Memorandum from Scottish Enterprise
INTRODUCTION
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.
SCOTLANDA
KEY PLAYER
IN THE
UK DEFENCE INDUSTRY
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.
DEFENCE INDUSTRIAL
STRATEGYTHE
SCOTTISH PERSPECTIVE
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.
NAVAL SHIPS
& SUBMARINES
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.
SUBMARINES
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.
SURFACE SHIPS
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 industrytraditionally
not seen as providing job certainty and therefore not attractiveif
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.
CONCLUSION
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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