Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)



  Chairman: Sir Robert and Mr Coles, welcome to our annual joust. We are playing at home today as opposed to travelling at exorbitant cost to Bristol. I am surprised you have any visitors in Bristol with the price of the tickets. You know we have three sessions dealing with our major procurement projects inquiry and this is the first of the three. The Minister will be coming at the third session. We will finish at 12.30. If you wish anything to be said in private, because I know there are a number of sensitive issues, not necessarily in terms of national security but things that are commercially confidential, please indicate you would prefer to answer those questions in private and we can set aside the last 10 or 15 minutes for a private session.

  Mr Jones: Just to declare my interest in terms of the register of members' interest, I am a member of the GMB trade union and they did sponsor my election campaign last June.

  Syd Rapson: I have an interest to declare being a member of the ACEU Amicus union which potentially might have an interest in the yards affected by the warship reorganisation programme. I represent Portsmouth North so I have a direct emotional interest but no financial interest. I should explain that this is a depleted Committee. Some Honourable Members are on proper business elsewhere but two in particular have chosen to stay on the Council of Europe in the European Union. I was a member of that body and my policy determines that you cannot be on both the Council of Europe and the Defence Committee. Defence is an important Committee and I had to make a choice. Unfortunately, we have had four sessions of this Committee this week. This is our fifth. For Members to choose to be on other parliamentary duties at will when there are substitutes for them, I think it is a sad reflection.


  1. Thank you. We have a maritime flavour to our session today. Later on we will be discussing the warship support modernisation initiative with implications for the support of ships once in service. First of all, I would like to examine possible changes that may arise on the warship procurement side. The study on warship procurement that you commissioned from RAND appears to have major ramifications, not just for the Type 45 destroyer but for many of the MoD's warship programmes into the future. When will the report be published? I hope we have an advance copy because we send advance copies of our reports to the Ministry of Defence. It will be kept confidential until the time of publication. Secondly, Sir Robert, what do you think are the major messages or lessons at this stage for the way that the MoD goes about warship procurement emerging from that RAND study? Linked to that, what makes shipbuilding so different from other defence industries that it requires its own strategy? RAND; difference between shipbuilding and lessons emerging at this stage in time from the RAND study.
  (Sir Robert Walmsley) I know that you appreciate crisp answers. I am afraid the scope of the questions you have asked me is going to make that rather difficult.

  2. If there is anybody behind you that could add anything, please feel free.
  (Sir Robert Walmsley) I am sure they could add plenty. They are here to support me and particularly to correct anything I say that is factually wrong because there is quite a lot of information to try to recall. The first question was when did we institute the RAND study.

  3. No, but we would like to ask that also.
  (Sir Robert Walmsley) Last spring. We did it because we could see that the Type 45 procurement strategy was not delivering results. I think it is reasonable for me to outline what was going wrong. We placed the prime contract with BAE SYSTEMS for three ships and associated contracts for the major equipment for six ships in December 2000. That had a design office established at Scotstoun in the Yarrow shipyard on the Clyde. That prime contract office had staff from both Vospers and BAE SYSTEMS in it and they were working harmoniously together. The purpose of having both shipyards present there was to ensure, as the design developed, that neither shipyard was excluded as a result of being asked to lift too great blocks or whatever. The design was to be well adapted to the construction techniques of both shipyards. At December 2000, the design maturity was such that there could be no very specific shipbuilding subcontract placed by the prime contract office on either Vospers or BAE Marine. Since we placed the prime contract in December 2000, it is not surprising that the design maturity was not tremendous. What we were looking for is what is called a risk sharing agreement between the prime contractor, BAE SYSTEMS, at corporate level, and each of the two shipyards, BAE SYSTEMS Marine and Vospers. That would require them to take a risk at the shipyard that work had to be added to the specification as presented to them early in the year 2001. We were unable to persuade the prime contract office and the shipbuilders to share that risk. That meant the strategy was going nowhere in the spring and we had to decide whether our ideas for competition were right or whether we were, as I think I have been accused of doing in the past, flogging a dead horse.

  4. Or flogging it to France.
  (Sir Robert Walmsley) That thought had not occurred to me but I understand why you make the point. Sometimes when you have been pursuing an idea for a long time, which was essentially to build ship one and three on the Clyde with bits from Vospers who would also build ship two, and then to have a winner takes all competition for subsequent ships, you do get stuck. I have been very impressed by the RAND Corporation, which is a non-profit making California based think tank—perhaps not a very good advertisement in your eyes—and the work they have done for the United States Department of Defense during the year 2000 on whether or not it makes sense to introduce competition into the Joint Strike Fighter programme, clearly a matter of huge interest to the US DoD and indeed to us. I understood something of how this work was conducted because RAND had included me amongst the people they had extensive discussions with. I was impressed with the people, with their business models that they used to assess whether competition was a good idea or not and when RAND Europe was established in spring 2001 I picked up the telephone and asked if they could send the same people to give us some advice on the Type 45. That is where this all came from. Were we stuck on a competitive procurement strategy? Was it a good idea? There was one group of people, who are very good value because they are non-profit making, with experience of assessing head to head competitions and whether they deliver value.

  5. The specialists from RAND in Santa Monica and Washington then supplemented the RAND Europe staff because the expertise was in the United States, I presume?
  (Sir Robert Walmsley) That is exactly right. RAND Europe were the contracting vehicle. It is much more attractive for me to do business with a European company. We wanted the American expertise to be US based, computer business models which showed what competition essentially does for you.

  6. When will this report be published?
  (Sir Robert Walmsley) The report was prepared on the basis of interviews with five UK shipyards, BAE SYSTEMS Marine, Vospers, Appledore, Harland & Wolff and Swan Hunter. Each of them agreed to give commercially confidential information. We have just this week had the replies back from the shipyards as to what information they would require excised from the report or sanitised in some way before it is published. It is now in our hands, the timetable. I am chancing my arm because we have not had time to look at the volume of all these comments. It will be published long before the parliamentary recess and placed in the House of Commons library. It is fewer than 100 pages long. I think it is a good read and it has a lot of commercially confidential information that we have to comb through and get rid of.

  7. I do not know when it will be published or what our timetable is but as it is going to be such an important report I hope we can have some opportunity of meeting you, formally or informally, to discuss the report and which parts of it you are going to accept. What will be the transition from these recommendations to policy being devised and decisions being made?
  (Sir Robert Walmsley) Some of the decisions which this report was intended to help us frame have already been taken, most obviously the Type 45. Because I knew this was a critical point, I wrote down the conclusion of this amazing body of work which has caused some wry smiles amongst those who have been outside it, but I found very reassuring. This is RAND speaking: "We estimate there is roughly an even chance that competitive production of a Type 45 at two shipyards would yield about the same overall cost as sole source production at one shipyard. There is no definitive answer as to whether competitive or sole source production would likely lead to lower costs."

  8. How much did that brilliant piece of analysis cost you? You could have worked that out yourself and saved money. I have not read the report but that seems to be classic Civil Service language saying the decision is over to you.
  (Sir Robert Walmsley) If you compare that with the robustness of their conclusions about the Joint Strike Fighter where they were absolutely against the introduction of competition, I found this slightly reassuring because we have persuaded ministers that a competitive strategy was good, partly to not put all your eggs in one basket and partly we thought it would probably lead us to lower costs. Here were RAND validating that initial strategy, not saying it was obviously right, but certainly not saying it was wrong. We were still stuck with the same problem as we had before. The RAND report went on: "Allowing each shipbuilder to build the same section of blocks of all 12 ships not only keeps both companies involved in building warships but also takes maximum advantage of the lower production man hours due to learning." RAND did the studies and that was the key to unlocking the Type 45 build strategy which I think you know moved from being a head to head competition between Vospers and BAE SYSTEMS for ships following ship three, which would potentially lead us into a situation where the loser went out of the warship building business into allocating the same blocks from each of up to 12 ships to specific shipyards. The strategy we now have soundly based on this RAND quantitative, data based study is that Vospers will build virtually all the ship forward of the bridge, both masts, the funnel and the upper works. Barrow will build the engine rooms and, after ship one, will do the assembly and Clyde will do the stern and the ops room.

  9. It seems like a T&G commission.
  (Sir Robert Walmsley) That is the reason why it is so important to have numbers underpinning our conclusion that this was an economical way of approaching the Type 45 programme. It still took quite a bit of negotiating with the shipyards but I felt comfortable that we were not flogging a dead horse of head to head competition and that we had a strategy which looked a good way of keeping two companies in the warship building business.

  10. What about the other shipyards? Did the strategy give any encouragement that there will be more than two surviving?
  (Sir Robert Walmsley) Probably not. I do get contacted by other shipyards from time to time but I draw a distinction between a destroyer—the complexity density of a destroyer I would say is higher than of any other ship, other than a nuclear powered submarine. That means that warship building skills are absolutely critical to these. I think they are called surface combatants now. The situation we have therefore is that we have to retain shipyards with these special warship building skills, outfitting, weapons SYSTEMS, lots of computers etc; whereas the other three shipyards consulted, Swan Hunter now engaged on building the ALSLs, the logistic ships, Appledore building survey ships under subcontract to Vospers and Harland & Wolff building two roro ferries, instinctively they are completely different types of ships. Survey ships do have complicated echo sounders but apart from that no weapons. The other ships are effectively cargo carriers.

  11. What makes shipbuilding so different from the other defence industries so that it needs its own strategy?
  (Sir Robert Walmsley) A number of features. The first one is not an analytic one. The word "emotion" has already been used this morning. There is no question that people feel a loyalty to shipbuilding that is not felt with car factories or aeroplane factories. Do not ask me why. Perhaps ships being called "she" is an indication of how people feel about them. Second, there is no reciprocity in the shipbuilding industry. I have not yet seen a foreign country with a shipbuilding industry being prepared to seek tenders from the United Kingdom to build warships. I do not find it very easy to contemplate giving them the opportunity to build our warships if there is no possibility of reciprocity on shipbuilding. I accept that that answer is somewhat conditioned by my first answer. The third point, which is a more analytical point, is that the design content of a ship build is low, relative to the unit production cost roughly speaking equal, whereas the unit production cost of an aircraft is far less than the design cost. We have been forced with aircraft programmes and missile programmes where there are very large, development contracts to go into international collaboration, to share the non-recurring costs. There is no real incentive to share the non-recurring costs of a ship design because the design costs are so much less. I am trying to create the impression that in many of our other defence industries, we have been dealing in international business and that forges international, industrial relationships which tends to encourage this international type of procurement. A final point is security. Integrating a warship's weapon equipment does require absolute disclosure of performance of all the subSYSTEMS. A lot of trade offs have to be done. Should we have a bigger gun or a more effective missile system because we cannot have both because there is not the space in the forecastle of the ship. Those types of discussions are simpler and therefore more efficiently conducted with national contracting authorities. None of those is a clear cut, black or white answer but they are factors which have influenced it.

Mr Jones

  12. Sir Robert, I do not envy your task because the situation the warship industry finds itself in now is as a direct result of the decisions taken in the eighties in terms of procurement, in terms of ending up with one main contractor. When I was involved with Swan Hunter we felt the effects of that in terms of Swan Hunter being taken out of the warship building industry and it is interesting now that they should get back into it. I accept what you say about BAE SYSTEMS being our prime contractors contracting for warships and the nature of the industry these days. I remember the days where a shipyard was awarded a contract and it got everything from building it all the way through to putting light bulbs in. Those days have gone now. You are possibly talking about coordination between a number of defence contractors actually building a large warship these days. You are trying to get competition CVF which I know the Chairman has a down on but BAE SYSTEMS are not a British owned company any more. What you are trying to do in terms of subcontracting work around the country—is that not a way of keeping the capacity going especially because the nature of some of the contracts you have now is you can build a module here and hook them together as a way of keeping that competition going in terms of keeping the yards like Swan Hunter and Vospers working. I think we should take this into consideration as well, the jobs implications not just for Swan Hunter but for all these shipyards in terms of sharing the work around so you can have one prime contract but a lot of work could be done in different yards around the country.
  (Sir Robert Walmsley) There is a lot in that. It is hard to give a quick answer. First of all, sharing work around as a simple concept is not a good idea unless you can demonstrate the benefit of doing so. It nearly always leads to fixed overheads being attributed to thinner streams of work which adds to the aggregate, overall cost. The RAND study took account of those effects. It was very clear that manufacturing the same blocks in a shipyard for a whole class of ships did give this learning curve improvement. Sharing it around has to be done in a very determined way with a clear strategy behind it.

  13. It is quite common in the oil industry, is it not?
  (Sir Robert Walmsley) I have spent some time on the oil rig construction industry. It remains a bit of a mystery to me and I sometimes think a bit of a mystery to some of the people engaged. They take their decisions for their own reasons and they are hugely influenced by the timetable for starting production which is when they start to get their money back, so they will do things in order to shorten time to production starting. I do want to get across the idea that none of this is intended to dilute my own commitment to competition. Competition stimulates innovation as well as grinding out costs. There is something there about looking for better ways of doing things. What is difficult for me to do is to rationalise an idea that we are prepared to forego competition today—that is to say, keep the work spread out—in order to generate the possibility of competition at some stage in the future. That is denying yourself something you want in order to retain a possibility of having it in the longer term. I admit that sitting behind this strategy that we are adopting for the Type 45 lies the concept of a different type of competition which is a competition for ideas which says, "If he is producing constructed warships for far fewer man hours per tonne than you, why should we go on giving our business to you?" That provides an incentive even with distributed work for both shipyards to continually improve their performance.

  14. Is not the ultimate aim that you end up taking capacity out of the industry like Swan Hunter and you have invested huge amounts of money in Swan Hunter and they are in a position where they can tender for work. They cannot do what Swans used to do in terms of design teams, but I know there is a tightrope in terms of competition to make sure you have capacity but if you over egg the competition too much is not the danger that you end up where you are now? You will only have one or two yards who can provide it.
  (Sir Robert Walmsley) It is not likely to be cost efficient to distribute the work in a carefree fashion. We do not need more capacity than the capacity that we are currently going to use for the Type 45. There is no particular advantage, it seems to me, for the Ministry of Defence artificially maintaining capacity which just generates costs. I still come back to not putting all our eggs in one basket being a good thing. I can see the point of having two people involved in warship building but I do not see any advantage in retaining more than two. These both are commercially strong companies. We would not have shared the work out between two companies who were not commercially capable of sustaining the warship work. I am a great admirer of Mr Kroese at Swan Hunter but he has not invested significant sums of money. He is so successful because he invests extremely small sums of money to deliver huge productivity improvements. I have been very impressed by the fact that he has used shipyard workers to build the new dock for the building of the ALSL. Digging a hole for himself is how he sometimes puts it and using his own money. When you are using your own money, you do not invest huge sums of it. You hire in etc. I am very impressed with what is happening at Swan Hunter, but that is not creating a warship building capability in the round in terms of design offices.

Syd Rapson

  15. Coming from Portsmouth, we have a different view of the process and we are very grateful for the RAND study and the outcome. We were championing Vospers and they have a fair slice. We are very pleased. I am coming from an attitude of gratefulness. The RAND study has gone into some depth about taking up competition in a certain way which is fairly unique. It appears to be for the present. Is there in future going to be a reimposition of competition if you can see that would make things better, or are we going to be using the RAND proposals as a backdrop for everything we do in the future? Is it completely black and white?
  (Sir Robert Walmsley) I would not rule out reverting to competition for some ship production. If we wanted cargo ships for the Navy, I imagine that you could see Swan Hunter, Appledore or Harland & Wolff being able to bid to do that. We would think very carefully before we decided not to use competition. It does stimulate innovation and drive costs out. People find new ways of doing things. For warships, as a result of the Type 45 strategy, I cannot remember a time when there has been a longer running contract placed with either Vospers or other marine yards. They have certainty on which to plan because we should remember that we have the biggest Navy in Europe but we are by no means the biggest exporter of warships, surface or submarine, in Europe. This is a challenge for the shipbuilding industry. We should be doing better in terms of securing warship export business. The Type 45 gives a platform and both companies can look for a certain future from the Ministry of Defence over a long period. Of course there will be some uncertainty about it but the Type 45 should be enough to help launch some export programmes. I very strongly believe that we should be able to do better in that respect than we do currently.

  16. There is 60-odd per cent over capacity in shipyards, as I understand it from a recent study. That is an enormous over-capacity. I know we are guessing but competition involvement in the future might be able to cope with that. There seems to be an enormous over-capacity which cannot be resolved other than by reducing the employees by a vast amount in this structure. You think the competition might be able to still keep people employed with that over-capacity?
  (Sir Robert Walmsley) The difficulty I have with that is that competition does not keep the loser employed. If you allow competition to kill off one of two effective companies, then you have no competition for ever. The Type 45 strategy retains an element of competition, a needle if you like, between two yards, each of whom are trying to perform better than the other, without putting them into a head to head, winner takes all, loser disappears situation. I think it is quite constructive. The same problems are arising in the United States and they have not solved them. The same problems are arising in other countries. We are all trying to face up to this issue. It does mean that the capacity is more distributed than it probably would be if you wanted to go to one set of overheads, pushing everything through one yard, but I do not feel comfortable with having all my eggs in one management basket.

Mr Roy

  17. Your memorandum acknowledges that the unsolicited BAE proposal for them to build all 12 Type 45s would have been cheaper than the strategy that you finally adopted. We are very interested to know why you came to the decision you did and why you rejected their original proposal.
  (Sir Robert Walmsley) Two reasons, one of which is a straightforward, commercial one. The unsolicited proposal—and it genuinely was unsolicited; it was a very unwelcome complication in our lives at the time—attached certain conditions about other programmes in order to generate the cost savings. This was an absolute compendium of how, if virtually all warship building activities for ever and a day went into BAE SYSTEMS Marine, everything would be great for us in the long term. Attaching those conditions to it really was signing up to quite a major shift in our policy which was to distribute warship building for competition reasons and also, for the strategic benefit of , just having two groups of people engaged in the same activity. The first thing was there were conditions attached to it which looked very unattractive to us in the long term. The second point is that if you look at Barrow, which was going to carry a far greater component of the Type 45 programme than it is currently going to do under this strategy which puts quite a lot of work on the Clyde, there was going to be enormous congestion in the shipyard between pieces of Type 45 destroyer going to Devonshire Dock Hall and pieces of nuclear powered submarine and quite a small clearance between them. There is nobody that I know who is a bigger expert on congestion in Devonshire Dock Hall than Mr Coles. It did not look to me or anybody who knew anything about defence programmes that either Astute or Type 45 would not have to have much of a hiccup for the whole place to come to a grinding gridlock.
  (Mr Coles) In relation to the Trident programme, because the pieces came in at the end, any disruption to production brought the whole thing to a standing start because you could not move things around. We used to plan in those days 18 months ahead where pieces would be to ensure that production would flow. If you bring on top of that a larger vessel, the chances of having a hiccup and not being able to fix it can mean the whole thing comes to a grinding halt.


  18. If it is all clogged up, should you have moved there in the first place?
  (Mr Coles) You need to have your throughput planned meticulously and thoroughly and have some give in the system; otherwise, you are blocked up for ever, or for a long time.

Mr Roy

  19. Why have you only extended the first batch to six vessels? Would not prices be lower for a larger batch of, say, the whole 12 vessels?
  (Sir Robert Walmsley) They certainly would but the flexibility of the defence programme would therefore have been seriously reduced. We have the conditions for pricing the ships beyond ship six very carefully linked to the productivity that we have secured in this first order. We have some of the benefits that you have hinted at but the consequence of ordering 12 sets of the missile system equipment, 12 radars right now, when we have not seen one working yet is a big thing to do. By going for six ships, we have given economies of scale and by locking in the productivity on the second six that will work well.

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