Select Committee on Work and Pensions Minutes of Evidence

Examination of Witnesses (Questions 127 - 139)




  127. Can I welcome you to the Scottish Affairs Select Committee and our inquiry into employment in shipbuilding on the Clyde. Before embarking on our questions, may I welcome in particular Mrs McGuire, who is new to her particular remit at the moment. We are very grateful to her for coming along this morning. She knows we will not go easy on her and she would not expect it. We know she does not need us to go easy on her anyway. We welcome Lord Bach, who I understand has come back overnight from the States. Mr Wilson is always welcome here at this Committee. Can we go straight into what we have been doing. Later today the Shipbuilding and Marine Industries Forum is due to consider an Implementation Plan produced jointly by the three marine trade associations. To what extent does the Implementation Plan respond to the first recommendation from the Clyde Shipyards Task Force that "UK Government shipbuilding policy should be restated"?

  (Mr Wilson) Thank you, Mrs Adams, for your welcome and for involving us in this inquiry. As you rightly say, the Shipbuilding and Marine Industries Forum is meeting this afternoon and it is taking forward really an updated agenda for the shipbuilding industry in the UK. The Forum has been in operation for some time now. I have been a member of it in various roles and latterly the Chairman of it. The Shipbuilding Forum has now been reshaped to strengthen the industry's role and to give industry a leadership role within it. Its clear objective is to create the circumstances, with Government supporting industry, which will lead to a significant increase in the UK share of the global market and also promote a positive image of the shipbuilding sectors. I think everything the Shipbuilding Forum will be doing this afternoon is very much in line with the recommendations of the Clyde Task Force.

  128. In their memoranda, the DTI and MoD reaffirmed that "all fighting vessels are built in the UK". Does it remain Government policy that domestic warships are constructed in the UK?"
  (Lord Bach) Mrs Adams, if I may take this, I think I know from what event this particular question arises with the Committee. May I say straight away that, yes, it is Government policy that all warships will be built in the United Kingdom. What does that actually mean I think is what the Committee wants to know. It covers, in our opinion, fabrication and assembly of new warship hulls. I must make it clear that it does not mean every last nut and bolt, or for that matter every weapon system carried on board. What is significant and what began this policy in the 1980s is that we retain the ability for the United Kingdom to manufacture warships right up to the largest and the most capable of vessels. That is the policy and it remains the policy.

Mr Robertson

  129. Lord Bach, you are talking about the fabrication and assembly. We have mentioned areas like the bow, the work for which has gone to a Dutch yard. Does this mean that in future anything of that sort of size and magnitude will be built in Britain?
  (Lord Bach) Can I try and answer that and come directly to the issue that I know concerned the Committee at its last meeting? I have already written to you, Mrs Adams, of course.[6] I am sure the Committee have seen a copy of my letter. The background is that the fabrication of the two ALSL bow sections - a very small part, I should say, of the bow sections - was put out to competition by the prime contractor, Swan Hunter. Competition included three UK companies. Swan Hunter chose the Dutch company, Centraalstaal,[7] because they made the most cost-effective bid to suit the required timescale and thus that company will undertake the steel fabrication of small units. I said it was small; it is under 5 per cent by weight of the total steel fabrication. However, and I want to emphasise this, Mrs Adams, final assembly, systems, outfitting and fabrication into a complete bow section will take place along with the construction of the rest of the hull at Swan Hunter's shipyard on Tyneside. Subcontracting sections such as this has not been uncommon practice when the shipbuilders themselves do not have the necessary in-house skills or equipment to carry out such complex work, as was the position here. However, in view of what has occurred here, and as soon as it came to my attention, we have had placed in the ALSL contract,[8] which of course as you know concerns Govan Shipyard very much, a clause which requires Swan Hunter to obtain MoD's prior approval before subcontracting any fabrication or assembly of structural steel work. To answer your question, Mr Robertson, and I am sorry it has taken some time to get round to it, future shipbuilding contracts will incorporate a similar clause and will make it clear that approval to place any such subcontracts outside the UK will only be granted in exceptional circumstances. I just want to say a very brief word about these exceptional circumstances. It would be palpably absurd if there was, for example, the most enormous price difference or difference as to where the particular item could be got ready if, because of this, it was not ever possible to use a non-UK firm. But I will need some persuading that the circumstances are truly exceptional before we breach this particular rule; in other words, that warships are built in the United Kingdom.

  130. I have two matters to raise with you. The first one is this. I attended a meeting with the Secretary of State, along with my colleagues from the other constituencies on the Clyde. We had the trade union representatives with us. At that meeting Geoff Hoon[9] said to us that the ships would be built in Britain. We seem to be playing about with words here, Lord Bach, as to what is being built. It has also been brought to my attention that Block 5 of this ship is now up for tender and I know that BAE SYSTEMS has tendered for it. I want to know about this Block 5, which is two large parts - and I can give you a copy of this[10] - and obviously bigger than the bow part that we were talking about that went to Holland. Are these sections going to be built within yards in Britain or is this another case of more and more parts of our ships being built abroad? I am quite concerned about this. I only got the information this morning, otherwise I would have let you know about it earlier. Out of the 15 sections of this ship, we now have three that are being put out to tender by a company about which I know my colleagues will be asking you in future questions.

  (Lord Bach) I am afraid it is news to me and to my officials. What part of the ship is Block 5?

  131. Now you are asking! It is the middle bit, to use a technical term. I will let you see this.
  (Lord Bach) I may be none the wiser when I see it.


  132. While that is being shown to you, Lord Bach, could I clarify one point? Was the transfer of work due to shortages of skills at home or because the Dutch bid was more cost-effective?
  (Lord Bach) I am afraid that in this particular instance the Dutch bid was much more cost-effective. It was much cheaper. That is not to say that necessarily meant that the contractor should have made the decision that it did. It was for that reason that we stepped in and are now going to have put in the contract the clause that I referred to, and it will be in future contracts as well, which is what Mr Robertson wanted to know.

Mr Robertson

  133. I am concerned that you will have a say obviously in these two sections of the ship that are going to be put out to tender. My problem of course is: why the devil should we give contracts to a company that cannot do the work? Should we not then pass the contract on to the person who was the runner-up in the bid?
  (Lord Bach) It is fair to say that prime contractors are not necessarily expected to do everything involved with the ship, not even with the construction of the ship. I emphasised that this was a very small part of the bow that needed a particular method used in order to get it as it was. So there is nothing, I think, unusual in subcontracting that. What was unusual, as has been found out, was the fact that, even though this, in my view, was fabrication or construction, it went to a non-UK company. As far as Block 5 is concerned, I am absolutely ignorant as to the answer to your question. What I promise to do, if I may, Mrs Adams, is to go back to the department, find out what the position is and let you know, as Chairman, straight away, but I would be surprised if this is part of the construction or fabrication of this vessel if we were going to have a repeat of what happened before.[11]

Mr Sarwar

  134. We all know that the shipbuilding industry in the UK is on the decline because of the level of investment and we are not able to compete with Europe and other places. I must thank Brian Wilson and Lord Bach for their support of the Govan shipyard and the shipbuilding industry on the River Clyde. We really appreciate that. One thing which is a matter of concern to all of us is that we were repeatedly assured by Geoff Hoon that all the warships will be constructed in the UK but the door has been opened and we are told that in exceptional circumstances some work will be passed on to other parts of the world. This is something that worries me. According to a letter to the Chairman from you, Swan Hunter emphasises that the majority of the subcontract work will be placed in the UK. What do you mean by "majority of the work" in percentage terms and what message do we take from this?
  (Lord Bach) Thank you very much for the kind words you said about Mr Wilson and myself. I want to make it quite clear that the policy relates to the construction of the hull of the ship. It always has and continues to do so. I do not want there to be any doubt about that, please, in the Committee. That stands. It has never been policy, as I understand it, that every part of the ship - all the bits that are added on to it - necessarily will all come from UK suppliers. The position is that MoD will look carefully to see where the prime contractor is putting out his subcontracts. Clearly, if too many are being put out or the wrong ones are being put out, MoD will be asking the supplier why that is so, but what we are concerned about is competition in order to get value for money so that the British taxpayer pays as little as he possibly can for what is needed by our Navy. So we would be very foolish if we were to say that every part of every warship has to come from the United Kingdom, and that is not our policy. As far as construction and fabrication of the hull is concerned, that has to come, as far as I am concerned, from the United Kingdom.

Mr Carmichael

  135. If I understand what you are saying, Lord Bach, you are telling us that this situation has arisen because a clause was not in the contract that ought to have been in the contract and will in the future be in the contract. It is not your fault and you are here talking to us today. In fact, I was in practice as a solicitor before I came into the House. If I had ever put a client in a position where something as fundamental as that was missing from a contract, I could only speculate what would happen to me. It might well involve the clearing of my desk. What are you doing?
  (Lord Bach) Mr Carmichael, I was a barrister before I came here. I do not know which of us is in the worse position. I think your comment is really very exaggerated here, if I may say so. We are feeling our way to some extent with the large number of warship builds that there are going to be in the United Kingdom over the next number of years. We know what the policy is in terms of the building of these ships. They must be British, they must be UK as far as the construction is concerned. Companies know that as well, whether they are companies on the Clyde or companies elsewhere in the United Kingdom. On this occasion, and we regret that it has happened and I want to be absolutely frank with the Committee about that, we are not hiding or covering up here; we regret that it has happened. Our letter and what I have answered makes that quite clear. We believe that this should not have happened, whether there was a particular clause in the contract or not. It did not need the clause in the contract for this not to have happened, but it has happened. Now, in order that there should be clarity in the future, we have inserted this clause into this contract[12] and will do so in all other shipbuilding contracts. I really do not think it is an issue in the event where you would have had to clear your desk.

  Chairman: You did make it clear in your letter and we are grateful for the fact that you responded so quickly .

Mr Weir

  136. I appreciate what Lord Bach is saying. Maybe I am naive about how a contract is tendered for. I would have thought that in working out the tender price, the company must have taken into account where they were getting the various sections of the ship built. Would they not have known from the outset that they were going to tender some of it to Holland? What detail would you department have got on how the ship was being built at the tender process stage?
  (Lord Bach) I think you are a solicitor too, Mr Weir. Am I right?

  Mr Weir: Yes.
  (Lord Bach) As I understand it, the department or the DPA[13] knew that a contract was to be put out for this work, but did not know that there was going to be any chance of a non-UK company tendering for it, and then learnt of course that a non-UK company had not only tendered for it but had won it as well. As far as this piece of work was concerned, it was always the intention, as I understand it, of the prime contractor to put it out for contract, and we would have known about that at the time the contract was signed.

  137. You would not have not known it was going to go to a non-UK yard at that time?
  (Lord Bach) No, we did not.

Mr Robertson

  138. Could I go back to the question I thought I was asking specifically about the Swan Hunter bit for the ALSL. As we now know, the fact is that they bid for ships for which they could not do the work. They might be able to do some of the work but not all of it. Firstly, could you comment on that? Secondly, could you take that away and make sure it does not happen again? Could you make sure that when companies actually put tenders in for MoD work, they can do the work and they can do it in Britain? Then we will know up-front if they are going to subcontract and were they are going to subcontract to.
  (Lord Bach) I will certainly take that away with me, but I have to say that on this contract when it was decided, Swan Hunter I think won it fairly clearly. I have to emphasise again that what we are talking about here is a very small part indeed of —

  139. There were reservations at the time that Swan Hunter could not fulfil their part of the bid. I know that from the unions who made representations. I was there at the time when Geoff Hoon was told that this company could not do the work. Geoff Hoon turned round and said that the company had informed him they could do the work. Subsequently, we find out that the unions were right.
  (Lord Bach) Companies can do the work, mainly by doing it themselves, but they are also entitled to subcontract in order to get the work done. That is what Swan Hunter did. I want to say that, as far as Swan Hunter are concerned, we are, on balance, pleased with what they have done with this particular contract.

6   See Ev 67. Back

7   Note by witness: Swan Hunter originally advised the MoD that the subcontract for the fabrication of the ALSL bow sections was won by Centraalstaal. Swan Hunter have since corrected this advice. The sub-contract was in fact won by another Dutch company, Niestern and Sander. Back

8   Note by witness: Swan Hunter have accepted that such a clause should be placed in the contract, which will be amended accordingly, as soon as suitable, unambiguous wording has been agreed. Back

9   Rt Hon Geoffrey Hoon MP, Secretary of State for Defence. Back

10   Not published. Back

11   See Ev 67. Back

12   Note by witness: Swan Hunter have accepted that such a clause should be placed in the contract, which will be amended accordingly, as soon as suitable, unambiguous wording has been agreed. Back

13   Defence Procurement Agency. Back

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