Examination of Witnesses (Questions 140
- 159)
WEDNESDAY 19 JUNE 2002
LORD BACH,
MR ANDY
MCCLELLAND,
MR BRIAN
WILSON MP, MR
NORMAN BRICE,
MRS ANNE
MCGUIRE
MP AND MR
IAN HOOPER
Mr Duncan
140. Just to link in with the discussion we
have just had, you have expanded on the UK build guarantee effectively,
if I quote you correctly, as being the fabrication and assembly
of new warship hulls. Before I ask specifically about procurement,
could I ask: what is it particularly about fabrication and assembly
of new warship hulls as opposed to the technology and equipment
that goes on in the warship that means it is treated differently
and that those other items are not treated in the same way?
(Lord Bach) In short, it is because we want to preserve
British shipbuilding. That is the answer to that question. As
previous governments did, we want to preserve British shipbuilding.
If the hulls of British warships were not built in the United
Kingdom, then we would not be preserving or helping to preserve
British shipbuilding.
141. It is useful to have that on the record
but I think it is self-evident from the last question that defence
procurement in this area is a political matter with a large or
a small "p", albeit in a sensitive area. Why are procurement
methods so convoluted, complicated and perhaps expensive? What
scope is there for improving the methods of procurement in this
area?
(Lord Bach) I think there is always scope for improving
procurement methods, but what we have to concern ourselves with
at the MoD when there is procurement for our own armed forces
is, first of all, what capability is needed, is required. That
is the prime factor. What is it that our armed forces need in
order to do the task that the government sets them? That is where
we start. We are always looking for ways to improve that. There
have been huge improvements in the last few years with the introduction
of smart acquisition, which I am sure the Committee knows about.
As far as shipbuilding is concerned, we still believe that competition
as a general principle is the right way to continue because it
normally leads to value for money and innovation. We are pragmatic
and, I hope, flexible. As you will know, Mr Duncan, our revised
strategy for a very big order indeed, the Type 45 Destroyer, replaces
competition for the later batches of that class with a strategy
which allows competition for further programmes. In other words,
we have said that two companies, BAE SYSTEMS and Vosper Thorneycroft,
will build those ships in order to keep both of those important
companies in the market for future competition. The revised aircraft
carrier assessment strategy maximises competition at the most
appropriate level; first of all, prime contractor and then at
subcontract level. What we need to do is buy ships when the armed
forces require them, not, I am afraid, when the shipyards require
them. Luckily, in the years that are ahead - and here I bring
really good news but you know it already - we are at the moment
in time when there is a large number of warships to be built -
I think 30 in the next 20 years, the largest for a very long period
of time. We know already that Clydeside will build a substantial
proportion of those ships. The news I bring is good news. That
is our attitude towards procurement in shipbuilding. We prefer
competition, we want to see competition; we think that does drive
down cost, and we are talking about what the taxpayer has to pay
at the end of the day. Sometimes competition is not always the
right answer.
Mr Weir
142. Could you perhaps tell us how you assess
the BAE SYSTEMS three-year strategy? We have had a lot of discussion
as to how this will work and the possibility of perhaps work being
transferred from the Clyde at some point.
(Lord Bach) I am not going to be very helpful about
this. We do take the view that this is a matter for BAE SYSTEMS.
They are the ones who tender for projects, for programmes. How
they work out their strategy is very much a matter for them. It
may be that Mr Wilson has something to say about this.
(Mr Wilson) I think that there will be some initial
scepticism about it, simply because it was not the way things
had been done in the past. The more it was examined, and the Task
Force looked at it very closely, then the greater the possibility
of the approach. In fact, if you put it in a wider context, there
was nothing particularly unusual about it. Yesterday I was on
Tyneside. There are absolutely massive structures in Tyneside
which are being assembled in different parts of the world with
bits being floated in from South Korea to link up with what is
being done in Tyneside and then floated off to Nigeria. The globalization
of maritime industries is now well established. Therefore, in
that context, it is a relatively modest undertaking to have three
yards co-operating in the building of one vessel, and certainly
of course it is excellent for the Clyde that two of these yards
are in close proximity to one another.
143. I accept what the Minister is saying. Some
worry was expressed that in the three-yard strategy, if it contracted
to any extent, one of these yards might become vulnerable because
work could be transferred from there to the other two yards within
the system. Do you feel that is a real possibility, given the
amount of ships being built? Do you see, at least for the foreseeable
future, a three-year strategy being viable?
(Mr Wilson) I am absolutely certain that the strategy
gives the best possible prospect of the long-term security of
the two yards on the Clyde and, with reasonable success in the
export field to complement domestic demand, the three yards will
be secure for the foreseeable future. In this business ten years
is a remarkably long timescale, given past experience. In fact,
we are inquiring into this industry at the time when there are
positive prospects such as had not existed within recent years.
Mr Lyons
144. We heard earlier some evidence about German
shipyards referring to a co-ordinator in marine shipbuilding.
What is the Government's view in terms of UK shipbuilding and
what are the advantages and disadvantages in that type of co-ordinator?
(Mr Wilson) The idea of an individual champion of
the shipbuilding industry is apparently successful in Germany
and also in the Netherlands where there has been a great development
of the shipbuilding industry. In principle, it was certainly something
that I was attracted to. We have a Shipbuilding Forum, which was
a fair effort to get everybody round the table in what traditionally
is a fairly fractious industry. We now have the Shipbuilding and
Marine Industries Forum. As I said earlier, there has been an
effort to move the leadership of the Forum over to the industry
itself and the Chairman now comes from within the industry. Within
the forum there is a strategic group, a small core group, again
industry-led, and which, on the surface, would seem to be designed
to do some of the tasks that a co-ordinator would do. At the last
meeting of the Shipbuilding Forum that I chaired there was a lively
discussion about whether the industry actually wanted this additional
figure or whether it would be premature, at precisely the moment
when we were restructuring the forum, to add what could be seen
as another layer or a competing entity with the forum and the
core group of the forum. Therefore, it is now in the hands of
the forum itself really to decide whether they want this additional
figure or whether the structure we have got now fulfils the same
role.
Mr Robertson
145. During taking evidence, Scottish Enterprise
considered some of the proposed investment to be indeterminate
and vacant in some cases. The trade unions also felt that high
levels of investment were needed to bring our shipbuilding into
line with the German yards. Has sufficient investment been made
in the Clyde shipyards to ensure they are innovative, efficient
and productive?
(Mr Wilson) If I may strike a slightly historic note
here, and I go back to 1997 when I became Scottish Industry Minister,
one of the first things I did was to go to Govan shipyard which
was suffering one of its occasional periods of difficulty. I learnt
very quickly that Scottish Enterprise and government in general
had turned its back on shipbuilding and had classified it as a
sort of write-off, sunset industry. Kvaerner at that time were
bitter about the fact that they had had so little help from Scottish
Enterprise or from government more widely. So there has undoubtedly
been a period when government in its widest form did nothing to
support investment in shipbuilding. The remarkable thing is that
these yards continued to invest on their own account and that
they turned out ships of the quality which came from both Yarrows
and Govan shipbuilders. There is a background to the question
you ask. I think with the new era of BAE SYSTEMS, which clearly
has made a very substantial commitment to their strategy, all
their vested interest is in investing in a way that is going to
see through that strategy. I am convinced, and the Task Force
was convinced, that the money was going in from BAE SYSTEMS as
promised. I understand there is a £9.6 million investment
being made in the current year and there is a £75 million
investment programme overall. I have no reason to doubt the integrity
of that commitment by BAE SYSTEMS because I think it is an essential
part of their strategy. On the other hand, what is enough? No
figure is the limit, particularly in an industry which has moved
dramatically from being relatively low tech to being extremely
high tech, and then the more investment the better.
146. I agree with what you have said, Mr Wilson,
but in agreeing with you, I would say that it is the government's
place to help yards out. Obviously we thank the government for
the orders. That has sustained shipbuilding within the Clyde for
many years to come and that is good news, but we have got to the
stage where there is a shortfall. While we have secured something
like 1200 jobs on the Clyde, that still leaves another 800 jobs
that have to be sustained as well on other types of work. Can
you help us by using government investment in the yards to allow
them to put in for orders that are not always to do with MoD work?
(Mr Wilson) Certainly during my time in this we have
on numerous occasions worked closely with the companies to ensure
that they have the best possible chance of obtaining other work.
Sometimes that has been successful and sometimes not. Ultimately,
the bids have to be commercially attractive to the customer. Government
cannot deliver these orders. What we can do is to make sure that
the playing field is genuinely level and that the companies have
every opportunity to bid on a fair and even basis.
147. The company obviously has a strategy. Does
the Government have a strategy for shipbuilding?
(Mr Wilson) As we have discussed earlier, the strategy
for shipbuilding is being revamped this very day at the Shipbuilding
Forum, working through the Shipbuilding Forum with industry, the
government and all the other interested parties in the same room.
The answer is: yes, we do have a strategy for shipbuilding and
we do have clear targets through the Shipbuilding Forum of what
we want to achieve. The ambitions, given the low point to which
we had descended over the past 20 or so years, might seem relatively
modest but, for instance, we aim to increase the number of merchant
ship completions to 35 per year by the end of 2004. That will
be a value of £300 million against £150 million at present.
Even to quote that sort of number, given our tradition, is an
indication of how far things have gone before we got round to
reversing them.
Mr Lazarowicz
148. This takes us on from the earlier questions
and initially this one is for Mr Wilson. How competitive do you
assess the UK shipbuilding industry as being and what more could
be done to improve the competitiveness and develop the revival
of the industry?
(Mr Wilson) The evidence suggests that in the global
shipbuilding industry, the British shipbuilding industry is not
competing terribly successfully. That is why we have seen the
decline in the number of yards. There are still some things which
it does extremely well and we have to build on these strengths,
but we certainly must have the kind of competitiveness agenda
which is being promoted through the Shipbuilding Forum. We have
to have a big emphasis on skills training because there is a real
problem with the ageing workforce and it has to be seen as an
industry with a long-term future for young people to enter. We
have to have greater co-operative working within the industry
so that while on one level they may be competing against each
other, there are also synergies among the companies where added
value can be obtained. As I say, we are starting from a low level.
It would be absurd to sit here and say that the British shipbuilding
industry is highly competitive when we compare the output with
other countries in Europe, but there have been tremendous advances
in those yards which have survived through thick and thin. Certainly
from the platform on which we are now, the surviving shipyards
can have a very bright future.
149. How far do you consider that the shipbuilding
industry has bought into the vision of improving competitiveness?
I ask that because in our earlier evidence session this morning
we were told by the representatives from BAE SYSTEMS that they
consider the Shipbuilding Forum, I think their phrase was, "a
useful forum for exchange of views". When it was put to them
by one of my colleagues that the forum was a talking shop, they
did not seem to demur too strongly. Do you feel industry is fully
supportive of the Government's efforts in this way and, if not,
what can be done to change their perspective?
(Mr Wilson) I think the Shipbuilding Forum could be
a more useful instrument than it has been up till now. That is
the thinking behind revamping it. I can draw a very direct analogy
with Pilot, which is the oil and gas industry forum that brings
together government and industry. In terms of effectiveness, Pilot
is pretty far ahead, but the reason for that is the strength of
commitment which the companies have made to their involvement
in Pilot. Probably in the oil and gas industry it was at least
as counter-cultural for the industry to become involved as closely
as that with government around the same table but, having done
so, and taken the decision to do so, they have contributed at
an extremely high level and an enormous amount of work is done
between meetings to carry forward an agreed agenda. Remarkable
progress has also been made in breaking down confidentiality barriers
between companies within reasonable limits. If some of these best
practices from Pilot could be translated into the Shipbuilding
Forum, then it would be more effective. It is now under industry
leadership and really the pace at which the Shipbuilding Forum
develops is in the hands of the industry itself.
150. Do you think more could be done to co-ordinate
the activities of government departments in this area?
(Mr Wilson) An effort is made to do that. The Marine
Unit in the DTI is in constant touch with the Ministry of Defence,
the Department of Transport and other relevant government departments.
I would always be cautious about saying that you could not do
more on this because I think joining up government is something
to which great lip service is paid but it does not always happen
in practice. I think we have to be vigilant always that the right
hand knows what the left hand is doing. Certainly within the Shipbuilding
Forum other relevant departments are represented and their involvement
is encouraged.
(Mrs McGuire) Thank you very much for your kind comments
at the beginning. The area that Mr Lazarowicz has mentioned about
a joined-up approach is one in which the Scotland Office is particularly
interested. Certainly, since the establishment of the Task Force,
we have established very good links with DESO in particular to
look at ways in which the Scotland Office can highlight the very
good skills and opportunities that are available specifically
on the Clyde, but obviously in a wider context in Scottish shipbuilding.
On the other hand, we have also provided, I think, a bit of a
bridge with the main contractors, with BAE SYSTEMS, with them
briefing us on opportunities. Obviously some of those areas are
a bit confidential but I do not think you would have to be in
prophesy to identify exactly where the main markets are. Certainly,
the Secretary of State has taken every opportunity to highlight
the skills that we have and the opportunities that government
is affording.
Mr Carmichael
151. Following on from that, Scottish Enterprise
has told us in the oral evidence session that the future sustainability
of industry in the Clyde is dependent on at least one export order
per year. You have touched briefly on the relationship of DESO
and BAE SYSTEMS. Is there anything else that the Scotland Office
is doing to promote or help win export orders for Clydeside?
(Mrs McGuire) As I have already indicated, the Scotland
Office is constantly appraising the opportunities that are available
and obviously some of these trails are very long. We cannot turn
round shipbuilding orders, with the greatest will in the world,
overnight. It takes a fairly extensive period to build that up.
What we now have are the links and the information to highlight
the opportunities that are available on the Clyde in particular,
since that is obviously the focus of the discussion, but ultimately
of course the export market is very competitive. It is about the
right time, the right price and the right ship. What we can do
is facilitate the opportunities. We cannot specifically insist
that any government or company actually places an order.
152. Is it the role of the Scotland Office to
get preferential treatment for Clydeside?
(Mrs McGuire) No. I think we have to be very careful
in what we do. This is one of the areas obviously that —
153. I mean within government?
(Mrs McGuire) We are there to argue Scotland's case
in government. I appreciate that Mr Carmichael and I might disagree
as to how we do that, but I certainly would hope that he would
recognise that the Scotland Office will not let Scotland's case
go by default inside government. Ultimately, of course, the Procurement
Agency is the MoD.
(Lord Bach) Could I say something in relation to the
export questions? I think Mr Lazarowicz and Mr Carmichael have
both been asking about that. First of all, the Scotland Office
certainly put forward Scotland's case in this field very effectively
in government, and the MoD unashamedly uses Scotland Office Ministers
to try and obtain defence exports from the Clyde when they go
abroad. Ministers throughout government - the DTI, FCO, all of
us - work very hard to get defence exports, not just of course
for the Clyde but for all British companies in this field. If
I may say so, Mrs Adams, just for a moment, I was very impressed
by the way in which the Task Force made the point about how crucial
defence exports are in the debate that your Committee has started.
I am quoting from 2.3.4: "Defence exports of £5 billion
per annum make an important contribution to the UK economy and
account for 40 per cent of defence industry output. In addition,
substantial cost savings to the MoD are achieved through reduced
fixed overhead charges from export defence orders. The UK Government
is highly supportive of defence exports, subject of course to
strategic and ethical policy guidelines". In our view, one
of the ways in which the Clyde will become successful and continue
to be successful is if it manages to export defence equipment.
It is not unknown for people to be a little bit shy about the
value of defence exports, but we do not think that the Clyde from
the MoD's point of view can survive on MoD orders alone, and that
is why defence exports should be supported by anyone who wants
to see the Clyde a success. Not any defence exports but legitimate
and controlled defence exports. That was a point I wanted to get
across, if I might. Can I make one other point on this. There
is a problem in relation to defence exports here, not just for
the Clyde but for Navy exports generally. Royal Navy vessels are
often pretty sophisticated, for the use of our own Armed Forces
and sometimes, frankly, too sophisticated for what other countries
need or require. We think export prospects would be improved by
some greater flexibility of design and hence in cost. We hope
UK shipbuilders, BAE SYSTEMS and others too, would consider producing
export versions of Royal Navy designs. We think that is something
your Committee might want to consider in drawing up its conclusions.
154. This is very interesting and I am afraid
it is going to be veering off in a direction that I certainly
had not anticipated. When we had evidence earlier this morning
from BAE SYSTEMS, one of the points Mr Phillipson made was that
in America, for example, the risk and the R&D commitment is
entirely taken on by the government whereas we insist that that
is a cost that is borne by the industry. He says that that is
a way in which our shipbuilding industry is put at a competitive
disadvantage. Would you care to comment on that?
(Lord Bach) I am afraid that in the defence field,
let's be absolutely frank about this, the United States and the
United Kingdom are miles and miles apart, both in terms, of course,
of the absolute amount they spend on defence and also the proportion
of GDP. The Americans start from where they start from and we
start from where we do. We have a proud record and we certainly
spend more on defence GDP-wise than all our European allies. It
is true that the American administration does put more into R&D
than the British MoD, but we do put money into R&D and because
of decisions made by the Chancellor recently for small and medium
enterprises we will be putting in more. I think that is right,
Mr Wilson?
(Mr Wilson) Yes.
(Lord Bach) So we do what we can. To suggest that
government can supply all the research and development costs for
large military companies just will not happen, I am afraid. We
think our system of procurement works pretty well here. We give
as much as assistance as we can, both the MoD and DTI, to industry
in this field.
(Mr Wilson) It goes back it a question Mr Lazarowicz
asked about competitiveness. It has been drawn to my attention
that we at present have a £3 million programme of grants
with the Shipbuilding and Ship Repair Association to improve competitiveness
and also we have a wide programme of grants in R&D. I would
very much support what Lord Bach says, that there is a relatively
small number of big contractors in this field and the idea that
government should pay all R&D costs, while doubtless very
attractive to that small number of companies, is not one that
instantly appeals to anyone else.
Mr Robertson
155. Going back to the Scotland Office, Mrs
McGuire, the question I asked BAE in previous evidence was what
contact they have had with the Scotland Office because in the
Task Force Report in paragraph 2.9.8 it says "every appropriate
opportunity should be taken to include ministers from the Scotland
Office in promoting the Clydeside's case in new orders".
They said they have had no contact with the Scotland Office. Can
you tell me—and I do not think you will know why—how
you are going about retrieving that situation?
(Mrs McGuire) First of all, I am certainly advised
that BAE SYSTEMS fully briefs the Department on commercial opportunities.
I am interested that a BAE SYSTEMS' representative here has said
something in conflict with that. Obviously given what you have
said I will take that back to find out whether or not there is
a misconception on my part or a misperception on their part and
we will certainly clarify it.[14]
Certainly our aim is to provide good channels of communication
between ourselves and BAE SYSTEMS and vice versa, but obviously
I have to consider what they have said this morning and will certainly
look at rectifying it if that is the case.
156. Can I take it from that that you feel there
is a place for the Scotland Office in looking for orders for the
Clyde and anywhere else in Scotland for that matter?
(Mrs McGuire) I think there is a strong case for the
Scotland Office highlighting the skills and achievements and the
future of the Clyde wherever we possibly can. Certainly the Secretary
of State misses no opportunity to do that and no doubt will continue
to do so.
Mr Weir
157. Can I follow up the question to Lord Bach
about defence exports. We discussed this with BAE earlier. There
are two points that came out of that about its long-term viability,
one being obviously that the UK wants to make sure that all warships
which are available to the United Kingdom follow a similar route.
Secondly, according to BAE much of the export market is basic
exported technology to build the first ship and thereafter the
foreign yard would take it on. I wonder on that basis how you
see the long-term viability particularly of Naval defence exports?
(Lord Bach) Both points that were made by BAE SYSTEMS
have some validity, the first point perhaps rather less because
there are only a limited number of countries that are fortunate
enough to have the resources to be able to build warships. We
are one of them and we know who the others are, but other countries
are entitled to have their own means of deterrent and defence
if need be and it is to those countries we would hope to sell.
Of course, there has been a pretty good record over many years
of Britain selling warships, big and small, to foreign countries
and they have been put to sensible use by those foreign countries.
I do not think anyone is particularly talking about exporting
chiefly to those countries that already manufacture warships although
that can happen.
158. If you have already got a shipbuilding
industry through the transfer of technology, in effect, can they
then start to build warships?
(Lord Bach) This is the second point you make and
it is true that a lot of countries to whom we would like to export
ships would themselves, of course, like to start up perhaps in
a small way procuring their own warships in the future. We have
to accept that. That is a fact. Not all of them want to do that,
some of them want to purchase if they can afford to do so, others
want to purchase, as you say, first and then have the technology
transferred about which our companies are very open compared to
some of our competitors overseas, and then do the remainder-in-country.
That is not to say that there would not be advantages for Clydeside
at the same time as those other countries were doing their second
or third of class in-country because Clydeside's skills, ability
and designs would always be needed. I am not claiming for a moment
that exports are easy in the Navy field, but it is important not
to give up on Navy exports too quickly. There are places in the
world that want the skills that the Clyde and other British shipyards
can bring to this field. The United Kingdom is unrivalled in this
field historically. We still have a great deal to offer. I know
there are problems for companies on this but I ask the question:
how will Clydeside exist in shipbuilding terms in 15 or 20 years'
time if you rely solely on MoD orders? It will be extraordinarily
difficult and I am sure one of the things your Committee is doing
is to look at how its long-term survival can be guaranteed. One
of those ways it seems to the Government is by getting more export
orders perhaps of smaller ships, not always of big ships perhaps
of smaller ships.
Mr Lyons
159. Just in relation to that, Lord Bach, the
question of new orders, how do we in mechanical terms go out and
do that, try and find out who is thinking of placing an order
for either defence or commercial shipbuilding?
(Lord Bach) As far as the defence side of it is concerned,
DESO, who I think you have heard about already in discussions
today, are part of the MoD but have a well deserved high reputation
in assisting British industry in selling abroad. One of the ways
they do that is to have information as to what countries are interested
in what at a particularly early stage and then they help the companies
run campaigns in order to try and persuade those countries in
a highly, highly competitive market—it is absurdly competitive
sometimes—to choose Britain as the source of their export.
DESO is always available to British companies - BAE SYSTEMS I
think know this better than anybody—in order to assist.
Also we get assistance from the DTI and the FCO, we all work together
closely in order to try and maximise these exports but they happen,
they do happen, and if DESO was not to exist I think it would
be much, much harder for there to be so many British exports in
the defence field, including the Navy.
14 See Ev 68. Back
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