The MoD door opens a little wider for industry

After years of Thatcherite emphasis on competition and open markets, Britain's defence companies sense a subtle shift in the policies of the Ministry of Defence. The conventions of MoD-speak mean that officials cannot actually call it a change. But cut through the weasel-words, and it is clear the Government is emphasising anew the importance of supporting the UK industrial base and fomenting closer collaboration with European defence companies.

Of course James Arbuthnot, eight months into his job as defence procurement minister, denies that such considerations have ever been far from the thoughts of MoD officials. But executives at the coalface of the defence industry have often wondered whether the MoD really understood the needs of British companies.

"What we do not want to do is give an impression that we want to create a protected British defence industry," Mr Arbuthnot says. "But procurement policy has to take a more systematic account of the industrial issues."

Mr Arbuthnot, an archetypal Tory whose background includes Eton, Cambridge and the law, has worked as an assistant whip, and private secretary to both Peter Lilley and Archie Hamilton, but the MoD is the biggest opportunity yet to advance his political ambitions.

He'll have plenty of work, not least in convincing the defence industry that the Government has the sector's best interests at heart. Recent orders, especially last year's award of a helicopter contract to America's McDonnell Douglas, caused some concern for people worried about jobs and Britain's technological base.

The Whitehall rumour mill has been rife with talk that the MoD was pushed into adopting a more coherent industrial procurement policy by the DTI. Mr Arbuthnot says a sub-committee of the National Defence Industries Council, made up of businessmen and MoD officials, will now have a greater input in procurement decisions.

He acknowledges that the role of the DTI will become more important but denies suggestions of a departmental power struggle behind the scenes. "The DTI is concerned with helping industry, whereas the MoD is British industry's single biggest customer. There is an obvious tension between these two interests. But we are working closely together."

That is why the MoD looks certain to oppose any attempts by British Aerospace and GEC to bring their operations together and create a national defence champion. Negotiations about closer ties appear to have been shelved for the moment. But the issue is strongly tipped to be back on the agenda once George Simpson gets his feet under the table at GEC.

Mr Arbuthnot will not voice any outright opposition to a merger, but the hints are strong enough. "It is no secret that to have a national champion would cause us some difficulty because our long-term interest is having value for money, and having good competition.

"What we are interested in is cross-border mergers between companies in different countries, so that there can be a genuine rationalisation of defence industries."

Mr Arbuthnot acknowledges that in a world of smaller defence budgets, maintaining competition is not always possible. But he rejects suggestions that the MoD's own warship procurement policies have encouraged the reduction in the UK's shipbuilding capacity.

Last month's order for Type 23 frigates is evidence that competition in UK shipbuilding is working, he says. Even so, analysts believe there was only ever going to be one winner for the order, GEC's Yarrow shipyard, because rival Vosper Thornycroft no longer has the facilities.

"The award of the order was the result of a competition, and Yarrow won by putting in a significantly lower price," Mr Arbuthnot says. "The fact that one of them won does not mean the end of competition."

Even so, he is clear that MoD orders alone will not keep UK shipbuilding afloat. Vosper, Yarrow and VSEL will have to continue to diversify if they are to survive, he says.

With the defence industry in such a state of flux, the procurement ministry is a department where an ambitious MP can make his name - or break it.