Select Committee on Work and Pensions Minutes of Evidence

Memorandum submitted by the Ministry of Defence (SHP 8)

MOD Warship Building Programme

  1.  The MOD has a large naval equipment programme which, on current assumptions, will lead to more than 30 warships entering service over the next 20 years. Within the last two years, the MOD has ordered two Survey Vessels, four Alternative Landing Ships Logistic (ALSL), and six Type 45 destroyers, and placed a contract for the lease of three new build offshore patrol vessels. All of these vessels will be constructed in UK shipyards, in line with Government policy. It is estimated that the total UK shipyard workforce employed on naval shipbuilding will need to increase substantially from its current level of 4,500 in order to accommodate the planned programme.

2.  BAE SYSTEMS Marine (Marine) has already benefited substantially from this programme, as have other UK shipyards. Marine's yards at Govan and Scotstoun on the Clyde have the following MOD work currently in progress or planned:

Completion of Auxiliary Oiler

Completion of 8 Landing Craft Utility

Build of two ALSLs

Type 45 destroyer—modular construction work and steel production

Assembly of Type 45 First of Class

The Type 45 Prime Contract Office design team is also based at Scotstoun.

3.  Marine estimates that the Type 45 work alone will secure 1,250 jobs on the Clyde well into this decade. The two ALSLs should sustain up to 600 jobs at the Govan shipyard. Other Scottish companies will also benefit from the warship building programme, by supplying materials and components. The MOD would also expect Clyde shipyards to have opportunities to participate in the future programme, which is planned to include further Type 45 destroyers, two future aircraft carriers (Carrier Vessel Future—CVF), the Future Surface Combatant and a number of support vessels.

Clyde Shipyards Task Force Report

4.  The MOD was not represented on the Clyde Shipyards Task Force, although it provided some information for the report. The MOD welcomes the report; it is a comprehensive document that forms a valuable contribution to the wider debate on the vital strategic issues facing the Clyde shipbuilding industry. However, it is important to note that competition remains at the centre of the MOD's procurement policy, because it offers value for money in the equipment we buy, and is therefore the keystone of our strategy for warship procurement. Although the current naval warship programme is the largest for many years, offering a sound basis for contractors to win other work, the MOD order book alone cannot be expected to sustain the UK shipbuilding industry. It is up to the shipyards themselves to be as innovative, efficient and productive as possible, enabling them to compete not only for MOD projects but also for commercial and export orders. Within this framework, companies such as Marine are sometimes forced to make hard choices, as they did last year when announcing a redundancy programme. That is primarily a matter for the company, although, as indicated in the report, they will need to ensure that they retain and develop the necessary skills to accommodate the forward shipbuilding programme as currently planned.

5.  In addition, it should be noted that the Task Force report concentrates on one region and one major UK defence company. The MOD has to recognise at all times that there are other UK warship builders and all parts of the industry must be treated on a fair and equitable basis.

6.  Although not directly involved in the Task Force, the MOD will play a full part, in co-operation with the Scottish Executive, the Scotland Office and the DTI, in addressing the recommendations of the report. Only a few of these involve the MOD. The recommendations are being taken forward through the Shipbuilding and Marine Industries Forum, which includes representatives of Industry and Government Departments, and informal contacts between officials of the interested Departments. The present position on each of the recommendations involving the MOD is as follows:

Recommendation 1: UK Government Shipbuilding policy should be restated

7.  The Task Force report notes that the volume of MOD work will peak over the next decade, mainly due to the CVF programme, and then decline from about 2015. The report suggests that it will be important for all Government Departments to work together to consider the implications for the industry and that it would be timely for them to restate their shipbuilding policy in the light of the report. A statement on shipbuilding policy is in preparation under the auspices of the Shipbuilding and Marine Industries Forum. This will include a statement on MOD policy. As indicated above, this remains that all our warships will continue to be constructed in the UK, with competition at the core of our procurement strategy. Regarding the future volume of work, the RAND corporation has carried out a study for the MOD to examine the potential advantages and disadvantages of alternative procurement strategies for the MOD's future warship programmes, including in broad terms the effect they might have on the UK's shipbuilding industrial base. The DTI and Scotland Office have been sent draft copies of the study report for information. RAND's analysis suggested that, on some estimates, the demand for labour across the UK will double between 2005 and 2010, driven mainly by the Type 45 and CVF programmes. The MOD will continue to work closely with industry to ensure that the programme is achievable, taking account of the management challenge presented by the need to maintain the required skills, against the background of an ageing workforce. The DTI is currently examining ways in which the productivity and competitiveness of UK yards might be improved, for example, through the establishment of a national skills database, which could have particular benefits in this respect. The final RAND report, which should be published shortly, is expected to outline areas requiring further investigation, such as future manpower demand and how the industrial base might be sustained.

Recommendation 6: The Government should consider whether there are lessons to be learnt from other industrial sectors in the promotion of exports where there are competing bidders

8.  The report suggests that industry should be encouraged to adopt a more collaborative approach for export bids and that the Defence Export Services Organisation (DESO) has a part to play in ensuring that UK shipbuilders are not competing against each other for overseas orders. DESO already operates a system whereby the most likely candidate is supported, if it becomes clear that continuing competition between UK bidders would seriously undermine the prospects of success. The MOD recognises that there could be better ways of bidding for export orders other than having several companies prepare separate proposals for the same contract. However, equitable treatment must also be assured. The MOD will continue to assess, on a case by case basis, the best way of supporting bids by UK warship builders, recognising the substantial cost to contractors of competing, while ensuring an even-handed approach.

Recommendation 7: The DTI should continue to engage with the MOD to consider the industrial implications of procurement strategies

Recommendation 8: The Government should continue to take account of the detailed industrial implications of its procurement decisions for naval shipbuilding, including design and integration capabilities

9.  The report acknowledges the difficulties of balancing value for money considerations on major contracts with the industrial implications of pursuing a particular procurement strategy. It suggests that procurement decisions on individual programmes should promote the longer term availability of the industrial capability required to provide competition for future orders. These recommendations are consistent with current Government policy. There are long established formal and informal mechanisms for ensuring that all relevant issues, including industrial implications, are considered and interested Government Departments consulted, before procurement decisions are made. As far as shipbuilding is concerned, the DTI Marine Team has regular review meetings with its contacts in the Defence Procurement Agency, including individual Integrated Project Teams. All MOD procurement proposals include a section on industrial implications and major programmes, such as the Type 45 and CVF, are subject to Cabinet level approval. The MOD is well aware of the importance of retaining a healthy industrial base for warship building in the UK, with companies potentially available to compete for future orders. As the Task Force report acknowledges, this was a driving factor in deciding to change the procurement strategy for the Type 45 destroyer.

Recommendation 9: As the specification for replacement vessels for the Royal Fleet Auxiliary becomes clear, early clarification on their designation as warships would be welcomed

10.  The Task Force report notes the MOD's stated requirement for a number of replacement vessels for the Royal Fleet Auxiliary (RFA). The programme to provide future afloat support capability, following the retirement of existing RFA vessels, is currently in its concept phase and it is too early to say what the specifications might be or how the capability might be provided. The MOD will nonetheless endeavour to identify, as soon as practicable, whether new afloat support vessels will be designated as ``warlike stores''.

Recommendation 10: The current high level of support from the most senior Scottish and UK Government Ministers for the industry should continue

11.  The report calls for support in recognition of the shipbuilding industry's strategic significance in the economy, with particular focus on the high technology and knowledge components in warship construction. The MOD is the biggest single customer of UK shipyards, which are currently engaged in the largest warship building programme for many years. There is no doubt that there is strong and continuing Ministerial support at the most senior levels for the shipbuilding industry. It is important that the industry is efficient, competitive, innovative and able to identify ``smart'' solutions so that the MOD's requirements can be met at an affordable price.

Other recommendations not attributed to MOD but in which there is a specific MOD interest

Recommendation 5: In addition to Government activity, every appropriate opportunity should be taken to include Scotland Office Ministers in promoting Clydeside's case in securing new export orders

13.  The Task Force report recognises the importance of high level political support in major defence equipment sales. DESO keeps Scotland Office officials informed of relevant sales campaigns to ensure that Scotland Office Ministers have all available opportunities to support Clydeside companies' ventures in the defence export market.

Recommendation 12: The Scottish Executive should assess the potential of offset as an export development opportunity for appropriate Scottish companies

14.  The Task Force report suggests that offset (direct or indirect through technology transfer) has increasingly featured as the competitive advantage in winning orders and that BAE SYSTEMS Marine requires expertise in offset arrangements to succeed in gaining exports. The report also states that there may be potential benefits for other British companies in being part of indirect offset deals in export warship sales. The DESO Offset Adviser is available to assist British defence companies in formulating and delivering competitive offset packages which could be of wider benefit to British industry.

May 2002

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