28
Examination of witnesses
Rupert Pearce, Lt Gen Anna-Lee Reilly, Jim Carter and Avril Jolliffe.
Q16 The Chair: The affair here today is being televised live. You may have noticed it featured as well on the 10 o’clock news last night. We welcome you to the second session of our inquiry exploring the implementation of the recommendations of the strategic defence review. A transcript will be taken today. We will send it to you for any small textual corrections that you might have. Members round the table will have to declare any interests in advance of their questions. I declare that I am a senior counsellor with the Cohen Group, but I was also the lead reviewer of the strategic defence review itself. Before we start, perhaps you might like to introduce the key people you have brought with you, Mr Pearce.
Rupert Pearce: Thank you. I am glad to be here and look forward to an open and transparent engagement on these very important topics. The reason I have brought some experts with me is that they are a visible manifestation of what the National Armaments Director Group can be when we work together across different disciplines.
On my left is Jim Carter, who runs national armaments, commercial and industry. He leads the activities with our supply chain, working on transitioning it from a transactional relationship to a more strategic one and making sure our supply chains are resilient and war-fighting ready.
On my first right is Lt Gen Anna-Lee Reilly, who runs one of our largest delivery organisations with hundreds of delivery programmes for our military equipment. They are many of the largest, most complex and well-known programmes such as Type 26, Type 31 and Ajax. It is a huge set of activities. General Anna-Lee was also responsible for leading the MoD into Ukraine and establishing many of the taskforce kindred capabilities that deliver £3 billion of capability a year into Ukraine, and so she is a very good source to talk about that.
On my far right is Avril Jolliffe, who runs the newly cohered organisation National Armaments International, where we have gathered together all our export and government-to-government capabilities to support UK defence exports around the world. She was responsible for leading the best year ever for UK defence exports last year, including some very big deals, which I will let her talk about. They are a good example of the diversity of what we do in the NAD group, as it has been newly formed. All three of my colleagues worked together around the Middle East crisis recently because it involved diplomacy, military capabilities and matériel; it involved a lot of commercial work as well, so when my organisation comes together it is more than the sum of our parts. I am very proud of what we have achieved in supporting our Middle East allies in recent days and weeks. We can talk about how we did that later on.
Q17 The Chair: Thank you very much. It is useful to have so many people representing the group. The National Armaments Director Group is one innovation that came out of the strategic defence review. Perhaps you would like to give some reflections at this stage about the experience so far.
Rupert Pearce: I should declare that I am not a career civil servant; I am not a career defence person. As to my background, I spent 13 years in a city law firm, including five as a partner; about 10 years in venture capital, typically technology venture capital, including in a transatlantic firm; and, in the middle of all of that, 16 years as CEO of a UK space company which was a leader globally in its sphere. It was a FTSE 100 company and I was CEO for just under 10 years. My background is strongly commercial technology, but also a lot of procurement and international work. I think I was hired to demonstrate the need for change and the way in which that change would come about. As MoD, clearly we need to move on the SDR, the DIS and the soon-to-be-published DIP, in a way that is faster, more agile and more entrepreneurial. As a result, we need to take on risk more intelligently. We need to accept risk as part of what we do and manage it accordingly, because we do not have a lot of time as a nation to be both ready to deter but also to be transformed in terms of our capabilities. Learn the lessons of Ukraine, update, modernise and become a more digitally enabled Armed Forces—these are big challenges ahead of us.
On the back of the SDR, one objective was to form the National Armaments Director Group to help play that part in three areas. No. 1 is to get better. Although I do not think we have a bad record in procurement if you compare us with industry norms, we can get better at procurement, running our programmes of delivery, bringing together all our arms of delivery into one cohered group. By putting a design agency at the front of that group to work with our military colleagues to get the design done better up front, we hope to move at a faster pace and deliver better outcomes.
Alongside the delivery organisation, we established a supply chain focus. As you know, one big strategic goal of the SDR was to recognise that our UK defence supply chain is a strategic asset; it is a military capability. If we do not have a robust, healthy and scalable supply chain able to move at war-fighting pace, we run out of our capabilities quickly in anything other than a very short war, so we must pay attention to our supply chain. We have set up two organisations to do that in the NAD Group and Jim’s and Avril’s organisations, both of which regard their customers as the UK defence ecosystem.
Finally, we are cohering the MoD’s capabilities in defence innovation. Inside my organisation three groups have been brought together: first, DSTL, the world-renowned R&D and S&T innovator, which both has a lot of fundamental scientific capabilities itself but also works very closely with academic institutions across the UK to do very early-stage innovation. We have brought alongside that a new organisation composed of bits of DE&S, DARA and other units to create UK defence innovation focused on later-stage innovation to horizon scan in the UK, develop an innovation strategy, pull through DSTL’s early-stage innovation into later-stage innovation and generate better relationships with the defence tech innovative community out there. Alongside them, we have set up a defence investment unit to bring private capital more closely into that machine so that, when we spot great technology that could give us an edge, we are able not only to pull it through ourselves, working with front-line commands, but ensure that venture capital, development capital and banking relationships are there ready to go as well so that companies’ growth is not constrained by lack of access to capital.
Those three things together will, hopefully, create the machinery for a step change in UK defence tech innovation. If we succeed in that goal, I hope we will be able to bring through novel capabilities more quickly, get them on to the battlefield more effectively and distribute them in NATO, partly under Avril’s auspices through exports. That will itself play a meaningful part in re-equipping our Armed Forces to allow them to outmatch our adversaries.
That is the overall philosophy as a group. We are still settling it in. It comprises 27,000 people with 14 different organisations and 70 boards becoming one, so it is a big job of change. None of that change will take root unless we address our culture and values, and liberate our people more effectively to move at pace, give them more accountability and trust them more. These are all cultural artefacts. We know we can do that because, when we took some of those constraints away from them vis-à-vis Ukraine, they moved at the speed of light. They acted with enormous intelligence, passion and skill, and delivered outstanding outcomes into the battlefield to support the brave men and women of Ukraine on the front line. We know we can do it if we are willing to take a little more risk. The skill is getting that risk in the right place for ourselves and then implementing change and the cultural tweaks that need to come alongside that.
Q18 The Chair: That is a useful overview. Can I tempt you to enter the territory of the defence investment plan and probe your views about how it affects your organisation and the outputs in which you are involved?
Rupert Pearce: First, one of the great difficulties of the defence investment plan is that it is among the most ambitious plans MoD has ever conceived. It is not just another one-year equipment plan; it is a root-and-branch, end-to-end, 10-year projection of where we are going and how our business model works. It is fundamentally a strategic document, but it is also designed to present solid long-term demand signals for industry, as the precursor for allowing industry to bring its balance sheet and capabilities in partnership with defence and for financial services companies’ investors to be able to invest with confidence in their corporate customers, but also perhaps directly into our programmes as well. It starts off as a very complicated document. It is the first time we have done it in a generation.
The second point that has created complexity and challenge is how much has changed since the SDR was written last summer. It seems like a short period, but in that time we have had pretty aggressive inflation. There has been cost escalation across the defence estate, everything from pay to infrastructure to raw materials. We have also seen the threat pattern become a lot more significant. I do not have to tell you that; you have written papers on it. The difference is that we thought we had 10 years for this plan to come to fruition and to be fully ready and transformed. Now we think we may have five, that we should be aiming to land the substance of our transformation by 2030, not 2035. That is creating the tension of a lot heavier investment in the front end in the first four or five years of the plan. To deliver something in 2030, you have to start now or next year in defence procurement terms. There is enormous intensity at the front end of the plan and big questions about how to fix that. If you cannot fix it because you do not have the money to do it, what do you flex? What do you move? What do you delay? That has been a big task.
Allied to that has been the need for European NATO to step up and do more of its own capability development. That is not in any way to diminish the contribution of the US to NATO, but just recognises that it wants Europe to step up more and be masters of its own protection and deterrence, and also that it has the capacity to be distracted with key interests elsewhere around the world. I think if you talk to our European NATO partners, they all feel the same: that we have to step up. That also means more intensity into the DIP. The DIP is a big challenge in an environment where money is in short supply. We cannot grow our way economically out of this, and that is the constraint, as you heard from CDS yesterday.
I would also agree with CDS that there is another structural issue: the RDEL-CDEL mix. As he rightly said, over the past 20 to 30 years we have moved from RDEL being all resources, opex if you like, being 80% of our budget and now it is on a glidepath to be 50% of our budget. That is creating big stresses inside MoD. CDS yesterday spoke very lucidly about the stresses on military readiness. If you get a larger military, that is a bigger cost—literally a marching money cost—and then there is the cost of making sure our Armed Forces are ready. There is not much point in having the toys if we are not ready. It is also a big issue for the NAD Group because we have to deploy the capital in thousands of programmes. If we are underresourced over time because RDEL is not keeping up with our ambition, we cannot put that money to work effectively. That leads either to risks in programmes that I would rather we got ahead of or overprogramming because of underresourcing, meaning that programmes just slide to the right inexorably and do not happen; they get late. Of course, if they are late they cost more, and so you get cost escalation as well. It is about getting the RDEL-CDEL mix right, recognising that having a lot of CDEL but not the RDEL to put it to work and be ready for it would be a mistake. This is at the very heart of the DIP discussions right now.
The Chair: You are in a more privileged position than we are because presumably you know what is in the proposed defence investment programme at present. Self-evidently, industry is being held back because of the delay. There is now a further delay in the publication as well, but what other implications will it have for your group?
Rupert Pearce: The major one is that the defence ecosystem is relying on the DIP to be able to make investments to get business. There is no question that publication of the DIP enables my group to increase its pace of activity and do more, and the UK defence ecosystem is poised waiting to participate in that. It is very regrettable that it is not out. I think it goes to reputation with industry and our allies. Everybody is waiting for this to come out. I want to get out there with the DIP and have discussions with industry about how we can move fast and be partners. I want to roll my DIP out over the top of the DIP equivalent of my allies and say, “Gosh, look, this is where we can do things together. You do this. I do that”. We can move on a multilateral basis with our allies as well.
I want to talk to the financial community. As you probably know, the DIP will be followed by the defence finance and investment strategy designed to help make defence more investable and improve our relationship and transparency with the financial community that can bring capital to the DIP and to our supply chain. That cannot happen without a DIP. Fundamentally, the biggest issue I face is that I am very conscious that we do not have a lot of time to transform our Armed Forces. They are to some extent hollowed out; they need to be grown and regrown. We also need to engage in a complete transformation of the nature of their capabilities to be ready for the war we will fight, or may have to fight, by 2030. That requires a lot of change. Every day that goes by without the resources to start that is a day lost when we already do not have a lot of time.
The Chair: The resigned Secretary of State said that it was not enough from what he knew of what was being proposed. Do you agree with him?
Rupert Pearce: I think you have to step back and see how much more money is gravitating towards defence right now. This year we enjoy £11 billion more than last year with the previous Government. That is a big change, so we are beginning to infuse capital into defence. There is a huge appetite in government to continue that process on a journey to 3.5% and the NATO commitment by 2035.
Taking a long-term view, things look pretty good. The issue is pace and how much we can afford in the early years of the DIP. That is a really tough thing. If you cannot borrow and you will not tax, it becomes a zero-sum game when for defence to get more money someone else must lose. That is a very difficult decision to make politically; it is not one that obviously I have to make. Also, remember that our resources are described as a percentage of growth. If we kick the legs out of growth investments by other ministries in energy, transport and so on, it could come back to haunt us in defence. We want our economy to be as strong as possible. I am a firm believer that one of the best forms of deterrence is a strong economy, so we need to think of this holistically as well, which is what makes this so difficult.
You heard the military response yesterday. Inside my group, the response is an easier one. Whatever the nature of the DIP settlement, my job is to spend that money wisely. It is to crowd in industry and their balance sheets around that settlement and to bring in allies and do more multinationally. It is to find areas where we can bring the City of London to add resources to the DIP and deliver it. The question is less about whether it is enough but whether we can align the DIP strategically to the money we are going to be given to do the best job we can to defend this country, deter Russia and keep the peace.
Q19 Baroness Blackstone: The SDR mentioned innovation well over a hundred times, which, to me, raises a query about your earlier position that procurement in the Ministry of Defence is not so bad. Certainly, the conventional wisdom out there, including from people who have been ex-Chiefs of the Defence Staff, is that procurement has failed on a number of occasions, with a lot of wastage and perhaps the wrong priorities. I would like to ask you about innovation and how you will bring about a change in culture so you do not get those sorts of procurement failures.
I would also like to pick up the point about the time in which you have to do this. It seems to me that most people who are involved in questions about how you manage change always point out that a sensible timetable is required. Why try to do something in four and a half years that probably needs seven or eight years at least, if not 10, which was what the original programme was going to be? Is it a mistake to try to innovate and change the culture as fast as this when you are trying to bring 14 different organisations into one, as you mentioned? The figure of 27,000 people working on all of this is pretty astounding to anybody outside this particular area of public expenditure.
Rupert Pearce: Thank you very much for your questions. To deal with the last one, we have to change fast because we do not have the luxury of time. The gating criterion here is not that we want to do it in five years; we believe there is a real chance that we will be at war within five years and we need to be ready for it. To do that, my group has to change fast to move at a different pace. If we look at the average delivery times in past years, they are too long for us to be able to deliver the kinds of transformation and capability enhancement that are needed by 2030. There is no question that it is a big challenge, but we are up for it. Part of that challenge is about cultural renewal. I believe we can do that because of the lessons of Ukraine. We moved at light-speed pace to support Ukraine over the past four years. It was the same people delivering those outcomes as I have in my group today, moving at a slower pace because of the way the system is designed to slow that speed. The job we have to do at the quad is lift the system a bit off the backs of our people and allow them to move more quickly. Making those changes is what we are doing. For example, Jim is leading defence procurement reform, dramatically simplifying and segmenting procurement, bringing new commercial pathways through, and moving the barrier and the demark point between what we do and what industry does to allow them to lean in to do more. If you change all of that but do not change the culture, people will gravitate towards the old, the tried, the less risky and the easier.
Baroness Blackstone: My point is that changing this culture cannot be done overnight.
Rupert Pearce: Maybe. We will do our best, but when we did change it overnight for Ukraine, behaviours changed. May I just allow Anna-Lee to say a few words on this? She designed the system and led us into Ukraine, so her experience of what we can do when we trust our people a bit more and give them more room for manoeuvre is really interesting.
Lt Gen Anna-Lee Reilly: As Rupert said, the same teams that deliver for Ukraine deliver the UK programme. One day they may be working on an item for Ukraine, which they are doing at breakneck speed, and the next day they are working on something for the UK. As Rupert explained, it is the system, the spend controls and process that slow things down. At the end of the day, it is all about risk and how we interpret it; it is about procurement risk, financial risk and commercial risk, and what risks we are willing to take as we deliver equipment.
I deliberately have not mentioned safety risk. You will be aware that safety risk in Ukraine is dealt with in a very different way. Safety risk when you are at war is something about which you are very much less concerned with the equipment you take. When we put equipment into the hands of the UK user, we obviously spend a lot of time making sure that that kit is safe. That is very important to us.
There are some brilliant examples of moving at breakneck speed with the same teams. That is exactly what Jim is trying to get to with procurement segmentation, so that we have a rapid pace for the stuff that is really quick, which we can buy virtually off the shelf, or we can innovate and spiral quickly. We know that the big programmes will take a long time; they always do. They are complex and cutting edge, but for some of the quicker stuff and the lessons from Ukraine it is super important we can do this rapidly.
Rupert Pearce: We have taken those lessons and tried to apply them, even in the early days of the NAD Group, through procurement reform. Some of the things we are doing in terms of pace in our innovation group are beginning to make that flywheel go faster. I would like Jim to comment on this and say a little about the early impact of the procurement reforms.
Jim Carter: It might be helpful just to provide a little bit of context for those primary changes, because they were explicit recommendations in the SDR. That is moving from one size fits all to a more segmented, tailored approach. That is being applied to live programmes today, as well as the headline target of reducing time to contract by two-thirds. To quickly set out a bit of our progress around that segmentation approach, but also bring to life, as Rupert mentioned, accelerating commercial pathways, we are moving from policy design to delivery. We have published three clear acquisition guides for organisations on those segments and are now providing deep user communications and engagement on how to use those. Importantly, we are doing that hand in hand with industry. The SDR set out the creation of a new relationship with industry and, through our defence industrial joint council, we have a structure that enables us to work very closely with them. As for the rapid commercial exploitation segment, we are implementing clear recommendations from industry on how we do that. I totally agree with Rupert that culture is a key point in taking proportionate risk.
The complementary programme to segmentation is accelerating commercial pathways. We launched six pathways to help our commercial and procurement teams apply the correct approach, whether that is spiral pathways for small and medium-sized enterprises, data or digital, or design to cost. We are going to do nine in total. There are two more: one for innovation and one for infrastructure, which will be live this month, with a final one on national security to come. The focus is now on scaling those up.
Just to give you some tangible examples and perspectives, 300 of our live procurements are using and have declared use of a pathway. Looking at the statistics just for May, over 70% of the procurements are using a pathway. These are the types of approaches that will drive this acceleration into our standard practice. To bring that to life with just a couple of procurement examples, things like the DragonFire directed energy weapon had a commercial team that was challenging around requirements, using an agile approach and working very early with industry in harnessing their expertise. We anticipate delivering the capability five years earlier than originally planned, as well as supporting 600 jobs. The first deployment of that capability should be on a Type 45 from next year. The contract was let end-to-end in five months. What is important about that is that it is really good for the war fighter. That is precision technology that is low cost per shot.
Rupert Pearce: It is ten quid a shot.
Jim Carter: The ammunition is pretty unlimited. To use another very recent example from April 2026, we delivered a Skyhammer sovereign anti-drone capability with Cambridge Aerospace. It was procured and fielded within four weeks, demonstrating a really rapid response to emerging threats. I have lots of other examples but I am just trying to bring to life some of what is being achieved. The low-complexity pathway is averaging around 60 days to contract. A lot of the culture and change we are driving is personified by a small commercial team that I have called Commercial X. They have now delivered about 940 contracts. They are averaging 54 days to contract. This year it is quicker; it is 44 days, because they have been building up for a year or two. Some 66 per cent of those Commercial X contracts are with small and medium-sized enterprises. Through that sort of approach to risk, focused on the outcomes we are trying to drive, we can inculcate and drive through the pathways across the full structure of the commercial teams to deliver the intent.
Rupert Pearce: This is all really encouraging. Speaking to your point about how you engineer change, Commercial X is a great example. It is a skunkworks. It was something that was established and told, “Rules don’t apply. See what happens”. We said, “Okay. Sign up digital contracts, 50 million quid max. How bad can it be?”, just to see what would happen. You heard how successful they have been. My natural reaction to that is “Great, what if we do it at £100 million? What if we extend it into other areas where we can deploy this kind of model?” It is one way that you can engender change at pace. Instead of trying to change the whole organisation, find little pieces of the organisation that you can free up to show how things can change and then build momentum from that. It is one of many ways that we are trying to get after change.
You are right: innovation is another big opportunity for that. We can all be intensely proud of R&D and S&T base in the UK, and there is so much more that we can do with defence for that. I am confident that MoD’s ongoing investment in S&T, R&D and innovation will be ring-fenced in the DIP. It is a very important objective. I have my fingers and toes tightly crossed on that, obviously. What we can do with that is pull through innovation to support capabilities development in areas where we are really strong—AI, quantum, autonomy, communications and space being good examples. In many of the areas where we are looking to make profound change for our Armed Forces we can do through the power of British innovation and at the same time create world-leading British companies that can win on the global stage, either because we are able to export them to many other nations through the auspices of Avril or because their technology is dual use and we are just the defence customer. We maybe get them in the game and then they grow into all sorts of other market segments as well. It is a very exciting potential for win-win.
The Chair: Okay. It is all really fascinating, but we have quite a lot of questions, so I have to ask you to be a bit briefer in replies—although you are painting a bigger picture as well—otherwise we are going to be here all day, and I think you have other things that you probably want to do. Lord De Mauley, who is a former Chair of this committee, is online, and he has a question.
Q20 Lord De Mauley: Good morning, Mr Pearce. Acknowledging the lack yet of a defence implementation plan and the changes you referred to earlier, what is your assessment of progress—you have started to do this in the area of innovation—in implementing the recommendations of the strategic defence review?
Rupert Pearce: Of course. I would say that we are broadly in good shape. The first thing to say about our response to the SDR is that we have set up proper programme management of the objectives and the desired outcomes so that there is a strong, well-resourced infrastructure to support the delivery of the different objectives under the SDR. There are 60-plus recommendations. It turns into about 160 actions. I should let you do the maths, Jim, because you are running the whole show for the NAD Group. If we look at what we should have delivered through the back end of 2025 and into April/May 2026, we are by and large on track. We have completed 15 of 17 actions for the NAD Group. The two actions that are not completed are because they are DIP dependent and the DIP has slid to the right. I am quite heartened. I am heartened by the transparency that we have brought to the process and the rigour with classic red, amber, green charts. We look at that in the NAD Group. We then report up to the MoD ExCo. The ExCo reports up to the Defence Board. From top to bottom in governance terms, this is looked after in a structural way. We are up and running. The NAD Group is a good example of that. We published a defence industrial strategy and a defence housing strategy. There is item after item in the SDR that we have actually got on with. It is not a sea of red in terms of the RAG chart at all. It is by and large in good shape.
The Chair: Maybe at some stage you could supply the committee with a list of the 62 recommendations, indicating which have been implemented and which are being held up by the defence investment plan. I am trying not to talk in terms of acronyms all the time, because not everybody understands them. I learned early in my time in the Ministry of Defence that if I asked for the explanation of an acronym I enlightened a whole room.
Q21 Baroness Crawley: You just mentioned the defence industrial strategy, Mr Pearce. By the way, what you have told us so far is a very positive, encouraging picture, because we are inclined to get just the negative headlines. However, the defence industrial strategy argues that the MoD is not as reliable a customer as it could be and that the current method of procurement leads to a feast or famine situation that is not helpful to industry. You have gone some way to batting that back by your six pathways that may help in answering that question. How have the delays in the defence investment plan affected your relationship with industry and therefore brought about that sense of uncertainty and unreliability that your own defence industrial strategy, or DIS, pointed out?
Rupert Pearce: Thank you. Again, that is a great question. As an outsider coming into the MoD and seeing this process, what struck me is that until the DIP the only messaging to industry was annual equipment plans. That is a one-year focus. No one in industry invests against a one-year perspective. You are not going to invest in plant machinery capabilities and innovation on that signal. That is a very tactical signal. Once you are into long-term procurement, great, terrific. You can then do that on the back of a 10-year commitment and a procurement contract to deliver that. The feast and famine, I suspect, is about only having a one-year signal, and that may be a good signal or a bad signal depending on the year, and on the resources that we have. We are now trying to pivot to a DIP that gives 10-year demand signals and projects our whole strategy down to the level of matériel and capabilities requirements, that allows industry to transform the way it does business with us, to be able to rely on those long-term signals and to invest in its own capabilities. Otherwise, it is condemned to invest in capabilities only when we come with a contract, which is not good for either side. We want people to invest in their capabilities and then bring them to us. For them to do that, they need those long-term signals.
The delay in the DIP is delaying the onset of that new relationship, which I think will be great for everybody—great for industry, great for government, and it is great to spend taxpayers’ money more efficiently and effectively. That is the delay. Even inside the DIP, the thing we struggle with is that it is all very well to say this is what our 10 years look like. We do not get 10 years’ funding; we have to manage our money year by year. If we get to the end of the year and we have not spent it, it does not roll over. We deal with annularity in terms of our budgets. There is still a structural fix there that needs to be addressed. I would still say that with a DIP we are in a much stronger position. I hope it will be out within weeks. I do not control that process, obviously. The trade space has narrowed appreciably over the last few months. I really hope we can get the DIP out before Ankara and then be in a much stronger position to transform the relationship with industry, as you said.
Jim Carter: Can I add a point? Notwithstanding the delay to the investment plan, we are still contracting and investing at scale. Since July 2024, we have done 1,400 major procurements, 94% of which by value are to UK businesses. The longer demand signal that the DIP will set out will clearly be helpful. We are still letting these big contracts. Just in terms of the engagement with industry, it was obviously a really key contributor to the industrial strategy. In all my conversations, it sees the words and intent in that. The engagement we have through the Defence Industrial Joint Council is striped throughout that structure. The Minister for Defence Readiness and Industry may be at the top council. We have working groups implementing some of the key parts of the industrial strategy, whether that is readiness and resilience, skills and people, international or commercial and collaboration. All of those are co-chaired by industry, and they are actively helping with our scope plans in terms of implementation. I take that deep engagement and deep work and leaning in to help as a sign of that good engagement.
Rupert Pearce: Another good example of longer-term thinking creeping in is what we are doing around munitions, energetics and critical minerals. We are publicly out there with a competition to support at least six new major energetics factories, energetics being the material for munitions such as high explosives, which has withered on the vine in recent years in the UK. We need it back so that we can control our own destiny in terms of manufacturing munitions. There is huge interest from across the UK and Europe to invest into the UK to create these new energetics factories. We then have to track back into critical minerals to make sure we access those. That then plays into the munitions factories that we have across the UK, from which we can then start buying on what is called “always on”. We can maintain production, capabilities, skills and jobs by always ordering munitions and stockpiling them. That is an example of very long-term, joined-up thinking with industry. If we can do more of that, we transform the relationship with industry.
Q22 Lord Ahmad of Wimbledon: I declare that I was Foreign Minister of State during the time of the integrated review in 2021 and in 2023 with the refresh. Perhaps there is something in that, bearing in mind your earlier comments. Following on from what Baroness Crawley and indeed the Chair said, there is the whole issue of monitoring and evidence based. I am conscious of the fact that the Public Accounts Committee and the Defence Committee in the other place, the House of Commons, have asked for this evidence-based audit on delivery. I have already listened very carefully, and it is heartening to hear that you have specific structures set up on monitoring. The issue of KPIs, key performance indicators, is key. We would certainly welcome when the evidence-based audit report is produced to be party to that. I understand it is due at the end of June, so I would welcome an update on that. Specifically with the legacy projects and this new framing under your leadership, how are you getting on beyond the legacy to ensure the framing of these new initiatives, the innovation and the programmes? It is also positive to hear that the work continues notwithstanding the delay in the DIP. Where exactly are we? Are you confident that the indicators will be met?
Rupert Pearce: Thank you for your question, Lord Ahmad. I am old-fashioned in this respect. I do not believe you can manage what you cannot measure. We are going to get after this properly. Essentially, as CEO of the NAD Group, I need to be able to measure, and then I can start to manage performance. Do we have those measurements in place to my satisfaction? Not yet, but we are working on it. We should be willing to share those measurements with you. They need to be objective. They need to be solid. They need to be relevant. We need smart metrics to be able to say, “Are we succeeding or are we not?” I am very happy to share those with you and all other stakeholders in this job of change and delivery.
We are not there yet. We are moving the NAD Group to an OKR performance approach. Instead of managing inputs into things, we are going to manage success by reference to outputs. That is much more important to me. This is a delivery capability. We need to be judged by whether we delivered or not, not how hard we worked or what happened to divert us, which does not matter. We have to deliver. Looking at KPIs through that lens, I hope, will play some part in changing culture and driving more accountability through my organisation as well. That process has been set up. I have used it many times in the past for high-growth companies and even very large and complicated companies. It works, but it usually takes a year or more to bed in before people realise that OKRs drive the right kind of conversations: for this outcome to be true, what has to happen? You then track back, discover the flaw, and then you fix it. There is work to be done there.
I want a lot more rigour around how we benchmark the performance in our programmes. That is not straightforward, but it is a job of work that is ongoing. As to the early signs that I have seen, the word on the street is that we are profligate with our money, we waste a lot of money, and we are inefficient and ineffective. You can get to that quickly when you look at how many of our large programmes are troubled, but these are incredibly large, very complex, multiyear programmes that can run for up to 20 years. Look at a Type 26 programme, for example. These look like HS2-type events. They are supremely hard to manage through. We have 2,500 programmes in flight right now. You cannot judge all those programmes through the lens of just our small number of very large programmes.
I went to the benchmark for megaprojects, which is the Flyvbjerg dataset. Interestingly, when I looked at our top 60 major projects, which are the hardest ones, the Flyvbjerg benchmark dataset for delivery on budget was under 50% for the industry—industrywide—and we are at 68%. If you add budget on time, believe it or not, the industry is at 8.5% and we are at 45%. If you go to time, budget and delivering the benefits—in other words, all the three major things: time, price and requirements—industry is at 0.5% for megaprojects and we are at 43%. This is not a failing procurement organisation.
Can we do more? Yes. Am I happy with where we are? No. We are going to get better. We are going to move faster. We are going to be more agile. We are going to go shopping a lot more, not developing. We are going to buy good enough. Why? Because we have to move at pace. The whole philosophy and architecture of procurement are all changing. We are going to be a more impactful procurement agency, but we are not really bad at what we do today. We have tremendous people working extremely hard, often in cases when they are underresourced against the level of ambition because of the RDEL/CDEL mismatch mix. The foundations are there for us to get a lot better. I am very proud of the organisation that I serve, and I feel that we have some really good people whose potential can be liberated.
Lord Ahmad of Wimbledon: You can apply this to your legacy projects as well.
Rupert Pearce: Absolutely. The DIP comes along to help us reset those projects and fix some of the things—my inheritance, if you like—but we are not just going to rebase everything, forget the past and look forward only. You will get a complete dataset.
Lord Ahmad of Wimbledon: Thank you.
Q23 Lord Alderdice: I would like to pick up on the centralisation of responsibility for defence exports within your office. I am the UK’s trade envoy for Azerbaijan and central Asia. These of course are former Soviet bloc countries. When I was appointed in January of last year, it was flagged up to me that I should stay away from the question of defence exports. As the year continued, the message that started coming through was a little bit different: “No, actually, if there is any chance of doing something on the export side, that will be really helpful”. Interestingly, when I went to Azerbaijan in the later part of last year, the previous week my colleague, Lord Coaker, had been there the week before, but there was no collaboration and no briefing of the two directions, DBT to Ministry of Defence, or Ministry of Defence to DBT. I want to clarify—because it has not been mentioned at all—whether, on the export front, there is any collaboration with DBT. It is a two-way issue. You mentioned the question of critical minerals. That is one of the key regions in the world for critical minerals. The Chinese are gobbling them up. The Russians already had a hold of them. Most other European nations and the Americans are already in there. Collaboration with DBT and of course our embassies would be really important, but I am not hearing very much about that either in terms of us selling our exports or in terms of some of the input that we need for some of the things you want.
Rupert Pearce: Thank you for your question. I will hand off to Avril after setting the scene a little bit. You are absolutely right. In terms of my experience over the last nine months in post, I have seen the absolute imperative of this. If we are going to succeed in our exports and international alliances, we have to unite the diplomacy, the military side and commercial side. Often, they interact with each other in real time. I very much saw that in terms of Taskforce Sabre, which was the NAD Group and MoD’s response to the Middle East crisis as to how you create the right climate with our precious allies in the Middle East to support them. You have a diplomatic initiative, then you have a military initiative, then you bring the commercial alongside, and then you have to bring the diplomats back and so on. We have to work together and we have to create these tiger teams that share information and that are co-ordinated. In the Middle East, we did that. We reached across government to cohere this vital interaction. If we do that, we play at a different level.
Interestingly, the role of the NAD Group then becomes one of orchestrating all of that. We are becoming more muscular in doing that, particularly with industry so that we do not just fling industry willy-nilly at an opportunity. We orchestrate that. Sometimes we stand in front of it and we work in a government-to-government relationship to broker our industrial capabilities into the country in a trusted way. We are getting a lot better at these things quickly, and our win ratios are going up, but it is a journey. It needs to bring in all of government.
Avril Jolliffe: Thank you very much for your question. It is worth reflecting where we came from over the past couple of years or so. My organisation, as it currently stands, is made up of a number of different elements, some of which have come from other parts of government such as the Defence and Security Exports team, who were in DBT and came across as of July last year with the physical move of the international network, and the individuals into the Ministry of Defence over the past three or four months. Now I have those individuals in my department with a really clear reach-back into DBT and wider government. In my international teams, I have people embedded in all the different embassies around the world, working either at trade commissioner level or where we have significant defence interests embedded inside the embassies. I have been very relaxed about how each individual embassy and ambassador uses those particular individuals. In some of them, they are inside the defence sections because that works best for that particular nation. In other parts, the ambassador tasks them directly. For me, it is not about necessarily saying from London this is the best way of doing this. Each ambassador knows their particular countries best, and I am really happy for them to use those assets as they see fit.
Within the Ministry of Defence, previously we had our capability collaboration teams. They were disaggregated across the department. We had a number of individuals doing international relationships through a capability lens. They were in different parts of the department. All those individual teams now are coalesced under me. For the first time, we are able to operate end to end and reach out in a collaborative way across government using the DBT teams and, as Rupert said, the links that we have naturally into the Cabinet Office and the FCDO.
The key thing is that we now recognise that exports and collaboration are not necessarily two different things. We used to treat an export as a very shrink-wrapped thing that you sold over here and then collaboration was a completely different discussion that happened over there. In reality, with our allies, it is a continuum, where they want to talk about co-development, co-creation and co-manufacture as well as sometimes just buying off the shelf. They also look to us so that we get an understanding.
As you mentioned, Azerbaijan has a huge amount of critical minerals. As we look across our international allies, we have significant depth and resources in terms of manufacturing capability and supply chain resilience, and we had not really ever brought those things together as a narrative that would enable us to go to international allies and talk about not only what they could take from us but what we could do across the entire continuum for our own Armed Forces. We are trying to bring that together. Azerbaijan is a really good example, as is what we did in the Middle East. You will be very pleased to hear that Lord Coaker raised Azerbaijan with me personally. I attended a meeting with him. One thing that I have done is agree to find funding from inside my trade show budget to take some SMEs and UK companies to Baku for the trade fair in September. We are now moving in a much more responsive way where we see allies reaching out to us wanting to have those relationships.
Q24 Lord Lamont of Lerwick: Most of what I wanted to ask has been covered, but perhaps I could refer to something you said a moment ago. You talked about the megaprojects and the delivery of them. The NAO, of course, has been quite critical, not necessarily on the delivery but on the length of time it takes to specify and define large projects. It would be interesting if you could tell us a word about what you would do to improve that policy there. Maybe you could illustrate it by referring to what you are doing to cost control on the GCAP fighter project, because that is in that exact stage. Of course, it is complicated by being a collaborative project, but it would be interesting to know how you are going to deal with that.
Could I also pick up one point you made in your opening statement when you said you wanted to move the relationship with industry away from being a transactional one to being one to do with resilience? It seems to me that the MoD’s function is always going to involve a transactional relationship. If you do not have a transactional relationship, you are not under pressure to get the best, or the best value for money. Of course, the Government have to be mindful of the consequences of their decisions on the economy and security of supply. I accept that. However, there is a danger in too close a relationship between the defence supplier and the customer. There must be an arm’s-length relationship.
Rupert Pearce: Thank you, Lord Lamont. Let me deal with that first item quickly. I agree with you; it is a balance. It is facile to say that historically we have been win-lose because it is our job to drive value for money in procurement for our taxpayers, and there are many mechanisms for us to do that. It is also an article of faith of the SDR, the strategic defence review, that our supply chain is a military capability and a strategic asset for defence, and therefore must be strong. If we engage in win-lose and if we boil everything down to the lowest common denominator and crush the margins of our supply chain, we introduce fragility into our supply chain, and when we need them to be strong they are not. When we need businesses to set up in the UK because it is the best place to locate a defence business, if we get the balance wrong between properly setting them to task and ensuring that they are strong and are war-fighting ready, they will set up elsewhere and we will lose our sovereign supply chain base, which is important to us. So it is a balance.
We are trying to reset the balance a little bit more towards encouraging innovation and agility, and encouraging industry to take on more risk in areas where it is better placed to manage that risk. Our mindset to date has largely been to eliminate risk in procurement. That sounds great, but it means our procurements can take longer. It means it could cost more. Sometimes that risk comes back on us anyway because, when a supply chain partner fails, that ultimately puts the problem back in our lap as well. It is about getting that balance right, inviting a strong and innovative supply chain to lean in to do more, making it less win-lose, sharing risk perhaps a bit more, but never losing sight of the fact that we have to deliver value for money for our taxpayers.
Lord Lamont of Lerwick: What about the megaprojects?
Rupert Pearce: Many of our megaprojects are trouble. They are of extremely long duration and complex. We are trying to change the way we go about the initiation of procurements. Hitherto, what was Defence Equipment and Support, DE&S, which is the kernel of the NAD Group, would be the recipient of very detailed requirements from the military, often from individual front-line commands. They would hand that set of requirements to us, and we would go off and get it done. The big shift in defence reform is to introduce something in the middle of all that, which is a design agency in my group called Plans and Portfolios. There are two big changes. First, instead of receiving requirements, we will now receive problem sets from the military, and we will receive those from the integrated force, not the underlying front-line commands. We will be given those statements of, “We have this problem. We need to fix this problem”. Therefore, we will do a lot more work with industry to design solutions to that problem, and we will have a lot more capability to say, “Well, here’s something we could just buy off the shelf. Here’s something that is good enough. Does it need to be exquisite? Can we design in?”
Lord Lamont of Lerwick: How do you apply that to GCAP?
Rupert Pearce: A lot of the bird has flown on GCAP because we have advanced things for several years. Anna-Lee, you should jump in here and provide more detail on this. Through the government collaboration, we will provide more of the design work through that Plans and Portfolios. I will have to come back to this group and say, “How much room for manoeuvre do we still have on GCAP in terms of getting that done?” I hope we still have a lot of influence over that. I do not know is the short answer. Over time, I hope that our design agency will do more of the foundational work that in the past has been left to later, and we will do far fewer things that are exquisite or overengineered, or if we do we have good reason for it, and we spiral develop our way to it and take a more modular approach to procurement. There is a lot more we can do through the professionalisation of that early phase of planning into procurement.
The portfolio approach is the other side of this that, hopefully, will root our decision-making in more of a systemic and strategic approach. There are examples across the world of people procuring assets without munitions and bits of systems without other bits of the systems. We can get better at thinking systemically. The portfolio approach is a strategic lens for the NAD Group and Military Strategic Headquarters to look at our capabilities at that strategic level, at what we have and ask whether it is still fit for purpose and going to last as long as we need. It can look at all the programmes—it could be digital, infrastructure or equipment programmes—that need to be brought together to deliver new capabilities. Are they cohering? Are they in lockstep? Are there pieces missing? Will they come on stream at a time that steps us from old to new, and then steps back and says, “What are our adversaries doing? Is this all still fit for purpose? What’s happening in the technology market? Is that disrupted? What are we doing about that?” We do not have that lens today to have those conversations. Once we start having them, and our first quarterly portfolio review happens this afternoon, we will get better at thinking ahead, and the procurement process, I hope, will get better on the back of that as well.
Q25 Lord Grocott: I have a slightly tangential question. In so many defence-type discussions, the word that I cannot pronounce, interoperability, comes into play. It is amazing to me that it is an issue after nearly 80 years of NATO. You would think it would be such a basic thing to make sure that equipment was usable in all member states and whatever is involved in those kinds of decisions. When you are supplied by a big manufacturer, presumably they will have similar dealings with other NATO countries. Does this issue come up or at what stage does it come up in the whole procurement process? To what extent is it a factor? Unless it is sorted out at the supply side early on, it will continue to be a contentious issue for a very long time to come.
Rupert Pearce: I agree. Thank you for your question. As we look across NATO and the world generally, and people stepping up their defence spending in these uncertain times, often alongside that comes a desire for two things. The first is to feed that expenditure into your own economy to drive jobs, growth and skills, particularly as what defence is buying more and more is what other elements of the economy are buying: AI, quantum computing, space, dual-use capabilities and so on. There is a big focus on sovereignty as well, by which I mean not economic but military sovereignty. If we buy this from that country, will it be available? Will it be switched off? Will I be able to get support to maintain the operational ability of that capability? These are really difficult issues to grapple with in terms of procurement and operations.
Set alongside that is NATO and the desire for us to move more quickly, to be interoperable, to fight together and support together. Look at the hybrid navy concept that is so exciting and that the First Sea Lord is leading in NATO with. That is about multinational crewing and training. It is about being able to share each other’s port infrastructure, and to aggregate munitions and roll them on to and off multinational fleets of ships. You look at what we have done with the Type 26 in Norway. It is incredibly exciting in terms of galvanising Atlantic Bastion and Baltic Bastion to push back Russian incursion into our seas. That is a wonderful example of interoperability and interchangeability. We freed up slots in our Type 26 procurement for Norway because it is going to be alongside us. I hope that it will invest in the unmanned vessels that will sail around the manned vessels as well so that we get stronger together.
There is not enough of that kind of thing going on in NATO today, either more broadly or more deeply. We have a lot of activities with other nations. We have Trinity House with Germany. We have Lancaster House with France. We have Lunna House with Norway. The list goes on. We work very closely with our brethren across the pond as well. If you look across NATO, if we are really going to galvanise the power of 32 nations, particularly in areas that are data-centric, where you get the platform economics of the data of 32 nations plus Ukraine, we need to step change this and do a lot more. The UK is committed to that. I am committed to working with my national NADs in NATO and in the JEF to figure out how we can do more together. We can buy more together, we can bring costs down, we can drive resilience through our matériel, and maybe use some of the emerging multilateral financial institutions to support that as well. Maybe we can come back and report on how that is going in the months and years to come. Avril, would you like to add anything to that NATO-wise?
Avril Jolliffe: Yes. The problem, as you outlined, is really clear and complex. It is complex because even within NATO different NATO members have different taskings. Their focus in terms of their capability requirements tends sometimes to not be exactly the same across the whole of the group. As well as the smaller coalitions that we work alongside, we are seeing a real shift in the way in which the national armaments directors across NATO come together, becoming much more outcome and action-oriented, and looking for ways to work together where we can. We have led in a number of initiatives such as the DPAP, the defence production action plan, which is looking at aggregated munition development and production so that we can share that across NATO. In terms of the industrial base, I highlight NIAG, the industry forum, whose plenary is in the UK for the first time this century next week in Portsmouth. We will be a real focal point for bringing together all the key industrial players from across the whole of NATO into the UK and using that as a real opportunity to foster some of those deeper relationships and have conversations with allies across NATO.
Rupert Pearce: In relation to the JEF, the Joint Expeditionary Force of 10 nations that collaborate in the Nordic region in the high north, our leaders have asked the NAD specifically to look at how we can step change interoperability and purchasing together. I will invite my JEF colleagues to meet at the Ankara summit in just a few weeks, at the beginning of July, to discuss that very topic and see whether through the JEF we can lead into NATO and try to do something more profound in this area. It is the only way we are going to get our cumulative capital to work.
Q26 Lord Bruce of Bennachie: My question slightly follows on from Lord Lamont’s question. As you want to strengthen and deepen the domestic supply chain base, can I ask you a little bit about the tendering system? An awful lot of companies that either are not engaged in defence or would like to be but are not sure are pretty fearful of engagement with any government procurement, to be honest. Competitive tendering is very expensive for the tenderers. For a lot of them, that kills it. You put in a tender, you spend a lot of money, and then you do not get the contract. Look at the different ways that Japan procures, which is culturally different, I accept. I can remember a briefing from Nissan that said that as a matter of policy it does not do competitive tendering. It has a supply chain and it works with it organically together to try to ensure that it gets the best outcomes. It takes a little longer, but it gets the quality and the price by negotiation both ways. That cuts across, of course, Lord Lamont saying that you have to get value for money, but you already said in a reply that too much competition can lead to less value for money.
How would you encourage new entrants to be confident that they can engage with you? How flexible can you afford to be? You said you are going to do more shopping, but it is a stage beyond shopping. In other words, it is going to companies that have a capacity, but you want to help their capacity and get them to help your capacity. It is a different dynamic, and it should not just be about money. It is about an organic relationship. Is that something you feel you can develop?
Rupert Pearce: In short, the answer is yes. Let me just frame this. It is a great question. I am going to hand off to Jim, who is doing this. We are passionate about making it easier for smaller companies to do business with the MoD, directly or indirectly. Indirectly, we are working with our primes to make sure they genuinely nurture our smaller companies, setting high standards of behaviour for that relationship. Directly, through our innovation channels and our new procurement pathways, we are trying to make it much easier, faster and cheaper for companies to do business with us. I do not find it acceptable that a smaller company has to bet the farm on winning a relationship with the MoD, and if they fail they go out of business. That is completely unacceptable. It is morally wrong, apart from anything else. It will also force companies not to come near us until they get bigger. We want their technology. We want their capabilities. Apart from anything else, they tend to be among the fleetest-footed, most agile companies. We want those kinds of behaviours in our supply chain because it encourages others to behave that way through force of competition. We are going to do everything we can to make that easy.
That does not mean you cannot compete with them. It just means the competitions have to be well run, much quicker and much lower cost for people in terms of compliance and absolute cost. We ran a competition recently for a novel, low-cost cruise missile called Project Brakestop. We deliberately wanted to seek innovation, so we did not overspecify. We threw a few ideas out there into the ether. Back came 25 companies, 24 of which we did not know. One of them was a Formula 1 company. If you think about it, Formula 1 cars are missiles with wheels. It was one of the winners. In six months, we had three companies on the firing range. That was an incredible success. At every single step, two things were important to me. First, the companies got funded. There were no cash-flow implications to them in engaging with us. We funded them through every step, as the 25 went to seven and then to three.
I also wanted to make sure that companies that dealt with this walked away, even when they were losers, feeling better about the MoD, having learned something, gained something, developed something and feeling good. We helped them even if they did not win that contract. We want them to come back and have another go, or we want them to be successful elsewhere. That is our mindset. I do not think you have to compete everything to show value for money. We have dramatically increased and enhanced our sole source capabilities in areas where we need to move quickly, particularly around innovation. If people come to us with something really innovative, competing that furiously is also very difficult, because why would they come with a good idea if they felt we were just going to compete it out? That is challenging. We need to be able to deal with people where we can show value and show something unusual. Then we need to move very quickly, free of competition as the only way of showing value for money. With that introduction, I hand off to Jim.
Jim Carter: Thanks, Rupert. There are various levers here. We operate under the Procurement Act. There are defence and security exemptions to that Act. Even under the Procurement Act, there are direct award grounds under what is called Schedule 5 in the Procurement Act that we can utilise. National security would be one of those. It is worth taking a step back. Over 50% of our spend will be single source, and that reflects some of these big programmes like the building of submarines where there is a sole supplier that does that. It was a clear recommendation in the defence industrial strategy that single-source regulations were designed at a different time and needed to be reformed to deliver the kind of war-fighting readiness that we need. We are actively implementing those through statutory instruments to improve the incentivisation when outcomes for defence are delivered, to improve our ability to flex for innovation, and to reward suppliers bringing their self-funded R&D to the table.
Rupert Pearce: And specifically targeting smaller companies as well.
Jim Carter: Exactly. We are reducing the burden for smaller companies by raising the threshold where those regulations apply. The SME agenda in terms of strengthening and diversifying defence’s industrial ecosystem is key, with ambitious targets to increase our spend by 50% by 2028. I mentioned earlier that we developed this SME pathway to help officers, but another critical tangible delivery that we have done is the standing up of the Defence Office for Small Business Growth. Behind your question was that it can be hard to navigate the Ministry of Defence. This new organisation exists to help that navigation and to encourage our commercial teams to think about how SMEs can play into this agenda. We are seeing this pulling through. It started small and is going to grow its capabilities. It is working directly with SMEs in terms of helping them. From a procurement perspective, we are also clearly trying to help suppliers, making our contracts more simple and shorter, and busting myths around things like security that can help attract them into doing work with us.
Q27 Baroness Fraser of Craigmaddie: You outlined to us that the key challenge is to scale up at pace and that we do not have the luxury of time to do that. Given this, how do you balance the desire to buy British and secure the best available equipment? Yesterday, CDS told us that we will not get the best value for money if we restrict ourselves. He suggested that, “Nations should be developing capability where they have the expertise”. I could be wrong, but I understand that since 2024 we have procured 3,000 drones, whereas Ukraine is using 200,000 a month. General Anna-Lee, I hope we are learning from not just supplying into Ukraine but tapping into that agility and scale-up that Ukraine has managed to do. What do we mean by British? Over 15% of every F35 that is sold anywhere in the world by Lockheed Martin is made in Britain. How do you cope with this?
Rupert Pearce: That is a great question. It is a balance. The single most important thing that my group has to do over the next five years is deliver the capabilities needed for our war-fighters to deter and, if necessary, to fight and to win, alongside NATO and as part of NATO. Fundamentally, issues of “Buy British” come secondary to that. If we face a hard choice between giving the right tools to our war-fighter or buying British, we give the right tools to our war-fighter. They are the men and women putting their lives at risk. They are the ones protecting our country and the peace from a very dangerous aggressor. That is really easy, in a sense.
It gets harder when it is not quite so black and white. Inside the DIP formation, we are thinking really hard about time versus the industrial strategy component of the SDR. The SDR is an exercise in industrial strategy, in saying we have to be ready and transformed but we also have to have a really strong supply chain to support us, and we also want to use the largesse of government to do this to grow the UK economy, to innovate and to create new British unicorns and global companies. I intensely agree with all of that, but those things come into conflict with each other from time to time. We are working through that in the DIP.
One way of looking at that is to say that in a lot of areas we have ready-made US capabilities. To what extent do we use those as a bridge to the longer term? This is not all just about 2030. You might have an interim solution into 2030 and then project something more British and more European into the 2030s. Then you have the whole issue of working with our allies. I am the SRO for Trinity House, which means I work with Germany around military procurement and matériel together. That has to be win-win. The answer cannot be that we will use German money to create UK businesses. That is not a win-win. It is about creating joint programmes where German industry benefits and we benefit. That is not just about UK sovereign outcomes at all. It is about arriving at a fair solution. We talked about NATO interoperability. That is about making sure that we create centres of excellence across NATO where we can be mutually reliant and have more distributed resilience, economic resilience and industrial resilience. All these issues come into play.
Ukraine is a really good example. I will hand off to Anna-Lee to give you more detail, but I would like to point out that we have gone from nowhere as a country on drones to No. 4 in the world for drone production and drone innovation. Ukraine has been the fulcrum for that. We are in a very strong position as a country in terms of our drone manufacturing and innovation. Just last week, we opened a new drone centre designed to be a system-of-systems centre, and I have ambitions for that to lead in NATO in terms of taking every effector, sensor and decider and hanging it off a system of systems. We need to be able to do that in NATO to really liberate the power of the 32 and learn the lessons from Ukraine, and adopt that into what we are doing in autonomous systems—land, sea, air and space, by the way. I am optimistic about that. You are right; it means we have to leaven issues of sovereignty and building great businesses in the UK with this international component.
I have one last thing to say before I hand off to Anna-Lee to talk about drones. I am a strong believer that strategy is about deciding what you do not do as much as what you do. In terms of our defence industrial strategy, we have to pick a relatively small number of areas where we want Britain to be world leading. We cannot be world leading in everything, so we have to decide where we pick winners, where we build clusters of capabilities and where we invest for success, and not try to do everything. Then we can answer the question about where else we go for these things. Those can be where we collaborate.
Lt Gen Anna-Lee Reilly: I was up at RAF Warton last week. BAE Systems is very proud of its 15%, the £22 billion that it brings to the economy and its 20,000 jobs. Sovereignty means different things, does it not?
Speaking of Ukraine, you mentioned the sheer quantity of drones that it has. We do not need a standing army of drones. We need the ability to be able to innovate at pace and to have the systems and the training systems set up to be able to do that. We touched on the stuff that my team do to support Ukraine. You will have heard of Taskforce Kindred. We procure about 95% of what Taskforce Kindred delivers into Ukraine. Alongside that, there is a taskforce called Taskforce HIRST, and that is very much about UK-Ukrainian defence industrial co-operation. That is super important because it became quite apparent right from the start, speaking to our colleagues in Ukraine, that they are concerned that we need to be ready to fight the next war, and they have the means and wherewithal to be able to help us do that. Therefore, it is not just about one-way technology. To them, it is very much a two-way street.
One thing we have done with that is barrel production—very simple and not particularly technologically advanced. We have started producing barrels at Sheffield Forgemasters for Ukraine, and then on the back of that a UK contract quickly followed. It is super important for both of us. Specifically for drones, Rupert mentioned the uncrewed systems centre of excellence in Swindon that was opened last week. We also have the Brane centre of excellence, and DUSC, the Defence Uncrewed Systems Centre, which is the largest facility in Europe to be able to fly those sorts of drones in practice. It is about having a hub to bring industry together. The other thing we have done is we recently opened a UK business hub in Ukraine with DBT and Avril’s team. That is really important. It is about having UK businesses on the ground, and a place to work from and to collaborate. It is really important for those SMEs that we spoke about before that cannot afford to have their own offices with the security and everything that is involved with that.
There are some important things that might on the surface appear not so cool. One was a project called Lyra. Lyra is really important and probably not one that makes the news. That is a government-to-government framework about exporting Ukrainian technology back to the UK. Under Ukrainian law, they cannot export technology anywhere in a time of war, which you would understand, but we are the only nation in the world that has that government-to-government agreement, which allows them to export technology for us to be able to work on it and then send it back into Ukraine, which has been super helpful. There is lots going on in the UK on uncrewed systems and lots going on in Ukraine. The most important thing is that it is not just about equipment; it is across all the defence lines of development. It is about training. It is about personnel. It is about doctrine. It is how we use them across the whole force and how we make that architecture work together. There is lots of exciting stuff. There is still lots of work to do, but we are absolutely working on it.
Rupert Pearce: Just to cap that, I was very proud that we announced the biggest ever supply of drones to Ukraine last month—120,000 drones to be delivered over the coming year, most of them manufactured in the UK by companies like Malloy, Tekever and Windracers that we can be intensely proud of in terms of what they have achieved. We are in the game and looking to up the game materially in the years to come.
Finally, when we look at what our offsets policy will be—we are running a consultation process at the moment—part of the defence industrial strategy is to ask ourselves: when we do not buy British, is there an offset? Do we require something back from the foreign Government or company that we bought it from? We often find ourselves subject to that. The Norwegian frigates deal we did with selling Type 26s into Norway comes with a Norwegian offset policy for us to put value back into Norway to compensate for the fact that it has bought British frigates from British Aerospace. This is a normal part of a landscape of sovereignty. We are in the latter stages of that offset policy consultation at the moment. That will be one of the tools that we have for international procurement going forward.
The Chair: Thanks. I am conscious we are getting really good information from you and you are wanting to tell us as much as possible, but I am also conscious about our time and your time. If we can keep the questions on my side tighter and your answers tighter, we will get through them all.
Q28 Lord Houghton of Richmond: I have to declare some commercial interests: advising Thales, SecureCloud+, Blackstone Inc, and chairing Defence Holdings plc. I start by thanking you for being here and blowing away some of the misconceptions that are somewhat cynically institutionalised within both, dare I say, these buildings and the media at large. I found it thoroughly encouraging.
My section was meant to be on innovation. We have eaten most of those sandwiches and time is against us. Can I ask you two quick questions? One is on innovation. You now have within the NAD Group defence digital: the alchemy of the digitised force, software-enabled capability, the digital backbone, the kill chain and all that. What is your confidence level that this can be delivered in a sovereign way and at speed given what we have available to hand and the world of regulation and concern about AI and all that? Secondly—you touched on it a bit—the DIP does not solve the problem, but it defines the future challenge. One of those remains financial. What is your confidence of private money coming to public benefit to help resolve the problem, which I think you referred to as a problem of timing as much as money? Just answer those two, and that would be great.
Rupert Pearce: Okay. I am confident that the digital targeting web, by which we mean not just the AI or ML outcome but the foundations of it, are a digital backbone, a proper data strategy and the ability to move data around through global communications networks, across which you run decision-making, interrogate data through AI, and fuse the sensor information in a millisecond with the effector that you use to respond with the manned platform that makes the decision. I am confident that we can make that sufficiently sovereign to have control and to drive tremendous innovation in the UK through our outstanding British companies in this area. Britain is a space power in terms of its capabilities in space. We are a leading communications power. We are also leading in areas like AI, quantum, machine learning, software and gaming. Those things all fuse together to create a digital targeting web worthy of its name. I find when I have discussions with our NATO allies that we are leading here and they want to come in and cohere around us, which is tremendously exciting.
Again, it depends on your definition of “sovereign”. Will we be able to get all of that from companies only located in the UK? No, but we will ensure that all the key pivots, points of control and operationalisation are in the UK. The orchestration has to be ours in the UK. That is the piece I have always worried about in setting up systems. I liken it to those lovely bits of cardboard you get when you order lots of coffee and you can put six coffees in the piece of cardboard. We need to own the orchestration cardboard so that we can pull in and put back application solutions capabilities, and keep them rolling forward and keep competing them to make sure that every element of our modular system is the best it can be. We do not want to end up in a monolithic or controlled environment, which we will be looking very carefully at.
On the financial challenge, I think there is enormous appetite for private capital to invest in defence. You have long-term signals that there are going to be capabilities needed, and that Governments are investing hand over fist. The market in European defence alone is going to grow by £300 billion in the next five years and then another £300 billion in years five to 10. That is investable. There is growth and there is long-term predictability in terms of what people want to buy. It is a great environment in which to bring private capital. People also appreciate that defence is a good investment in terms of returns that can be generated now and from the nature of what is being sold. There are good margins to be made by businesses large and small. That makes defence investable once we can blow away some of the myths around defence.
I also think that the financial community is on a journey to believe that investing in defence is morally acceptable. A lot of ESG rules used to prohibit investment in defence, but now we are in a different world. People are realising that you cannot take peace for granted. If you leave a vacuum, some very unfortunate figures can fill it. We are seeing a change of heart there as well. It is really welcome to understand that the business of defence is not to fight but to deter. We do not want to use these missiles, but we have to have them in order to hold the peace. That is better appreciated and understood now.
That is all good. We are working very hard as part of our defence industrial strategy to create a better environment and a better communication relationship with the financial community. We set up the Defence Investors Advisory Group. That is a forum for the City of London to work with us so that it understands us better and we understand it better. We are launching a defence finance and investment strategy shortly after the DIP, the tagline of which will be “Making defence investable”. It is talking about a whole series of policy objectives and steps that we will take to create an environment in which our supply chain and our programmes are more investable, such as dealing with the debanking of the defence industry particularly for smaller companies.
Finally, we will launch a defence investment summit in the autumn, in which I hope we will be able to make a whole series of exciting announcements about bringing private capital to the business of defence, and we will be able to announce a number of strategic relationships and important partners stepping forward as our strategic partners to help make that happen. When the dust settles on all of that, I hope our supply chain has much better, more predictable access to capital to grow, and that we have more relationships with financial partners in terms of advancing our programmes at pace as well, and that we have created a virtuous cycle on the back of the 10-year DIP to leverage the power of the City of London. When I go around Europe talking about investability, the rest of Europe is very envious and keen to leverage off the City of London. It is an incredible asset; we need to use it.
Q29 Baroness Prashar: Mr Pearce, first I thank you for a very encouraging session. Your team has given us a very good picture of the direction of travel, notwithstanding the challenges that you face. We have been talking a lot about innovation, but I would like to hear about the development of UK Defence Innovation, which was set up about a year ago. You have ring-fenced funding. What progress has been made? How are you going to measure its success? When can we see some tangible results?
Rupert Pearce: Okay, thank you very much; you are right. We set up UK Defence Innovation as the later-stage innovation arm. It is going to pick up innovative ideas and businesses at technology readiness level mid-range through to ready to buy. Its job is to find these businesses and then help mature them, working with the front-line commands. I am a big believer in exposing innovation to the real customer. We have some amazing organisations within the front-line commands—NavyX, RAPSTONE for the Army, the Rapid Capabilities Office in the Air Force, and the same in Special Forces—that are engaged in throwing jelly at the wall and seeing what sticks but from a uniform mentality. In other words, it is something that is golden for an innovator, which is a real customer solving real problems with your technology. I want UKDI to work so closely with those organisations to bring capital and capabilities to those organisations that we become an intelligent development customer, advancing technology to minimum viable product and ensuring product market fit. Those are the two things that, if you can tick, first, we can buy it, and, secondly, even better than that, venture capitalists love it.
I have found that when you stick UKDI, venture capitalists and companies in a room together the magic happens. We ran a “Dragons’ Den” contest for 10 of our most promising young companies recently. The minimum capital requirement they needed was five; the maximum was 60. We thought we might not fill the room, but 150 venture capital companies turned up. Every single company got funded. We turned another 100 venture capitalists away. There is appetite here if we can cohere it in the right way. These are the kinds of early things that UKDI has done. It ran the competition that I talked about a moment ago that gave us our low-cost cruise missile. It has stood up a number of other programmes.
It has £400 million a year ring-fenced. I hope that will survive the DIP process. It is really important that it does. Think of that as a £2 billion MoD-focused venture fund. It is really exciting in terms of what it can do. It has done a lot of work in how it reaches companies it does not know exist. That is hard, but we have some very good ideas on that. I would call out HMGCC, the intelligence community’s vehicle, as having done great work to do that, and we are going to shamelessly follow it to access clusters that get our problem sets into communities that then come back and we get to know. There is a lot of good work going on there. With the money ring-fenced, we have the ability to do some really good things.
The Chair: Thank you. That completes the questions that we have for you today. We may have some more later and may write to you. It would be useful if you could give us a list of the recommendations that have been so far dealt with. In the meantime, thank you very much to you and your officials for coming here today and being subjected to this cross-examination. It has been, as Lady Prashar said, enormously reassuring that so much of the strategic defence review on which I spent so much time is now being implemented and put into practice, and that there is a real genuine change in the atmosphere and the climate about procurement. I hope that when you come again you will be able to reassure us further on that, and maybe by that time the defence investment plan might have been published.
Rupert Pearce: Thank you so much, Lord Robertson. Thank you, all of you, for your time, your interest, your passion for this subject and for your great questions that have drawn out of us, hopefully, what we are doing. I look forward to coming back to this group regularly. As you say, hopefully it will be on the back of a very fast-paced adoption of the DIP and then we are up and running, and hopefully our pace of activity can increase.
The Chair: Thank you very much.
