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5.43 pm

Mr. Stephen Hepburn (Jarrow): As a member of the Select Committee on Defence, it was my intention all along to speak in this debate, as the Committee has

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devoted a great deal of effort to procurement issues, and specifically to the lessons learned from recent engagements by our armed forces throughout the world, but the announcements made by my right hon. Friend the Secretary of State give me an ideal opportunity to comment on his procurement decisions and how they affect the area that I represent in the north-east.

I extend the warmest possible welcome to the decision to award the contract to build the alternative landing ships to Swan Hunter on the Tyne. It is good news for the armed forces because, as my right hon. Friend said, the current provision is over 30 years old and in desperate need of replacement, but it is especially good for the workers on Tyneside and those in my constituency who will benefit directly from the work in that yard.

The order will create about 2,000 jobs on Tyneside. Workers who are at present scattered all over the world, not just the United Kingdom, will get the opportunity to come back and work in their home town. Moreover, more than 500 extra jobs will be created in the external economy, thanks to the economic activity in the area. That is great news.

Probably more important than any other factor, however, is the creation at the Swan Hunter yard of 100 apprenticeships. Skilled workers on the Tyne average 50 years of age, and the figure is rising, so those apprenticeships are crucial. The fact that the average age today is 50 does not mean that it will be 51 next year: the cyclical basis of the industry means that the average will be 53 in a year's time.

The decision announced by my right hon. Friend the Secretary of State today is crucial. It will stabilise the shipbuilding and repair industry on the Tyne, and it will pave the way for additional Ministry of Defence contracts--possibly for the manufacture of aircraft carriers--in the future. The order is therefore excellent news for Tyneside.

However, it would be wrong of me not to voice my concern at my right hon. Friend's decision about the ro-ro contracts. I have had meetings with my right hon. Friend about them, and I have also mentioned the issue twice in debates in this House. I have also asked a parliamentary question on the matter. No explanation that I have been given of why the private finance option was taken has convinced me that the decision would be helpful to British industry.

I welcome the fact that part of the order is going to Belfast. The creation of 500 extra jobs there is good news for the area's economic viability and for the peace process. Many of my colleagues who work in the north-east shipyards also work in Belfast, where they have made friends for life with their co-workers in the industry. Yet the decision about the four remaining ro-ros should be questioned. The industry in the UK does not share a level playing field with that on the continent. People who work abroad will confirm that, as will business leaders and trade union leaders.

To place a multi-million pound order, and the years of work involved in it, with a European contractor, at the expense of workers on the Tyne, the Mersey, the Clyde and the south coast is indefensible. I would love to know what other European country would do that--I do not believe that any would.

The order for the four ro-ro vessels is going to Germany, but is my right hon. Friend aware that the bulk of the work will probably be done in Poland, where there

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is a cheap labour regime? To understand how firms in Poland undercut British industry, one has only to look at the contract that is being proposed.

There should be an investigation across the political spectrum into initiatives that have been funded by means of the PFI. Is it in the taxpayer's interest to export the jobs involved in the order abroad? I know that my right hon. Friend was under intense pressure from civil servants, but recent developments have taught us that they are not always correct.

My hon. Friend the Member for Walsall, South (Mr. George), who is Chairman of the Defence Committee, said earlier that the Committee was told in evidence from the Ministry of Defence that the ro-ro ships would not be classed as warships. Those ships will operate in war zones, and it does not take much imagination to understand that vessels working in areas of conflict should be designated as warships. I believe that the advice given to my right hon. Friend the Secretary of State was wrong.

My right hon. Friend has confirmed that the ro-ro vessels will sail under a foreign flag--except in times of conflict. I am led to believe that the consortiums building the other vessels gave a guarantee that the crews on those ships would be British and would sail under the British flag, and that they would belong to the RMT union. Those are the options for Glasgow, Tyneside and Merseyside.

It is acceptable in peacetime that the vessels should be able to work around the world and under foreign flags, with their foreign crews earning their wages for being involved in fruitful employment. However, in times of war, when it gets dangerous, British lads will have to crew the ships. If it is right for them to work when it is dangerous, it should be right for them in times of peace to make money for themselves and their families.

This policy flies in the face of our maritime policy. Under the leadership of the Deputy Prime Minister, a tonnage tax was introduced that was linked to training and employment, and the employment of British crews under a United Kingdom flag. Flying under a foreign flag goes against that policy.

I appeal to the Minister to scrap the whole thing. The Government should go back to the drawing board and come up with a design that can be classed as a warship. No one is saying that the order should not be awarded to Belfast, the south coast or Tyneside--as long as it is awarded to a British yard so that we can get the benefit.

There are examples: the replacement for the Atlantic Conveyor, which was sunk in the Falklands, was built at Swan Hunter and paid for by public money. It was given to P&O, but was always at the call of the British military for use in times of conflict.

Notwithstanding that, I do not want one daft decision on ro-ros to overshadow today's great announcement for Tyneside as far as jobs are concerned. There is no doubt that the order for Swan Hunter is good for Tyneside. It stabilises the industry, gives the north-east economy a shot in the arm and sends the message that Tyneside has a future in shipbuilding and ship repair. However, I ask the Secretary of State to think again about ro-ros.

5.51 pm

Dr. Alan Whitehead (Southampton, Test): I wish to speak about a specific area of current defence procurement--the type 45 destroyer programme. I do so

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as a Member of Parliament representing a Southampton seat, because the Vosper Thornycroft yard is in Southampton.

First, I wish to say a few words about how I see the current state of defence procurement. It will not exactly hit the headlines, but there is a stark contrast between the Government's overall approach and the previous Government's woeful record. The previous Government appeared to have a blind spot on defence procurement. It was always curious to me that at the same time as they were announcing draconian penalties for local authorities which had marginally stepped out of line on compulsory competitive tendering, they were tolerating huge overruns on contracts, inadequate competition safeguards, sole tender contracts and all sorts of practices in defence procurement. Collectively, that meant that far more was spent on equipment than was necessary and far longer was spent completing contracts than should have been tolerated. The result was that there was far less investment and equipment than could have been the case.

The recent National Audit Office report on the cost overrun on 25 major projects suggested that about £3.2 billion had been spent on those overruns which could have secured more than half of the projected type 45 destroyer programme. That is the extent of the overruns that the previous Government appeared happy to tolerate.

The overall design of the type 45 programme is the result of smart procurement--the idea that we get better value and that contracts are completed more quickly by paying closer attention to procurement, ensuring that competition is sound and procurement is carried out in a best value regime. However, a problem arises when we apply smart procurement to the type 45 programme, because only two companies could build the vessels for the programme. The question is how to ensure good value and effective competition when there are only two tenderers. In this sense we get into game theory--the so-called prisoner's dilemma and chicken. It becomes difficult to envisage real competition when there are only two tenderers; both are likely to know the moves of the other but will not necessarily have the same starting point in their tendering practices.

With a programme of 12 ships to be tendered for over a period of time, there has to be competition over the life of the bidding. It is no good simply having a competition at the beginning of the bidding, after which the rest of the competition goes out of the window because one of the competitors may not subsequently be able to compete.

Again I quote Sir Robert Walmsley, who has been mentioned this afternoon and who said, very appositely, to the Defence Committee last year:

He was clear about the need to ensure proper competition throughout the building of the 12 vessels and about the fact that Vosper is, and will be, an important part of that competition.

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The design that the Government have gone for for this complicated contract and to solve the problem of two tenderers only, is to eschew a straight bid for ship one, which might save some money in the short term but would be disastrous in the longer term, and go instead for a prime contractor for the first three vessels. Vessels one and three are to be built at Yarrow, while vessel two is to be built at Vosper's, but modular work on vessels one and three will be carried out by Vosper and the design and engineering will be shared between the two yards, so that, by the completion of ship three, both yards will have shared the work about 50:50. Most importantly, both yards will have shared the learning curve so that they can compete on an equal playing field for the vessels thereafter.

By the time that the yards have to bid for vessels four to 12, as Sir Robert said, all involved will have a realistic chance of winning. That is the idea of smart procurement as it is applied to that contract. In principle, that seems a sound system and a sound method of ensuring that the 12-vessel contract can be procured at the best value for the British taxpayer.

What if the prime contractor is also the owner of one of the two yards scheduled to build the first three vessels, however? That is the case with the type 45 contract. This is a hypothetical temptation, but I can imagine it being very real. Rationally, as a business, the prime contractor's goal would be to gain a monopoly over the building of the 12 vessels if possible. Indeed, the rational action to take in that case would be to ensure that the competition was not in a position to tender after three vessels, or better still, was not in a position to complete the work on the first three.

Appearances certainly suggest confirmation of that strategy. I am not saying that that is the case, just that it appears that way to me on the south coast and to some people who are involved with Vosper's shipyard. Vosper and Yarrow were asked to put in a price to the prime contractor for the work. They know each other's prices and are collaborating on the work. The prime contractor said, however, that the prices were too high, even though the productivity gain in the prices submitted was, I understand, unprecedented.

That is the equivalent of a poker game between two players when one has a limitless line of credit with the casino owner and the other has only the chips that he brought to the table. The object in those circumstances might therefore not be to win with the best cards but simply to drive the opponent away from the table because one has superior betting power.

That is a real problem for the strategy as far as the Government are concerned. It is certainly a real issue for the 600 workers at Vosper's yard who have had precautionary redundancy notices served on them because the signatures on the dotted line are not there between Vosper and the prime contractors despite the Government's good intentions.

The danger is that if the process drags on too long--whether accidentally or deliberately--Vosper will have to declare those men redundant. As the hon. Member for Eastleigh (Mr. Chidgey) said, after that it would be difficult to get back to the starting line to compete for

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a contract. Then, we would end up with a monopoly contractor, which is the opposite of what the Government intend.

It may be said that this is not an issue for Government because it is an internal matter between the prime contractor and its subcontractors. Indeed, the Secretary of State suggested that this afternoon. However, given the specialised and very restricted circumstances that I have mentioned, it is an issue for the Government. The outcome of an internal decision to procrastinate on the contract can overthrow the entire admirable and supportable smart procurement structure that the Government have set out for type 45s.

It is important that the Government ensure that the prime contractor lets the contracts on time, and with Sir Richard's words firmly in its ears. I do not know the small print and detail of the prime contract with BAE, nor whether the Government have already taken action, but I suggest that they should do so and ensure that the small print is adhered to. I would welcome hearing the Minister's thoughts on that in his reply. There is a real possibility that smart procurement, with all its manifest advantages will not work in the specialised circumstances of the type 45 programme. That will be desperately sad for the 600 men who would lose their jobs at Vospers but, more important, it could be very costly for the United Kingdom defence procurement programme and might force a return to the inefficiencies and the regime that we have thankfully got away from with our smart procurement programme.

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