Select Committee on Defence Appendices to the Minutes of Evidence


Letter to the Chairman of the Committee from the Minister of State for the Armed Forces (25 March 2002)

  I wrote to you in January 2001, informing you that the Ministry of Defence intended to enter negotiations with Babcock Rosyth Defence Ltd (BRDL), Devonport Management Ltd (DML) and Fleet Support Ltd (FSL) with the aim of modernising arrangements for warship support to achieve better value for the Defence Budget.

  Negotiations have now been successfully concluded with the companies on increasing the proportion of the surface warship refit and repair programme which will be opened up to competition. At Portsmouth, negotiations have also concluded with Vosper Thornycroft on their proposal to establish a new warship building facility on land leased at the Naval Base.

  Also, in September 2001, formal proposals were received from each of the Companies for partnering at the Naval Bases. At the same time, we received formal proposals from our Trades Unions. We have evaluated both proposals against an internal Benchmark of the projected costs of running the Naval Bases, including internal efficiencies. The proposals from the Companies cover the provision of engineering and waterfront support, logistics, estates and facilities management activities. The TU proposals put forward further Naval Base efficiencies, and wider restructuring proposals, whilst retaining the workforce within the Ministry of Defence.

  Our analysis has demonstrated that, together with the changes to warship repair, the partnering arrangements with the Companies offer best value for money. It is the intention therefore, to place partnering contracts with each of the companies, subject to the successful completion of detailed contract negotiations. In total these changes will achieve a saving to the Department of £327 million over the period 2002-07. This is higher than our original estimate of £237 million over the same period, and reflects in particular an increase in the level of savings to be achieved at the Naval Bases.

  Negotiations with the Companies on the warship repair programme have been aimed at increasing the amount of work open to competition and reducing excess capacity. The negotiations also addressed the reduction in the overall volume of work following the Strategic Defence Review and led to the agreement of reduced allocated programmes, for some of which reduced prices have already been negotiated. The renegotiated programme takes into account the time needed for the companies to adjust their workforces and infrastructure against the diminished workload.

  Further analysis was undertaken of the option of competing the Naval Base business. This confirmed that the scope for mounting a competition in the warship maintenance market is severely constrained. This is particularly the case at Devonport and the Clyde where competencies in nuclear maintenance work would be required. The analysis also shows that, under competition, a higher level of savings would be needed to match those on offer under single source partnering, because of the additional time and cost involved in mounting a competition.

  The partnering arrangements at the Naval Bases will involve the transfer of approximately 3,000 MoD posts to the private companies, under TUPE regulations. As the Companies review existing arrangements and rationalise the operations for which they will be responsible, job reductions are likely to occur over the next five years. Although these reductions would be unwelcome in the regions concerned, the changes upon which they are based would help to ensure the long term future of those jobs which remain in both the Naval Bases and the Dockyards. The changes will provide greater efficiencies in support to the Fleet, and there will be no compromise on safety and security at the Naval Bases. Operational capability will remain of paramount importance, and these arrangements will ensure that current standards and levels of support to the Fleet will be maintained, or indeed improved, as processes are streamlined and improved working practices are introduced.

  Exemptions from the competition elements of European Union regulations, on the grounds of protection of UK security interests have been confirmed by security and legal advisors. No issues of state aid have arisen from the proposed arrangements. Partnering contracts are anticipated to be placed in April, subject to successful completion of negotiations, with transition to the new arrangements planned to complete in July.

  Geoff Hoon will announce this decision to Parliament by means of written answer today.

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