relationship is rising to the challenge of ensuring that the UK has the required industrial capacity to prevent or, if necessary, engage in military activity.
To start our work on this new venture, we are delighted to welcome Kevin Craven of ADS and Andrew Kinniburgh of Make UK. In a moment, I will ask you to introduce yourselves but first, just to let you know, this is being transmitted live. There will be a Hansard record of it, and you will have a chance to look at that to make sure that your words have been correctly written down. I will introduce my fellow members of the committee as we take questions from them. Could I just first ask you to introduce yourselves?
Kevin Craven: I am the CEO of ADS, the trade association for aerospace, defence, space and security. We have some 1,800 members, over 95% of whom are SMEs. In essence, we represent the advanced manufacturing end of the manufacturing sector in many ways.
Andrew Kinniburgh: I am director-general of Make UK Defence, which is part of Make UK, obviously, the voice of British manufacturing. We have around 1,000 member companies within the defence business unit within Make UK. Much like ADS, the vast majority are SMEs but all the big primes are also members so we have a nice mix.
Q2 The Chair: You can understand why we are very keen to hear from the two of you. How do you both see last year’s strategic defence review’s desire for a new partnership between government and industry? Is that the correct approach? What progress have the Government made in implementing the SDR recommendation, and what more needs to be done to get that relationship working well?
Kevin Craven: First, we should say that the strategic defence review is a good document. The 62 recommendations were all accepted by the Government and, broadly, industry and almost every commentator you could find agrees with those. It is a good document that now needs to be supported by the funding mechanism, which will be the defence investment plan you mentioned and which may be coming out later this week, or maybe not.
Along with the “Defence Industrial Strategy” it signalled a change of relationship, in essence, with industry where collaboration and ability to deliver sovereign capabilities over time were seen as an important strategic enabler to our military and resilience capability. In terms of that culture change, it is probably fair to say that it is still evolving. The delays in the DIP have been unhelpful in providing the long-term certainty that industry needs. That has probably been unhelpful to the military and the planners in being able to set out their stall and then have something to collaborate on with a fully funded programme.
There are probably a couple of things we could point to that are really good. The Defence Industrial Joint Council, which is co-chaired by the Minister for Defence Readiness and Industry, Luke Pollard, and Charles Woodburn from BAE Systems, represents a formal interface between industry and the MoD with a large amount of structure beneath it. That structure is most welcome and we look forward to that being even more successful. The early market engagement side is good. We are now seeing collaboration and consultation in the force development, war planning and capability development processes of the MoD.
Where we are probably not seeing progress in is that translating into procurement. We still have a challenge, in that the new promised procurement processes are not yet fully embedded. We have seen some promising pilots but they have not been transitioned on a large scale. Of course, the entire procurement process in and of itself needs to transition from a “just in time” type of mindset to probably “just in case”, whereby we are actually ready for a war and for things that might change at a moment’s notice. We could use the example of “just in case” war breaks out in the Middle East at a sudden point in time. There has been some progress, which still needs to be underpinned by the funding. I am therefore hoping that when that arrives, we can see an acceleration in that visible progress.
The Chair: Before I go to Mr Kinniburgh, is that a new phrase, “just in case”, that we have heard for the first time, or is it a regular one?
Kevin Craven: It is my new phrase, put it that way, Madam Chair. It is important because if you think about the beginning of the Ukraine war, literally there were agents out buying drones off supermarket shelves in order to convert them into something that a grenade could be attached to with duct tape. Clearly, in Britain we rely on that crisis mentality: when the big occasion arises, we will rise to it too. I am worried that that is not going to be sufficient when you are talking about the major threats we potentially face.
Andrew Kinniburgh: I shall attempt to disagree agreeably with Kevin at some point, but I agree entirely with what he said in his opening statement. For me, probably the key word in your question is culture. Changing the culture of a very big beast such as the Ministry of Defence is a really tough challenge. We are yet to see major change in the culture. There are some levers that are changing, and that is very welcome.
It is worth noting that more than half of the defence equipment budget is immediately spent with a handful of big primes in single source regulated contracts. That reduces the scope for MoD to be more flexible in using perhaps non-traditional defence suppliers and others, particularly SMEs. There is an element of structural change that still needs to happen. Clearly, you are not going to prime a nuclear submarine or a global combat aircraft programme with an SME, but you will have many hundreds in the supply chain. We need strong UK primes; I am not at all arguing against that.
The percentage of MoD spend with SMEs is still very, very low. If you compare us with the US, for example, which spends some 23% of its equipment budget directly with SMEs and then the primes are on the hook to deliver approximately 20% of their contracts directly with SMEs, we look like a very poor relation. We are hovering at around 16% to 20% total spend. The MoD has committed to increasing that by £2.5 billion by 2028, which is good and to be encouraged. However, we are still seeing things such as consultancy work, framework agreements—of which there are over 100—and smaller equipment procurements going to the big primes. We need to somehow wean ourselves off that.
In terms of positive developments, there is the new Defence Office for Small Business Growth, which is a new part of the MoD. The problem with that, though, is it is not being funded properly at the moment. It has four civil servants out of an establishment of 29. It is unable to recruit at the moment because of the recruitment freeze within MoD. We have some beginnings of positive stuff but it is not happening quickly enough, certainly from our perspective and for our many SMEs that Kevin talked about earlier on.
We would also like to see that office have some levers of power—some procurement capability and some teeth. At the moment, it really is just more of a website and an advice line rather than an organisation that would act, as we would describe it in defence, as a sandbox to test things out. We would argue that Commercial X, which is the experimental bit of the commercial branch of MoD, should embed some people into the Office for Small Business Growth so that it is actually practising what it preaches and testing stuff out.
MoD has come up with things such as an eight-page contract. That is revolutionary in terms of the commercial branch of MoD. Traditionally, the smallest contract you would see would probably be about 100 pages. An eight-page contract is amazing. That is up there with SpaceX in terms of a quick and dirty contract—off you go, give it a bash, see how you get on, learn those lessons and move very rapidly. However, generally, the amorphous mass that is MoD is still lumbering through those changes and that culture is going to be hard to change. I hope the National Armaments Director will help to deliver that.
Kevin Craven: If I may just add a supplementary thing: I agree with Andrew on a lot of those promising pilots, as we discussed. One encouraging sign is that the recent revision of the single source regulations in May this year talked about, for example, raising the reporting requirements for SMEs from a cap of £5 million to £25 million. It is an example of how, with a stroke of a pen, you can cut out huge swathes of onerous regulation and reporting requirements that are impossible for an SME to manage easily.
Q3 Lord Best: Yes, clearly, there is going to be a huge increase in defence spending. This can be an engine for wider economic growth, but to what extent does the UK’s own defence industry have the capacity to meet the expected increase in defence spending? What are the barriers to UK-based companies providing the necessary capacity? How should those barriers be addressed?
Andrew Kinniburgh: I do not see it as an issue, and I do not say that lightly. At the moment, the UK capacity in the defence industry is certainly not fully utilised. We have between 10,000 and 12,000 companies in the UK defence supply chain more broadly. That ranges from companies with 10% of their work in defence to 100% and everything in between. There is lots of capacity in the existing supply chain.
Kevin and I have both seen big growth in our memberships. Certainly, from my perspective, we have seen companies from the oil and gas sector, automotive, offshore wind, rail industry, and various other precision engineering, high-grade, safety-critical type industries that are looking to move into the defence industry. The problem we have at the moment is that there is no DIP—defence investment plan—so there are not really demand signals flowing through. What we are saying to our new members is, “By all means, join, but make sure you have working capital and other work to let you continue operating while you hope and wait for defence contracts”.
On the capacity side of things, if you look at a region such as the West Midlands, there is a West Midlands defence procurement conference on Thursday and Friday this week. That is focusing on how we can get the West Midlands more engaged in defence manufacturing. However, a lot of those companies will be high-volume manufacturers providing components to Jaguar Land Rover, Nissan, Toyota, which are exactly the kind of businesses we want to have in defence when we get to high volume—for instance, drones. I do not see capacity as being a big issue, without devaluing the question. However, we need clear demand signals to let those non-traditional companies begin to spool up and get ready for the defence market.
Kevin Craven: Yes, I would certainly agree with that. The underlying capacity of the industry is pretty strong; the challenge is that having the long-term certainty to build additional capacity or stockpiles is a problem without the orders to take back to your shareholders and investors to make that investment. There is also the question of the complexity of the supply chains. Aerospace and defence are correlated at a component level by about 40%. There are quite a lot of dual-use things in the equation that are very complex.
To ramp up takes some time. Everybody thinks of a slinky, where the spring bunches up and then leaps forward. However, in fact, in terms of advanced manufacturing, we are talking about hundreds of slinkies all bunching up at the same moment in time and moving forward at the same pace. It is extraordinarily difficult to do that without a very clear view of what is coming down the track in the future.
Q4 Baroness Drake: Staying with defence readiness and resilience in the UK’s industrial base, my question is in two parts really. How do you consider defence procurement processes and contracts need to change, to adapt at pace to new technologies and requirements such as drone and anti-drone capabilities? Related to that, in your view, what progress have the Government made in moving towards their segmented procurement model: the rapid commercial exploitation, pace-setting and major model? Tell us your view and what you think is happening on the Government’s programme.
Kevin Craven: First, the introduction of the segmental model is a good thing: what gets measured gets done. Measuring the difference in pace is a really important thing. The slight challenge we have is that we are not yet seeing some progress at scale across those procurement categories, in part because the vast majority of the procurements are paused or waiting for the funding that underpins them. Certainly, it is one positive step forward.
There are other barriers to defence procurement, particularly when we are talking about those SMEs that would be in the third category of procurement, which is the procure within three months, off-the-shelf type commodities, or rapidly innovating technologies such as the drones you referred to. There are some improvements such as the Commercial X programmes that Andrew talks about and the shorter contract form, but again, there are delays in funding. Then on the other side, the lack of access to funding for SMEs also presents a reasonable barrier to procurement.
There are things such as security vetting. There are a number of peripheral activities that go to being able to work in the defence sectors. All those need to be working appropriately in order for that to happen. However, the biggest single challenge in the procurement system is the risk appetite, which has been well discussed. In reality, while we are talking about 3,000 or 4,000 commercial officers in the MoD, there are probably 10% at the top who understand the change in culture required and are thinking their way through the processes. There needs to be a change in culture down the rest of the value chain in order to make sure that we start taking a little more risk in how we procure.
Further on down the line, you probably also need a change in model whereby people talk about “always on” production. That is, instead of ordering 100 very large-scale things all at once and then not ordering something for 10 years, rather, order 10 per year for 10 years. The ones that you are producing at the end are better than the ones you produced at the beginning. That is a complex change that requires both commercial change as well as manufacturing and planning changes.
There are huge amounts of transformation and change required at the MoD. The National Armaments Director, as mentioned by Andrew, is leading that change but is in fact overseeing a vast—I will use the phrase—army of some 25,000 people to produce this change. In and of itself that is complex.
Andrew Kinniburgh: As we said earlier, there are some pockets of good practice and indeed perhaps best practice. We mentioned Commercial X. We are both big fans of Commercial X because it is trying to move more quickly, but the reality is it has let only 400 contracts so far, out of many thousands that have been let by the MoD. That is certainly an issue in terms of scaling that innovative view. I completely agree with Kevin about the risk appetite. The challenge culturally is that you are rewarded for following the process in the Civil Service, which is probably the right thing to do but it does not lend itself to very dynamic, fast-moving procurement actions because you are rewarding de-risking and taking a safe bet. That can be a real challenge.
This is perhaps straying into an area that I should not, but the pay differential between MoD civil servants and their industry counterparts is vast now. That needs to be grasped by MoD. It cannot just continue to ignore it. It is a huge problem. It is very difficult for perhaps a junior commercial member of staff negotiating with someone from industry on two or three times their salary. I am going where angels fear to tread, so I will get into trouble, but it is certainly something worth thinking about.
If I use a Ukrainian example, the Ukrainians built 4 million drones last year. We are in discussions at the moment with a company that is considering moving to the UK or adding to its capacity in the UK. It alone makes a quarter of a million drones per month in Ukraine. This is the kind of volume that we are talking about. The problem we have is that the hardware—the actual drone itself—moves quite quickly, but the software changes almost day to day. We have examples of companies that have software engineers on the front line, and as the drone returns from its mission, they are changing the code before it actually lands on the ground. There is very, very rapid change.
Both our organisations are looking at things such as whether to provide a drone as a service, so you are almost outsourcing the software development. The hardware will move slightly more slowly, but it will incrementally improve. The software is changing all the time as the electronic warfare of the enemy, for instance, changes. You have to react immediately to those kinds of things. It is tricky, and MoD’s structure at the moment means it is quite difficult.
If I give you one more example, one of our members received an invitation to tender from the MoD for an advanced technology. I cannot tell you what it is, I am afraid. The invitation to tender was 6,000 pages long. It estimated that there were 2 million words in this invitation to tender. This is in the last couple of months. Its estimate was that it would take five and a half weeks for one of its engineers to read this document and absorb it. That is without annexes. That is just the standard document. Tenderers were then expected to respond with a 400-page response. For an SME, which is what this company is—a UK-based SME—that is impossible. It kills it. It costs it tens and tens of thousands of pounds just to read the documents.
What is interesting with this example is that there was no demonstration phase. MoD did not say, “We want to see your technology and then we’ll talk about what the requirement is”. Instead it said, “Here’s a 6,000-page document. We don’t actually want to see your technology. We want to see a 400-page written document. On that basis, then we will decide which one we want to go for”. We did not really see a technology demonstrator at any point in the tendering process. There are good examples but that is a shocker, really, where SMEs do not stand a chance. They simply cannot resource that. Yes, there is some good and bad.
Baroness Drake: I have a small follow-up, just in the interest of balance. You made a powerful presentation on the cultural point in MoD. Are there any cultural issues in the major providers that need to be addressed to get to this change or innovation?
Kevin Craven: One of the things that is probably reasonably well known—the cultural implications of it maybe less so—is that inevitably, the larger defence primes use a great many ex-military and civil servants in their companies. Quite often, two sides of a negotiation might look exactly the same. It is not necessarily surprising that perhaps the outcome is the same. We cannot sit here and say that industry does not need to evolve, as does the MoD; that is absolutely true. I would say that industry can evolve far quicker than the MoD can, bearing in mind that roughly 40% of the total turnover in the defence industry in the UK, which is around £37 billion a year, is in exports. These are companies that are competing directly with the rest of the world and therefore have to move at the pace of the fastest procurers around the globe, not necessarily just our domestic market.
Baroness Drake: They have an external imperative.
Andrew Kinniburgh: I am just going to add a couple of examples. We both have hundreds of SMEs in our membership, and it would be very tempting to point a finger at the big primes and say, “Well, they’re the evil empire, these vast global defence companies”, but actually they are putting huge amounts of effort and energy into trying to engage with SMEs more effectively. There are a couple of examples. Lockheed Martin has something called the SMEUNITE programme that our organisations are both involved in, which is specifically designed to try to engage with SMEs in a very usable, less dominant way. Boeing is doing the same, as are BAE Systems and Qinetiq. A lot of these companies are doing some really good stuff.
The problem is that sometimes, the structure of the contracts they are getting from MoD make it very difficult for them to then quickly innovate. However, they are certainly pushing hard to try to improve the lot of the SMEs. If they do not, then they have people such as me and Kevin on their back saying, “Why are you not paying our members on time? Why are the terms and conditions so tricky?” Yes, there are some good examples.
Q5 Baroness Harding of Winscombe: What progress has been made in establishing UK defence innovation and allowing greater freedom in the procurement of innovative and dual-use technologies for defence? I wonder if we could double click on that part of the ecosystem.
Andrew Kinniburgh: It is moving forward. It was slightly rearranging the chairs to some extent, in terms of bringing a number of disparate bits of MoD together under defence innovation. It has helpfully now changed all the names of all the organisations within defence innovation. Just as we got to know what they were, they have all been rebranded under the National Armaments Group, which is not helpful. Unless you have a marching army of people to sit studying all these things, it is again another barrier to entry for SMEs. That is frustrating. We keep doing it in MoD; we keep changing names and moving things around.
There are some really good bits of innovation. To give a good example, there is the three-two-one type procurement. This is the opposite of the example I gave you earlier. You take three really good demonstrators, let us say three really good drones. You test them all in the field, and then you say, “Okay, the top two are these two. Let’s go to two now, and let’s do a deeper dive into their capability, and then move down perhaps to one or possibly have two in the background”. We really like that iterative procurement model whereby you are actually looking at the thing you are buying before you start writing some exquisite, gold-plated requirement. However, things such as the Defence and Security Accelerator, as it was known, which has now rebranded—I do not know what the name is, I am afraid to say, I could write to you and let you know if that would be helpful—
Baroness Harding of Winscombe: If you could give us a map of all these different organisations, it would be amazing because I am already lost.
Andrew Kinniburgh: We would like MoD to do that. Maybe it has. Maybe I have just missed it.
Baroness Harding of Winscombe: Maybe we should ask it.
Andrew Kinniburgh: Maybe I have missed the memo. There are things such as DASA, which is really good. It has regional business partners all around the UK. Its idea is to reach out to SMEs, new businesses and new tech and to encourage them, give them a little seed funding, help them to get going, and help them to mature their products. In defence, we talk about technology readiness levels; DASA is there in the early stages. It goes from one to 10, and for TRL one to three, DASA will help you. It will give you maybe £350,000 or £500,000 to help you move your product forward. We would like to see things such as DASA given much bigger funding and much greater clout. There are 12 regional business partners at the moment; would it not be wonderful to accelerate that—ironically, it is the Defence and Security Accelerator—give it more resource, and give it more capability to reach out into the market?
If I may just give one more example, London Tech Bridge is a really interesting, tiny little unit of six people in London. It is a joint initiative with the US navy and the Royal Navy. It is purely horizon scanning: what is out there? What might be of interest to the research agencies, DARPAs, DASAs and Dstls of this world? It is a little team. It does not buy anything, which gives it great power because it can say to everybody, “We’re not buying anything, but we will signpost you to the right bit of UK R&D or indeed US R&D”, which is multiple times bigger than the UK. The US spends an enormous amount of money testing and evaluating equipment. If you can plug a little SME from the UK into a big US R&D S&T-type programme, it can be amazing.
There are some really good examples that need to get resourced properly and expanded and multiplied out. We are then really going to start shifting the rudder in terms of the ability of MoD to reach really interesting bits of tech.
Kevin Craven: Maybe you covered this a little. UK Defence Innovation is the new body, which is aggregating all the smaller organisations that previously were set up, including DASA. The new front end of UKDI will be what was DASA. Those regional structures will still exist going forward and still be a route forward. It is probably worth saying that prior to UKDI’s establishment—it is reaching operating capability only next month—we stopped counting at 90 different gateways or approaches that existed for innovation funding in MoD territory. For a small player, even for a large player, that is incredibly difficult to meet.
I also gather that the new leadership for the UKDI process is taking some time longer than it was meant to. That has probably not helped. There are some signs of encouragement. We are learning lessons from Ukraine, it is fair to say. In particular, the team that is sending equipment and munitions to Ukraine, Taskforce KINDRED, is using rapid procurement techniques to drive that. In return, we are learning quite a lot about the Ukrainian methodologies. In fact, I now have over 20 Ukrainian companies as members here in the UK, and they are all looking to establish UK partnerships, which will be incredibly helpful. There is some challenge with export licences for IP from Ukraine, inevitably.
It is moving forward. I would return to the risk point. One of the things that is probably a structural difficulty is that the Treasury and the National Audit Office tend to treat a failed prototype as a failure, rather than as a learning point for iteration, as does a company such as SpaceX, for example. There is some way to go but there are encouraging early signs.
Baroness Harding of Winscombe: Can I just push a bit on that risk point, as you referenced it earlier? It is clear that when you are buying new technologies and innovative capabilities, you have to adjust your risk appetite as the procurer. Are Government doing that? If not, what should they be doing differently?
Kevin Craven: It is a really challenging concept to move the risk appetite of an entire culture where historically, prior to the statement that the new defence industrial complex will be more collaborative, mostly it was a very transactional relationship. Everything was governed by the contract that, as Andrew said, was very complex, very difficult, and probably out of date as soon as it was printed because of the rapid pace of movement.
Maybe another positive is that when the DIP arrives, some 10% of that is promised to new technologies. Within that, there are things such as the drone cluster and other promising initiatives where things might go faster and a smaller group might be able to adjust that risk appetite. However, even in the big PLCs’ boardrooms, having been in a number of those, a discussion around risk appetite is fraught. Translating that into civil servant speak and then putting it into a process or protocol that can be delivered and managed by 3,000 or 4,000 people is really difficult. I sympathise with it, but we have to get over it to make this work.
Baroness Harding of Winscombe: That is a great description of the problem. Top down, what could government do to change that? You mentioned HMT and the National Audit Office. If we need to move to a “just in case” model, what recommendations would you have for government to change that approach to risk?
Kevin Craven: In the categories we have described, the big platforms currently take six years; it is envisaged going forward that it will take two years. The smaller procurements are envisaged to have a target of one year, and then the rapid procurements, three months. Within those bottom two categories, you could accept more failure, which is in essence the point we are making, really. There will be some failure, and there is the point that 80% is good enough because you need something on the shelf in order to deploy. With munitions, you are manufacturing a shell that, once you have it right, you can then produce hundreds of thousands of them. However, if you are producing something more complex, there needs to be a form of commercial wrapper that allows both failure and iteration over time.
Andrew Kinniburgh: May I add to that? One of the problems we see is that in defence, we continually trip over the Treasury. What we would like to see is the Treasury actually getting out of No. 11 Downing Street, getting itself down the road into the MoD and helping it. Help the MoD improve its procurement and help it change the rules and culture, rather than what appears at the moment—this will be a very contentious thing to say—to be sitting back and throwing bricks at it and saying, “Well, you keep delivering late. Why do you have this wrong? Why has this moved out to the right?”
Yes, those are established facts in the public record, but these are incredibly complex pieces of equipment with phenomenal challenges, both in the laws of physics and of software, and in bringing all those things together in very harsh environments. Instead of throwing bricks, why not get yourselves out of No. 11, get down the road to MoD and help it try to change that culture and procurement and lighten up, as Kevin said, the administrative and risk burden imposed upon everybody in government? My challenge is to the Treasury, perhaps.
The Chair: I congratulate you on getting through 48 minutes before fingering the Treasury. We will move on to Lord Barber.
Q6 Lord Barber of Ainsdale: My question is about SMEs; you have already touched on a number of issues about the barriers SMEs face in increasing their share of work in the defence area. You mentioned that erasing reporting requirements has been helpful; you also mentioned that it is not easy for an SME to work with a 6,000 page invitation to tender. What would you see as the key barriers? Can you identify anything else that gets in the way for SMEs, whether they are part of a supply chain to a prime contractor or are supplying directly to the MoD? In this area of procurement IP is potentially hugely important, not just for commercial confidentiality considerations but for security considerations as well. Does that potentially become an obstacle for SMEs that are able to get in and bid successfully?
Kevin Craven: The short answer is yes, and it is tied into the ability to scale rapidly. Quite often small organisations are able to develop a concept, get it to prototype and possibly get it to a technology demonstrator or something similar. But if that is followed with an order for 1,000 units per month, they need premises, they need a production line and they need investment. Access to finance is generally a very large barrier to entry in the defence sector due to a whole host of reasons, including long procurement times and the uncertainty of orders. But to get from that small scale, successful, highly capable prototype to mass production requires both scale and—to answer your question about IP—potentially licensing the IP to a partner that might help them scale up. There is a complex mix of answers to that question, but IP is of course important.
Having said that, we should again refer to Ukraine’s procurement systems. Inevitably we are drawn there; we are seeing those lessons played out in the Middle East as well, although if this country went to war in the near future, we would not fight the same war as Ukraine, I should imagine. It has a brigade officer on the front line who has a credit or purchasing card so that he can buy things. Brave1, which is the Ukrainian technology procurement arm, runs a three week competition specifically in that drone area. It will generally go out to 50 or more suppliers, choose 10 and fund them to deliver a prototype or a demonstrator, then it will choose four or five to go into production. In six weeks’ time from start to finish, it can have something that is going to the brigades for procurement by those guys with the credit cards. At that point in time whatever they have produced is probably only 80% fit for purpose, but they can use it; as Andrew mentioned earlier, the iteration is happening on the front line where there is a software upgrade within six days, an equipment upgrade within six weeks and a platform change within six months. That 666 cycle is what it is using to drive the pace, and it has this loose commercial model around it that helps do that.
Within that scenario, the IP point is slightly moot. We are at peace and it is at war. That is much harder to deal with, but better collaboration between the larger and the smaller players and more sympathy from the MoD in terms of how IP should be treated is a good thing.
Lord Barber of Ainsdale: Does the issuer of the credit card operate different rules than those it would normally apply?
Kevin Craven: Yes; Ukraine is fighting for its life, so one can understand the shortcuts. I do not imagine the MoD will be issuing credit cards tomorrow.
Andrew Kinniburgh: I would agree with that in terms of intellectual property. There are also examples of it being nicked by some primes. I am not pointing specific fingers, but when you share your IP with a big company and make a subsequent bid, you end up running against that prime, which can be tricky because your IP has effectively gone. It is not a wide-scale problem, but it has been an issue in the past that needs to be considered. On complexity, I would absolutely agree with Kevin. Complexity is the enemy of SMEs in MoD and in the defence world. If you cannot afford to employ an ex-official or an ex-military person in your organisation who has lived and breathed that immense complexity, you are really on the back foot and trying to learn as you go along, particularly as defence innovation is rebranded and they change the names of all these things. Unless you have lived and breathed it, it is extremely difficult to get your head around. So complexity is a big thing. Big frameworks are also dangerous; if you look at things such as weaving, textiles, and sewing, they sit under a really big framework with a big prime and lose all their nuance. They just become a commodity, and when things become a commodity, it gets very dangerous very quickly because you lose that human connection with businesses in the UK. For me, that is a real danger.
If I could just extend my answer a little, I have a couple of examples from the Royal Navy. We have one of the leading naval gun manufacturers in the world—MSI Defence—based in Norfolk; it is a member of both our organisations. We also have Welin Lambie, which makes davits in Wolverhampton; a davit is the crane that puts smaller boats in the water and brings them back out again. Those companies are world leaders in what they do, but there are no Welin Lambie davits on Royal Naval vessels, and MSI Defence systems are only on a handful. We use Swedish-made Bofors guns instead. That illustrates the fact that, to some extent, the MoD has ceased to be an intelligent customer and is commoditising even major subsystems such as guns and davits. It is fascinating that both those companies are on every single capital ship in the US navy and the US coastguard, and yet the Royal Navy chooses to buy davits from Norway and guns from Sweden.
Lord Barber of Ainsdale: Could the 90 gateways for innovation funding be considerably simplified?
Andrew Kinniburgh: Yes. I think there should be a department of simplification within the MoD to cut away this layer upon layer of complexity and the obsession with acronyms, which are bewildering for yourselves as parliamentarians and for SMEs as well. That complexity is a real barrier to entry and to understanding the defence market; stripping it away would be hugely powerful.
Kevin Craven: Just in terms of balance, it is worth saying that Bofors guns are actually made by a joint venture with a British company.
I believe that John Healey is making a speech today about buying British; that has to be considered very carefully in the Defence Industrial Strategy. If we are at war, we need capability on shore that we can trust and rely on. We do not want our critical components sitting in a port in France, for example, and being held up as we saw during Covid. There is no doubt that this is an important issue.
Q7 Baroness Carberry of Muswell Hill: Let us move on to cyber security and the industry’s resilience to cyber attack. Could you help us understand where, at the moment, the industry’s UK sovereign capabilities lie in terms of capacity and skills both to deter and react to cyber attack from malign actors? Where do you think the responsibility lies to develop that resilience between the industry and the Government?
Andrew Kinniburgh: Just last week I sat in a meeting with colleagues from ADS and other trade associations—including techUK and the Society of Maritime Industries—about AUKUS and the challenge of cyber security across three nations. I have to say we were deeply disappointed in the MoD’s response and its ability to explain how it would work and how the UK is dovetailing into both US and Australian standards. We have a big hill to climb multinationally, and we need to think very carefully about that. Domestically, there are examples such as Jaguar Land Rover where it almost brought the company down. You can see how vital it is to secure every single supplier in your supply chain, from the sandwich makers to the very high-end subsystem manufacturers. We have some good standards in the UK; Cyber Essentials and Cyber Essentials Plus are the base levels and you build up from there. But again, we are back to the complexity issue. It is very complex, and the MoD, as far as I can see, is unable to explain to industry exactly how it is going to work and how it will be implemented. Then you have the really big American systems coming through with American standards; to suggest that we will negotiate with the Americans and that they will adapt their systems to the UK model is pie in the sky. We will have to adopt many of those standards if our British companies want to export from the UK.
If I may give a tiny example of an SME that is doing something really interesting in this world, there is a company called Helios Information, which Kevin and I work very closely with. It runs a programme called the Joint Supply Chain Accreditation Register, which is a compliance database. You fill out a very large questionnaire and the idea is that you are asked the questions only once. For instance, you are asked, “Do you have ISO 9001”? You tick, “Yes”. All the primes should then be able to say, “I know you have ISO 9001”. There are lots of other questions as well. Recently it has implemented a real-time assessment of all the members within its compliance database, which is around 6,000 companies now.
Baroness Carberry of Muswell Hill: Sorry, do you mean the MoD?
Andrew Kinniburgh: It is a joint initiative of Helios with the MoD and the prime contractors as well. In effect the MoD owns the data, although Helios is a privately owned company. But it has introduced a real-time system that pings all those 6,000 companies on a daily basis and gives them a cybersecurity score. That is an interesting example where industry—an SME in particular—has taken the initiative, invested a lot of money with support from the primes, ADS, Make UK and others, and implemented something that is innovative and real-time, which is important.
Kevin Craven: We should all be aware—if we are not already—that the UK is under attack from any number of cyber players and state actors; there are thousands of such attacks every day. They are probably focused on our high-tech industries, academia and innovative places in order to take those technologies back to their own countries. It is fair to say that our defences against those attacks are improving, but at a glacial pace. A huge amount more needs to be done, and the Government have to take a lead because of the size of the ecosystem and the number of industries and sectors that are affected—not just defence, but security, aerospace, banking, pharma, et cetera. They all need to be clear about the standards that are being set and the methodologies that are used. As a nation, we are very clear that our defence posture is all about NATO first. We need NATO standards, de facto, in order to be interoperable with other NATO nations, so that is probably a sensible starting point for some conversations but it does not apply, for example, to the whole range of dual-use components.
Baroness Carberry of Muswell Hill: Is there anything you would add about the skills base in this area as it stands? If it is not up to meeting the challenges, what would the Government need to do?
Kevin Craven: To be honest, skills should probably be the subject of a whole separate inquiry. But as a country we are significantly lacking all skills—engineering, technical, cyber, digital—in the development pipelines and the number of people we need to support our industries. There are some 60,000 engineering and technical vacancies in manufacturing as a whole. In my four sectors, there are probably 10,000 plus vacancies at any given time. There is actually a war for talent between high-tech software AI in the marketplace and the digital engineering that is required for modern manufacturing across our members as well, so it is a reasonably challenging picture. There have been recent initiatives by the MoD; I am sure we are going to talk about the regional growth deals and the defence technical colleges. Those are helpful additions, but they do not go far enough.
Q8 Baroness Valentine: I am going to come on to that regional approach. How do the Government and devolved, regional and local authorities work together to support local and regional defence industries? What will the defence growth deals need to provide in order to be a success?
Andrew Kinniburgh: Kevin is more expert in this than I am, so I will bow to his superior knowledge, but from my perspective there is a lack of co-ordination at the moment. I know it seems like a soundbite, but we are not seeing a national conversation. If there is, I am not aware of it. There is a lack of sitting down together between the regional, devolved and UK Governments to discuss how all these things are going to work. We are aware of pockets of good practice; it is really important to emphasise that defence can reach parts of the economy and the geography of the UK that no other sector can even get near. For example, QinetiQ tests and evaluates military hardware on a range in the Outer Hebrides; it is the biggest employer there. Touching on Kevin’s point, why do we not have a defence technical excellence college in the Outer Hebrides, working with QinetiQ and developing jobs for young people in the local economy? Another example is NMITE—the new model institute for technology and engineering—based in Hereford. Again, I do not know of any other industry in the UK that could create a very specialist, highly expert academic institution in Hereford. So there is some really good practice there. Fife Council works very closely with my organisation; we deliver courses to help new companies understand how defence works and then visit a big defence show to understand how the whole market works. But from my perspective—this could be our chance to disagree agreeably, Kevin—it is not as closely co-ordinated as it could be. We would like to see a national conversation to tie all those different strands together.
Kevin Craven: It is very hard to disagree on most things around defence, but the regional growth deals—five regions with £50 million each—is a good start. That horrible word complexity is involved because we have two devolved Governments and the politics of those individual Governments come into play. Some of our devolved Governments are less keen on defence than others. Where there are devolved matters such as skills, there might be different policies on how skills in a region should evolve, which is important because when companies stretch across multiple regions, they have different policies in different regions to deal with.
It is a good start, and we have been working very closely with the regional devolved Governments on the specific implementation of those deals. We need to build on them and develop them over a longer period; a short-term injection helps, but it is not sufficient to change things. We should probably say that the MoD is increasingly seen—and almost used—as an economic development agency; the spend of the MoD in a given region is monitored very closely and there are big disparities. It is hard to imagine how you could spread things evenly, but there is a very big difference between, for example, the south-east and Northern Ireland, which has the lowest MoD spend per capita. Again, we admire the intent and we admire the initiative, but we would like to see more done in this area.
Q9 Lord Fuller: You mentioned Helios for cyber defence; let us avoid going down the rabbit hole of skills, but to what extent do you feel there are some basic foundational constraints in the domestic supply chain? For instance, I am thinking about the security supply for certain raw materials such as lithium for batteries, or the capacity for chemicals. To what extent do we have a critical reliability on overseas supplies that may be vulnerable in the case of a hot conflict?
Kevin Craven: Our supply chains are remarkably at risk. Most of the aerospace and defence manufacturing industries pre-Covid were very globalised, long, complex supply chains, without a huge amount of visibility down the chain. It all came together just in time as required, but Covid, the Ukraine war and now the Middle Eastern war have provided huge shocks in those supply chains. In addition, some of those suppliers of critical raw minerals and materials are concentrated in regimes that we do not like. For example, China not only has the rare minerals that we need, but also the refining capability for those minerals situated either onshore or in its sphere of control. As a country, we have made strides in improving the visibility of those risks in the supply chain, but we are not yet at a point where co-ordinated action or buying as a nation for these critical elements is happening, so more could be done. Other nations and entities—the US and the EU, for example—are very focused on this, and it is a component part of their foreign policies in terms of doing the types of deals that give them some assurance about where those supplies might be coming from.
Lord Fuller: Andrew, what do the Government need to do to fix this?
Andrew Kinniburgh: They need to start buying from their own country: that is what they need to do. I do not say that in a little Britain, jingoistic, “We hate foreigners” way; but if we take one example, textiles, we continue to outsource weaving, finishing and sewing to China and Cambodia. However, if you look at the contract, you will see a company based in Northern Ireland. It is a UK business, it has a company registration number, it has a postcode in the UK, so the MoD can legitimately say, “We have outsourced to a British company”. What actually happens is that the work gets outsourced to China and Cambodia, including—this beggars belief—the infrared coatings that we use to protect our soldiers and our service personnel from being detected by the enemy. We outsource that to China and Cambodia. The trouble is that we are not using weavers such as Toray in Mansfield, which is one of the biggest weaving mills in Europe; it is doing absolutely no work for the MoD. Toray is weaving uniforms for Germany, Finland, Norway, Denmark and Sweden, while we outsource to China. I get very annoyed about these things; our fundamental starting point should be that we try to buy British where the capability is there. If we do not, then we will lose capability and capacity and it will not come back.
I will give you another example. We are beginning to lose companies in the UK that provide heat treatment for things such as turbine blades. That is partly down to our crazy electricity prices, which are driving us to international markets. Coatings, heat treatments and so on are done by relatively small businesses; Kevin probably has a dozen examples from a wider aerospace perspective. The trouble is that, if you lose these little companies, then big companies such as Rolls-Royce, Pratt & Whitney and others who are using UK machinists and UK manufacturers begin to think, “It isn’t economic to do this in the UK because I have to send my turbine blade to Ireland to get heat treatment, then back to the UK for a bit more machining, then off to the US for coatings and then back again to the UK”. If we do not use these smaller companies, we will lose them, and the ripple effect up the supply chain could be really significant. We should start off in our own backyard, thinking about how we can use UK businesses more effectively. But I re-emphasise that that is not meant in a little Britain, blinkered, “We want to do everything in the UK” way; we simply cannot do that.
Lord Fuller: I am pleased you have not held back because this is not a defence committee, it is the UK Industry and Regulators Committee. We have to make sure that industry has sufficient capacity and that it exists so that the defence industry can do its downstream manufacturing and make a safe and secure Britain.
Kevin Craven: The cost of doing business within the UK is increasingly making this a hostile area for manufacturers to choose. Energy, as Andrew called out, is three to four times the cost in other nations in this marketplace; it is difficult even before we consider the cost of employment and other things that are rapidly rising. But the point you are making is about the resilience of the supply chain. The sourcing of finished goods is one thing; the supply of critical raw minerals and materials is another. Some 75% of all the manufacturing we do in the sector uses rare earths and critical materials that come from outside the UK in the first place. Even before we get to the manufacturing point, we have to have a shared supply to be certain that we can produce what we need.
Lord Fuller: Perhaps we need to dig into that later in the inquiry.
Q10 Lord Udny-Lister: I have a three-part question. First, how does the regulation of the defence sector affect investments and the delivery of defence requirements? Secondly, do the defence regulations provide barriers to those requirements, particularly with new technologies? Thirdly, what changes are necessary?
Kevin Craven: Regulation is an extremely important factor in the defence sector. For example, as was mentioned earlier, over half of the defence equipment plan—or the investment plan as it has now been renamed—falls under the remit of the Single Source Regulations Office. It is challenging that the profit motive within those single source regulations is kept at a lower level than that of our international competitors; that is an example of a disincentive for global companies, including British ones, to invest in the UK. Probably the most immediate impact at a tactical level of regulation is in the test and evaluation phase. I have an extreme example, which I hesitate to use, but certifying equipment for use in Ukraine can happen within five or six weeks, while the equivalent process in the UK would probably take nine months or longer. There are examples of companies that are busy writing safety cases for the wood in the packing cases of their equipment that are longer than the technical specification of the equipment inside the box.
Andrew Kinniburgh: From a test and evaluation perspective, there is some good news from QinetiQ, which runs most of the MoD’s test and evaluation facilities, such as the one I mentioned in the Outer Hebrides. It has been released from the constraints of its contract with the MoD and is now able to offer a much more cost-effective service to SMEs, which is very much welcomed because it gives the opportunity to test drones or submersibles in world-class test facilities. In the past the rules that the MoD imposed made those tests eye-wateringly expensive.
One of the challenges that we see is that regulation is almost being made up on the hoof. That sounds very rude; I mean developed on the hoof. To give you a quick example of how regulations are way behind the technology, one of our members is delivering uncrewed submersible vessels—submarines, basically—uncrewed surface ships, and uncrewed land systems. Regulation-wise, land and sea are separate; they both fall under the Defence Safety Authority, so they are part of the same organisation, but they are regulated separately. Recently that member was asked about fire extinguishers and life jackets on the unmanned submersible because the regulations insist upon it. Why would they need those when there is no one in the vessel? Someone might go on board when the submersible comes back to base, or if it is intercepted at sea, but it is a nice example of the regulations trying to catch up.
Kevin Craven: One of the challenges in this space is the fragmentation across the civil regulators, the military regulators, and the internal MoD safety and assurance processes. That is probably the first area I would point at where better co-ordination and cross-departmental collaboration would be helpful in identifying barriers to reducing the timelines we have indicated. For example, it can take nine to 12 months to test and evaluate beyond the visual line of sight capabilities, and it can be done far quicker than that. I agree with Andrew that there have recently been some changes that should help.
Q11 The Chair: Is there anything you would like to leave us with, or anything we should have asked you and did not?
Andrew Kinniburgh: May I just give you one more example? I am sorry, I am a bit of a stuck record on examples from our members.
The Chair: I do not think you should apologise; that is what brings our inquiry to life.
Andrew Kinniburgh: I wanted to touch on tungsten, the cost of which has gone up 900% in the last couple of years. We are delighted to see that there is now a move to re-open a tungsten mine in Devon; I should highlight to the committee that there has been absolutely no government support for this. It is a purely commercial venture; as prices have climbed, it has slowly become economic to re-open that mine again. We need to be imaginative about such things. We do a lot of work with Canada House and the Canadian High Commission, which are really pushing hard to develop their capability in rare earths and other capacities that Kevin mentioned. We need to be imaginative in what we are doing—in the UK and internationally—to try to wean ourselves off the very risky supply chains that Kevin talked about earlier.
Kevin Craven: I would return to the overall theme for the committee, which is the relationship between the MoD and the defence industry. If we look at other international exemplars, that relationship is radically different. As a nation, we are struggling with our place in the world, and I believe that we need to do more to find ways to collaborate and work across traditional boundaries. One example I would point to would be France, which is hard to say but necessary; Japan and the US also have exemplars we could learn from.
Chair: I was about to ask you for examples, but you have provided them.
Baroness Harding of Winscombe: You have nearly answered the question I was about to ask. This hearing has been hugely helpful; all the way through you have peppered your answers with examples and referenced again and again the need for culture change and how hard that is in this huge military-industrial complex. What role would you like to see the top office—No. 10, the Prime Minister and the Cabinet—play in driving that culture change? What role would you like to see for Parliament? I recognise the problem statement, but I do not think we should accept that it is a problem that cannot be fixed.
Kevin Craven: The defence of the realm is the first duty of any Government; funding the defence of the realm is therefore the first duty of the Government. The leadership of both the Prime Minister and Parliament in establishing that as a priority—among all the other very difficult priorities the Government have—is desperately important. There needs to be a national debate signalling that defence is important and the safety of our citizens is important, in order to allow greater support for our defence industry and our Armed Forces.
The Chair: I am afraid we have run out of time. Unfortunately I cannot tell you when, but you will get a draft of the Hansard report; partly for checking but if, after having read it, there are issues you would like to feed back to us or that you wish you had said, we are still open to taking your written evidence.
For the moment, I echo what has just been said: you have helped set this alive in a very useful way. Thank you both, not just for your time today, but for all that you are doing out there to help this move forward. That ends the public session of this inquiry.
