Select Committee on Defence Written Evidence

Memorandum from Scottish Enterprise


  Scottish Enterprise (SE) is the principal economic development agency for Scotland, covering 93% of the population from Grampian to the Borders. The SE Network consists of SE' main office, based at Atlantic Quay, and 12 Local Enterprise Companies. Working in partnership with the private and public sectors the SE Network aims to build more and better businesses, to develop the skills and knowledge of Scottish people, and to encourage innovation which will help make Scottish businesses internationally competitive.

  Scotland has significant and long-established involvement in many aspects of the defence of the United Kingdom. This includes:

    —  The presence of major bases of operation for all the armed services (including being the base location for the UK strategic nuclear deterrent).

    —  World-class defence equipment design and manufacturing operations.

    —  Major military aircraft, warship and military equipment maintenance operations.

    —  Cutting edge research & technology activity in both companies and universities.

  In pursuit of its remit to promote and support the development of the Scottish economy, SE is actively engaged with all of the major defence contractors located in Scotland, as well as a significant number of those in the wider supply chain. By and large, defence companies are technology-driven and as such provide opportunities for quality employment, often in locations that continue to suffer from higher than average levels of unemployment.

  In the area of workforce development aimed at ensuring that companies operating in Scotland have the skills and expertise to support increasingly complex manufacturing techniques, SE is actively involved in funding and delivering diverse skills development initiatives through its Modern Apprenticeship and other programmes. This is in close coordination with the company base and the education sector, where SE has a catalytic role. An example of this would be the support provided for training and skills development at BAE Systems Naval Ships, currently the largest single private sector employer in our Modern Apprenticeships scheme, with some 297 apprentices in the current financial year.

  SE welcomes the opportunity to provide evidence to the Defence Committee in its inquiry into the Government's recently published Defence Industrial Strategy (DIS), given the potential impacts of the DIS on the employment and economic development in Scotland.


  In 2004, some 20,410 MoD personnel were employed in Scotland, including 7,100 civilians. Within industry, for many companies defence-related activity is an integral part of their broader business interests, which also includes civilian work. The defence sector extends well beyond prime contractors into the extended supply chain. For this reason, it is difficult to identify the specific dimensions of the defence industry in Scotland. Indeed the Defence Analytical Services Agency discontinued the collection of such figures in 2002 as a result of concerns over accuracy. However, based on a review of companies operating in the sector which are known to have won MoD contracts, it is conservatively estimated that companies directly employing some 20,000 people are engaged in whole or in part in defence-related work, with an estimated further 17,000 staff employed indirectly in the supply chain. Defence-related business is therefore an integral element of the business base and as such, a significant contributor to the economy of Scotland.

  Scottish-based companies and universities are represented in all of the aspects of the defence sector highlighted in the DIS Review by Industry Sector (Part B), with world-leading strengths in many areas. Major company presences include Selex Sensors and Airborne Systems, BAE Systems Naval Ships, BAE Systems Integrated System Technologies (Insyte), Rolls-Royce (Marine, Nuclear and Aerospace), Babcock Engineering Services, Babcock Naval Services, Thales Optronic Systems, Thales MESL, MacTaggart Scott, Raytheon Systems, Qinetiq, DARA and many more.

  Scottish universities are involved in many aspects of defence-related research and the development of complex defence electronics systems, where Scotland's strong research background in microelectronics, optoelectronics and electronic technologies (MOET) provide a firm basis for the defence sector. Scottish university research activity includes Edinburgh & Heriot-Watt Universities in sensor development, Strathclyde University in areas such as composites and energy research Glasgow University in aerodynamics and rotorcraft development and Glasgow/Strathclyde Universities which jointly operate a department having a leading world position in naval architecture and marine engineering research.

  SE is actively engaged with the Scottish company base in many aspects of the development of their businesses. This includes support for staff development and training, business process improvement and support for R&D activity. SE has detailed strategies in place specifically to serve and support both the Aerospace and the Shipbuilding/Marine sectors. We are also actively involved in wider UK initiatives such as the DTI's Aerospace Innovation and Growth Team (AeIGT) initiative and the ASTRAEA (Autonomous Systems Technology Related Airborne Evaluation & Assessment) programme, in which we are a funding partner.

  The Scottish defence company base includes the presence significant international players who have either grown their businesses in Scotland over many years or who have set up in Scotland to take advantage of the leading technologies being developed in our universities or the skills of a highly-trained and innovative workforce.

  The defence sector is therefore a significant generator of inward investment to Scotland. Continued commitment to defence companies in Scotland from the MoD as a customer, will have the spin-off benefit of encouraging yet more inward investment to the additional benefit of the economy.


  SE welcomes the stated aim of the DIS to "promote a dynamic, sustainable and globally competitive defence manufacturing sector". We also welcome the recognition of the UK's (and thus Scotland's) quality defence base and its ability to compete in international markets. A high technology, high value-add manufacturing sector remains as one of the principal building blocks for the long term success of the Scottish economy and the defence industry remains at the leading edge of technological advancement in support of our armed forces, as well as in terms of the potential to generate export opportunities. If consistently and wisely applied, the DIS can help companies become even more competitive, thus creating the conditions for enhanced international defence market penetration.

  SE welcomes the recognition in the DIS of the evolving nature of defence procurement and the need to improve long term value for money to the UK taxpayer. This mirrors the business efficiency and business improvement themes that as an economic development agency we have been vigorously promoting and supporting within all the industries and relevant customers with whom we interact.

  The emerging theme of developing through-life capability is also to be endorsed. Both value for money considerations and the development of through-life support will necessitate a reshaping of industry and the development of new skills and capabilities. SE is already supporting companies in the defence sector (and other industries) in initiatives such as lean manufacturing, logistics, distribution and supply chain management, project management and other management skills.

  In broad terms, SE welcomes the clarity that the DIS will provide to defence companies. This will assist in the development of long term training initiatives and in our efforts to focus and develop the Scottish supply chain. However, based on an understanding of the practical issues facing the industry in Scotland, we do have some significant concerns surrounding the implications for long term job creation and stability that result from how the DIS is implemented in practice.

  Clearly the desire expressed in the DIS to "maintain appropriate sovereignty and thereby protect our national security" is understood and naturally endorsed. The contention that the UK may not be able to maintain a complete cradle-to-grave industrial base in all areas is also understood. The desire to get away from the "boom and bust" history of major defence projects, particularly in the shipbuilding sector is also welcomed.

  However, we are concemed that the defence expenditure focus in the DIS underplays the complexity of the wider economic impact calculations that are inherent in any decisions on which industry capabilities should, and which need not be retained In the UK. Such assessments must take account not only of the need to secure value for money on specific defence contracts or groups of contracts, but also must simultaneously secure the maximum benefit to the UK economy. The MoD's expenditure of public funds is significant it has a duty of care to ensure it achieves value for money in the widest sense for the UK taxpayer, not just against its own expenditure targets. The cost-benefit calculation is more complex.

  Company capital investment decisions in the defence sector company base can be very large. Investment in the recruitment and training of staff, particularly in the skills required to serve complex defence projects are also significant, with long lead times to ensure that the necessary skills are in place. If the MoD expects companies to invest in facilities, equipment, staff and training it must offer both certainty that such investment is justified and will provide a reasonable rate of return. From an employment standpoint, that same certainty is required to attract people to join and stay with the industry. Recruitment and retention of staff is a major issue. The MoD has a role to play in ensuring that this is effective.

  Taking into account the economic implications of determining the industry base essential to retaining the essential core requirements of the MoD, there is a concern that there may be a danger for overly-simplistic programme-based thinking to skew the agenda. This is seen as a particular problem in the light of the current compartmentalised approach of the Defence Procurement Agency to procurement programmes. It is therefore welcome that the DIS acknowledges that re-organisation within the MoD and the DPA is planned. The hope and anticipation is that this reorganisation will enable more broad-based considerations of how defence programmes can be managed to derive the maximum economic benefit to the UK Taxpayer.

  While SE has an active interest in the economic contribution of, and involvement with, companies engaged in all of the industrial sectors considered as part of the DIS, the industrial landscape is such that Scotland has a proportionately greater interest in the area of shipbuilding and ship maintenance. The implementation of the DIS in the maritime sector is therefore of greater significance, particularly as to its impact on employment and economic impact.


  In value terms, Scotland's shipbuilding sector is focussed primarily on the manufacture and support of naval ships and specialist, more complex vessels for niche markets. In 2003 (the latest published figures) Scotland had some 20% of the UK's output in shipbuilding and employed 5,200 staff.

  In the same year, shipbuilding alone was recorded as contributing some £150 million gross value add (OVA) to the Scottish economy. Since 2003, naval shipbuilding activity has increased significantly with the Landing Ship Dock (Auxiliary) and Type 45 destroyer programmes. It is fully expected to grow significantly further based on current and future MoD orders, particularly the Future Aircraft Canier (CVF) programme. Scottish-based companies have already been identified as playing leading roles in CVF, and yet more Scottish companies are hopefully to be considered as potential major suppliers to the programme.

  Scotland is home to 50% of the UK's naval shipbuilding and ship refit capacity, the largest companies being BAE Systems Naval Ships, which is headquartered in Glasgow, and both Babcock's Engineering Services and Naval Services divisions, again both headquartered in Scotland. These three companies alone currently employ some 5,400 highly skilled staff. This includes a significant proportion (circa 62%) of the UK's surface ship design capacity.

  The DIS provides welcome recognition of the "high priority for the UK to retain the suits of capabilities required to design complex ships and submarines, from concept to point of build; and the complementary skills to manage the build, integration, assurance, test, acceptance, support and upgrade of maritime platforms through-life." Scotland has strength-in-depth in all of these fields.

  However there are aspects of the Maritime section of DIS, particularly in how in practice it is to be implemented, that give grounds for some concern in terms of the implications for employment and economic impact. While details for implementation of the DIS are still to evolve, it is as well that such concerns are highlighted in advance in order to ensure that they may be addressed as implementation of the DIS proceeds.


  SE welcomes the firm commitment to retain all the UK capabilities with respect to submarines and nuclear steam raising plant (NSRP). In addition to the surface vessels deployed there, HMNB Clyde at Faslane is the base location for the UK ballistic nuclear (SSBN) fleet and for the Swiftsure-class SSN fleet submarines. It is also the nominated base location for the first six (three committed and under construction) Astute-class fleet submarines, where a substantial additional capital investment programme is now underway to ready the base for the deployment. As such, the base has both the specialist facilities and highly qualified nuclear staff in place to handle current and impending workloads.

  An economic impact study undertaken in 2005 on behalf of SE of the Faslane/Coulport base found that some 4,055 jobs were created in the Travel to Work Area (TTWA) by the operation at Faslane/Coulport some 9.4% of local employment. The base is a significant local employment generator in an area which demonstrates higher unemployment rates than Scotland as a whole. The purpose of this study was to inform current concerns on the employment implications of the anticipated significant downturn in maintenance workload stemming from the decommissioning of the current Swiftsure-class SSNs in advance of the introduction of the Astute-class boats.

  From an economic development standpoint, SE has a concern that workload downturn will result in the loss of skilled jobs that, owing to lack of equivalent employment opportunities in the local area, may be lost to the local economy completely. The DIS recognises this fact in relation to shipbuilding, but the same concern applies to companies engaged in ship and submarine refit and maintenance.

  The DIS highlights the intention under the Maritime Industrial Strategy (MIS) to "start negotiations with key companies that make up the submarine supply chain to achieve a programme level partnering agreement with a single industrial entity for the full life cycle of the submarine flotilla". This is understood and endorsed. However, there is a concern that failure to address short/medium term workload issues will result in the loss of skilled jobs at Faslane that will not be easily replaced in order to address the future upturn in work. Babcock Naval Services, the contracted commercial operator at Faslane/Coulport, has already provided significant operational cost savings to the MoD based on the terms of its gain-share contact. This type of contract is understood not to be in use at other UK dockyards. Equally there are no guarantees on workload at Faslane, which contrast with the case elsewhere.

  Concerns over the workload at the Faslane facility, potentially both constrains its ability to contribute to the cost-effective submarine acquisition modernisation (SAM) strategy to serve the best interests of the UK in the longer term, and will lead to a negative impact on local employment.

  SE would welcome an urgent review by MoD to the potential sharing of the short/medium term submarine basing and maintenance workload between the available facilities at Devonport and Faslane. This is particularly against the backdrop of the both proportionately and numerically higher levels of employment, lower levels of unemployment and the larger labour pool prevalent in the Plymouth area, and the ability for Devonport to take account of the larger surface fleet presence there to adjust its workforce deployment. SE would welcome the assurance that the MoD will take account of all of these issues and that no decisions will be taken on submarine work allocation/basing in advance of a properly balanced decision under the DIS.


  SE welcomes the measured and balanced approach in the DIS to the issues surrounding procurement of surface naval ships. As has been set out above, the drive to achieving manufacturing greater efficiency, the emphasis on high value-add activity and move towards considerations of value for money in the development of through-life support are entirely in line with work that we are promoting in industry generally.

  The skills and training programmes that we are currently helping to develop and deliver are available to companies operating in Scotland and we look forward to playing our part in support of the aspirations of the MoD to achieve better value for money for the UK taxpayer.

  The abandonment of the absolute commitment to onshore hull construction which was previously set out in the Defence Industrial Policy is recognised as necessary and pragmatic. Given the complexity of modern warship construction, particularly on large, complex programmes such as the CVF, Type 45, Future Surface Combatant and more complex support vessels (MARS) programmes, the abandonment of he commitment on hulls is probably less relevant in any event.

  The high value-add in warships is in their systems and complexity of construction (packing density) where the UK workforce skills and experience can be brought to bear more cost effectively. The acknowledgement the DIS of the fact that "it is not effective to develop from scratch the most advanced, high-value skills needed for specialist hull construction or complex assembly tasks" is also welcome. As has been stated above, SE is already actively supporting a wide variety of skills development and training from craft/trade skills right up to senior management and specialist training programmes.

  The DIS sets out broad guidelines for those elements of the forward surface ship programme that must strategically be retained onshore, and those which may be open to international competition, based on the complexity of the ships involved and the stages in the ship construction process. This clarity is welcome, but there is a concern that there may still be a tendency towards viewing individual ship procurement programmes on a stand-alone basis (Paragraph B2.18 of DIS| "The strategic need for onshore execution will be judged on a case by case basis|").

  It is our view that judging the need for onshore execution on a case by case basis is too simplistic an approach, and inconsistent with the desire to ensure best value for money in future naval shipbuilding programmes. In the development of an effective and efficient long term defence industrial strategy it is necessary to consider the impact for disjointed planning to add costs to the procurement programme overall. This is equally true in terms of ship maintenance and refit programmes which, if carefully programmed, have the ability to add value to wider construction programmes and help to retain and up-skill staff.

  Careful planning for the incorporation of programmes for the construction of lower complexity vessels (those which might otherwise in a stand-alone programme approach be considered for offshore manufacture such as has been hinted at with respect to the MARS vessels) could instead:

    —  help to de-risk the "core" onshore naval ship programmes;

    —  provide opportunities for developing and maintaining workforce skills;

    —  effectively utilise hard-won staff experience and knowledge;

    —  help justify further expenditure on, and utilisation of ship construction assets;

    —  spread the overhead costs that might otherwise have to be borne by the "core" naval projects; and

    —  help secure economies of scale.

  The "core" programmes such as Type 45 and CVF will provide the opportunity to safeguard and to increase shipbuilding employment in Glasgow and Fife (and elsewhere in the UK). More workers will be attracted to join the industry—traditionally not seen as providing job certainty and therefore not attractive—if there is surety of long term employment. Combining CVF with other programmes, including ship refit work, has the potential to help secure both economic advantage and the benefits set out above. Additionally properly planned, multi-programme planning which enables the flattening of workflow peaks will help further improve job security and the attractiveness of the industry as an employer.

  In short a careful, planned approach may have the potential to maximise the job opportunities and economic impact from the shipbuilding sector, whilst at the same time improving company efficiency and securing better value for money for the UK taxpayer. This will of course require commitment both from the shipbuilders to improve efficiency and cost-effectiveness, but will also require a cohesive, efficient and sophisticated approach to procurement from the MoD as customer.

  As a practical example of how this might operate, the UK construction industry has seen remarkable changes in the approach to the procurement and undertaking of major capital investment programmes in recent years. Major customers such as BAA (which expects to spend some £6.8 billion over the next 10 years) have taken the lead in helping to forge new approaches to contracting and working with suppliers to provide cost effective solutions to its needs, while ensuring the sustainable viability of its suppliers. As stated on its web site:

    "BAA is one of the UK's principal developers of infrastructure and one of the construction industries largest clients. To ensure value 18 achieved from this investment, BAA works in partnership with the industry to achieve maximum efficiency, continuous improvement and higher standards in construction projects.

    As a major construction industry client, BAA has an important influencing role and ensures that a safe and sustainable approach to construction is adopted across the whole process starting from development and design and leading through the supply chain to delivery and operation."

  There is no reason why the MoD, as the single largest customer for ships in the UK cannot act as an effective catalyst for change in the shipbuilding industry, although this will require the adoption of a new and ambitious approach to contracting. However, the net benefits to the UK taxpayer from adapting such an approach will help secure a long term sustainable shipbuilding sector offering concomitant advantages to the economy and to job creation in the UK.

  It is acknowledged, of course, that in certain circumstances, the competition for surface ships, particularly support vessels, from international suppliers may be appropriate, if only to ensure continued value for money from UK builders and to ensure that competitive costs are being achieved. However, there are two issues to consider. Firstly the costs of acquiring overseas must be compared with the overall advantage that might accrue to the MoD and the UK (and the Scottish) economy of retaining the work onshore in its broadest sense, as set out above. Secondly, in deciding to acquire overseas, the UK MoD must be mindful that it may be simply helping to spread the overhead costs of foreign yards which have the advantage of protected contracts from their own national governments, this making it even easier for them to compete with UK yards in international export programmes from other countries.

  Scottish companies have significant potential for export work which should not be hampered by the unintentional, but nonetheless effective weakening of their competitive position resulting from the MoD contracting overseas.

  It is important to recognise that under European rules (Article 296 of the Treaty) military ships need not be tendered out with the home country. Whilst there is nothing to prevent the MoD from contracting for military vessels overseas in appropriate cases, the potential advantages from being able to use less complex vessel programmes to assist in the efficient procurement of the UK "core" shipbuilding programmes is lost if an arbitrary decision is taken to declare them as non-military. As an example, the MARS ships are designed primarily to operate in service of the Royal Navy's front-line warships. As with each of the current RFA vessels, the MARS ships will be fitted with weapons systems. As such they can hardly be termed clearly "civilian".

  As explained earlier, SE has been actively supporting workforce training initiatives and the provision of Modern Apprenticeships. It would be good to know that the skilled jobs developed as a result of this public support have long term potential to contribute to the economy. The increasing technical complexity of military equipment requires the creation and safeguarding of advanced design and manufacturing jobs and skills. Jobs are not limited to lower level trade skills, but include a broad spectrum of skills areas including naval architecture, computer aided design, project management, electronics, electrical and mechanical engineering.

  A well developed and efficient skills base provides the potential not only to help create a vibrant defence industry, capable of winning overseas orders and providing export income for the UK, but also of supporting the continued development of the broader UK industrial base. Skills developed in the defence industry have the potential for dissemination into other industrial sectors.

  They also have the potential for ensuring a long term supply of skills to the ship refit and repair sector, thus helping to secure the aims in the DIS for achieving savings and efficiency by means of a through-life approach to military procurement programmes.

  The shipbuilding industry in Scotland has a long and distinguished history. With careful management it can have a bright future, fully aligned with the aims set out in the DIS.


  With few exceptions, SE welcomes the clarity and comprehensiveness of the government strategy for defence procurement set out in the DIS. Effectively implemented, the DIS has the potential to assist in the long term sustainability of the defence industry in Scotland and to help secure quality employment opportunities which will assist this industry and help to feed into other industries on which the economic success relies.

  Our reservations with some elements of the DIS are less to do with overall substance and more to do with how certain aspects will be addressed in its practical application. We highlight these issues to the Committee in order to secure a firm understanding of their implications for economic development in a Scottish context.

  We will continue to support the development of industry in Scotland in its broadest sense. Defence is a high technology business offering the potential for quality employment, export opportunity and the development of an enhanced research base. As such it is closely aligned with our ambitions for the Scottish economy.

20 February 2006

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