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Thursday 24 May 2012

Wednesday, 1st February 2012

The MoD wastes another opportunity

[i-1_fullsize]Today’s White Paper on defence procurement makes disappointing reading for the UK defence industry — and for anyone who believes that one of the lessons of the last few years is that we need a more active industrial policy. IPPR set out the case in a recent report on globalisation, arguing for sustained support for industries, like defence, which have high potential for growth, for exports, and for high-skill manufacturing jobs.

We need robust safeguards on the sale of defence equipment to repressive regimes, as well as greater transparency on government lobbying to avoid a return to the bad old days of the Pergau Dam — or minor embarrassments like David Cameron’s attempt to rebadge an export drive in the Gulf as a tour of the Arab Spring. But we also need clear and unapologetic government backing for a sector which, as the White Paper notes, employs 300,000 people and is a major player in a global market valued at £260 billion.

In that respect, the timing of the White Paper could hardly have been worse. Yesterday brought the bad news that India has awarded preferred bidder status for its $10 billion-plus fighter contract to France’s Rafale, in preference to the Eurofighter Typhoon in which Britain’s BAE has a major stake. The White Paper makes the usual noises about ministers ‘doing their utmost’ to support exports, but privately many in the industry are disappointed by the lack of help — especially given ministerial rhetoric in 2010 around reshaping our foreign policy around trade. That rhetoric always looked somewhat simplistic, and David Davis’ intervention at PMQs today, linking the Indian decision to our aid programme, was equally anachronistic. But ministerial activism is important, and the government’s record so far is underwhelming.

As for the White Paper itself, despite the clear sense of the ‘the size of the prize’, the government’s response lacks both imagination and ambition. Any assessment of this area must be tempered with an acknowledgement of the difficult situation ministers inherited, in terms of the gap between the MoD’s budget and its future equipment programme — as I was at pains to do in my review of the SDSR last year. But however bad the predicament, at some point ministers have to take responsibility for the way they have handled it. Most obviously, the first thing they did was increase the ‘gap’, by deciding to cut the MOD budget by 8 per cent in real terms over four years. This was an understandable choice — why should defence escape its share of the burden of tackling the deficit? — but it was a choice nevertheless. Second, and less forgiveable, was the way the SDSR flunked a once-in-a-generation opportunity to take the decisions needed to reform defence, at a time when ministers could have blamed the bad news on their predecessors, as well as exploiting the powerful new narrative around the deficit and public spending.

The SDSR was an ideal moment to tackle the real drivers of the overspending and mismanagement which have characterised the MoD for decades: the bureaucracy, the inter-service haggling, the failure to prioritise, and the lack of professionalism in specifying and managing contracts. The SDSR should also have cut deep enough to create the head-room to allow a more strategic and responsive approach to future investment. Instead, we are left with the MoD trapped in the familiar cycle of annual budget crises, and an industrial strategy which fails to give defence companies the clarity they need to guide investment. ‘Saying we don't know what we want, and we are broke anyway’, as one sector expert said to me today, ‘is a way to guarantee that you don't end up with any indigenous defence capability’.

Labour’s Defence spokesman Jim Murphy responded by urging ministers to commit that equipment will only be procured from overseas if it cannot be upgraded here, to protect skills and intellectual property as well as ensuring that UK requests for upgrades don’t get put to the back of the queue by foreign companies or governments. That would be a good start, but the government should go further. With unemployment at historic highs, now is the worst time for Peter Luff, Minister of Defence Procurement, to announce that ‘the MoD would no longer consider wider employment or industrial factors as it assessed whether a piece of equipment offered value for money’. A better approach would seek to build on examples like the recent contracts for Armoured Fighting Vehicles (here and here), which fostered genuine competition from suppliers here and overseas while taking appropriate account of the impact on UK industry and jobs.

Finally, the difficult state of the MoD’s budget is no excuse for the poverty of ambition on R&D, particularly two years into a new government. Luff tried today to make a virtue of his ‘guarantee’ that R&D spend won’t fall any further, but 1.2 per cent of a shrinking budget is hardly something to boast about, and compares poorly with our competitors.

This long-awaited White Paper was a second chance for the government to demonstrate its seriousness about tackling the real problems in defence procurement. Instead we got feeble commitments of support and simplistic rhetoric about ‘buying off the shelf’ in a hypothetical ‘open market’ which, in relation to large defence equipment programmes, simply doesn’t exist. Another opportunity wasted — for Defence, and for one of our better prospects for export-led growth.

Matt Cavanagh is an associate director at IPPR.

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