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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1705-i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE DEFENCE COMMITTEE
The Future of the UK's Strategic Nuclear Deterrent: the manufacturing and skills base
Tuesday 7 November 2006 MR MURRAY EASTON, MR STEVE LUDLAM and MR PETER WHITEHOUSE MR RON GRANT, MR JIM MORRISON and MR JOE OATLEY Evidence heard in Public Questions 1 - 94
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Defence Committee on Tuesday 7 November 2006 Members present Mr James Arbuthnot, in the Chair Mr David S Borrow Mr David Crausby Linda Gilroy Mr David Hamilton Mr Brian Jenkins Robert Key Willie Rennie John Smith ________________ Memoranda submitted by BAE Systems, Rolls-Royce plc and Devonport Management Limited
Examination of Witnesses
Witnesses: Mr Murray Easton, Managing Director, Submarines, BAE Systems; Mr Steve Ludlam, President Nuclear Business, Rolls-Royce plc, and Mr Peter Whitehouse, Corporate Development Director, Devonport Management Limited, gave evidence. Q1 Chairman: Good morning to everybody and welcome to our three witnesses for the first part of this morning's session. I wonder if you might like to introduce yourselves, first of all starting, Murray, with you, and then moving along the line, to tell us who you are, what you do and why you do it. Mr Easton: Chairman, why I do it? Good morning, Chairman, ladies and gentlemen. My name is Murray Easton, I am the Managing Director of BAE Systems Submarines, the main part of which is based in Barrow-in-Furness. Our responsibility is the design and construction of the Astute-class submarines currently. Mr Ludlam: Good morning. My name is Steve Ludlam, I am the Managing Director of the Rolls-Royce Submarines business and our responsibility is to design, manufacture and support in service all the Nuclear Steam Raising Plant. Mr Whitehouse: Good morning. I am Peter Whitehouse, I am DML Devonport's Development Director, and we are the site that refuels and refits the SSBNs and SSNs. Q2 Chairman: Thank you very much. I will start with a question which seems as though it covers the whole of this inquiry, which is about the skills base that is needed for the strategic nuclear deterrent, but in fact it is quite limited. I wonder if I could start with you, Murray Easton, and possibly Peter Whitehouse, to ask: what are the specialist skills that are required to maintain a minimum submarine design, construction and refitting capability in the United Kingdom, please. Specialist skills. Mr Easton: First of all, Chairman, if I could talk to the design and construction end, and I will let Peter, if you do not mind, speak to the refitting and support end of life, as far as the submarine is concerned, a nuclear submarine is without doubt, as yourself and the Committee, Chairman, saw very recently when you visited Barrow, an exceptionally complex product, both in its design and construction to, really, the highest standards of manufacture. As a result, there are very specialist skills required. If you look at the design end of life, both the computer graphic skills that we need in our professional engineers, our designers and in our draughtsmen, are key. We design to very tight tolerances and very complex systems, and in systems engineering there is the integration of, for example, structural hydrodynamics, noise and vibration, life support, safety - both boat safety and nuclear safety - and a number of other key skills. If we then move on to the construction, both in terms of the staff - which I think is often understated, that being the planners, the safety technicians, the quality control people and the supervision of a very skilled workforce in terms of manual skills, both at the structural end through electrical, mechanical and the integration of those systems - and then the commissioning of them in this very complex task means that when you look at the minimum number that we would require, I think that was your question, back in the early-90s we had some 14,000 people at Barrow-in- Furness, supplemented by some 2,000 subcontractors and we now have 3,450 plus 200 contractors. A lot more is required of our people now, such are the issues of affordability and our response to that challenge, and I feel very much that we are at the critical mass just now in the design, build and commissioning end of the enterprise that we actually need. So below this I think we would be in a very perilous state. Q3 Chairman: Bear in mind it is the skills I am talking about rather than the number of people. Mr Easton: Yes. The skills themselves are very submarine-specific skills. It is often said that submarine designers can design surface ships but surface ship people cannot design submarines, and that is not a reflection on either, simply to say that one is much more complex. So the skills are very specific; the standards that are required for the design and ultimate operation of the submarine are such that they do not exist anywhere else, and in order even to supplement the nuclear skills we do transfer small numbers of people between our colleagues in Rolls-Royce, in DML and Barrow. So you will find that there are already some shortages, and we cover them by that level of co-operation. Mr Whitehouse: I could repeat a lot of what Murray has said in terms of the specialist skills in the nuclear area, systems integration, commissioning skills and things like that. In addition, so far as Devonport is concerned, we work on the submarine in configurations that are totally different from when it is operating. Refitting and refuelling the submarine means that we have to address things like safety case issues that are very specific to the things that we do and the configuration of the submarine when the reactor is opened up and we are refuelling, for instance. So there is a very big emphasis, in our business, on an additional area which is on the facilities, their safety justification and the safety justification of the boat as part of a system that comprises the dock and all of the support infrastructure. That is probably the biggest area that is additional to what Murray describes. We are probably slightly lighter in the front end detailed design area because we are actually working on a product that exists and is there in our facility, but I think the additional areas I would highlight are things like the environmental discharge consents, the environmental assessments - all those additional adjuncts that actually come into play because of what we do to the submarine during the refuelling operation, in particular. Q4 Chairman: Would you agree with Murray Easton's suggestion that a surface ship designer would be less able to design a submarine? Would you put that into the refitting context as well? Mr Whitehouse: So far as the nuclear specialisms, some of the system specialisms, are concerned, I would agree with that. When we look at the industrial labour force in Devonport, we have had to, and we are continuing to, move large numbers of people between the two types of work stream. So, so far as the industrial labour force is concerned, we do actually have quite a bit of mobility between the nuclear and non-nuclear work streams. Q5 Chairman: What about the design and construction of a Nuclear Steam Raising Plant? What specialist skills are needed for that? Mr Ludlam: If I take the two different sets of skills, one on the design side, the design-specific skills there are ones of nuclear engineering which is essentially a multidisciplinary engineering approach, and it is a very vital skill to bring all the disciplines of engineering together and make sure that we design and develop a very safe plant operation. I would endorse what Peter said about the safety justification skills that are absolutely vital to be sure that we are safe at all points in time with the operation of the plant. So they are the essential skills in the design side of Nuclear Steam Raising Plant. The essential skills on the manufacturing side are particular to core manufacture, which is very unique to what we do here in the UK, and are also particular to heavy pressure vessel manufacture since we now have only one pressure vessel manufacturing capability in the UK to undertake this size of pressure vessel for nuclear submarines, and they are very specialist manufacturing skills, not ones which are easily acquired or easily trained. Q6 Chairman: Of these skills that you have talked about, which are the most vulnerable to loss and which would be the hardest to replace? Mr Easton: That is an exceptionally difficult question to answer because we, quite frankly, do not value one more than the other. The interaction of all the skills on the site, whichever of the three sites we were looking at, would be crucial. To have, on the one hand, world-class welders (and I mean absolutely world-class structural welders or pipe welders), I could not compare them as more or less critical to the designers, for example, or the commissioning engineers. If they move away you are vulnerable to any of those parts of your business being reduced. Mr Ludlam: I would endorse what Murray is saying; it is that multidisciplinary nature that is necessary to bring the total submarine together and keeping those specific skills within that multidisciplinary area that is absolutely vital. Mr Easton: If I may, Chairman, often in the public domain there is a view that a welder is a welder is a welder, as an electrician, but it is so specialist in this particular product that it is not just a matter of their training it is a matter of their experience as well, and it is vast, quite frankly, in any of the three facets of the business that you are interviewing today. Q7 Mr Jenkins: If I could ask questions on the Nuclear Steam Raising Plant, what is the difference between the commercial nuclear power station and their steam raising plant with all their engineering skills to the submarine environment? Why are they not interchangeable and why are you still going back through the record of how much skill and experience we need? We need that across the commercial world as well as in the military world. What is so different? What is this specialist skill? What is unique about building a Nuclear Steam Raising Plant for a submarine? Mr Ludlam: At a basic level the skills are the same; the uniqueness of a Nuclear Steam Raising Plant for a submarine is its size - its compactness. That is the first point I would make. We need to fit a very powerful reactor into a very small space, which is quite different to the civil world, and the materials therefore are likely to be different on a submarine reactor; the size and shape of things are quite different and the tolerances we are working to as a consequence are quite different, in that respect. If we look more specifically at some of the more detailed parts of the reactor - let us take the reactor core - that is quite different, out of necessity, for the way that we operate a submarine plant compared to the way that we would operate a civil nuclear plant. A submarine plant is moving up and down in speed all the time and the reactor, essentially, follows that movement up and down in speed and therefore has to be controlled in a particular way. A civil reactor sits at power, at a constant power, and the control systems are quite different as a consequence of that. I think there are some quite marked differences, but at the basic level there are some similarities too. Q8 Mr Crausby: I would like to ask some questions specifically on the submarine design base, and these questions are aimed at all three witnesses. I have heard a great deal over the years, really, particularly about the loss of the design base for the production of submarines at Barrow. The question I would like to ask is: what do we do about it, then? We go on and on and talk at great length about what a great problem it is, so how could a minimum design base be sustained and what kind of work would it need to be involved in? Mr Easton: May I start? If you look over time, over certainly the last 20, 25 years, it is quite apparent, although I am relatively new to Barrow-in-Furness - only three-and-a-half years there - that the design and build of nuclear submarines has been supplemented by the design and build of very large first-of-class surface warships, and some of them very complex surface warships. That rather builds on the response I made earlier about the capability of designers but it has also assisted in smoothing the peaks and troughs, if you like, of the design demand, resource demand, over time. So what can we do to retain them? We routinely recruit significant numbers of apprentices. We are now up over, at the last count, 114 apprentices this year, and that is excluding 12 accelerated and four adult apprentices with a further 28 graduates. So we are trying to bring new blood in, and they love coming to us because it is a very challenging work environment; it is on the leading edge of technology. So we are supplementing and we have a lot of people who stay with us a long time because they are skilled. How do we retain them? I have to say by ensuring that there is continuity of work in a place, clearly. Q9 Mr Crausby: Lots of people would say that there is no future in this business. I was brought up in Lancashire and that is what people said about cotton when I was very young, and they were right, were they not? Is that an issue - where people say: "There is no long-term future in submarine design, so I ought to do something else"? Mr Easton: If I were to make the analogy you just have, there are other places in the world to get cotton but as far as nuclear submarines are concerned, first of all there are very few places that build them and build them to the cost that we do. I think we have a very favourable comparison to at least two other builders, being France and America, so whilst they are expensive products, they appear comparatively to be good value for money. What else can we do? Where can we get them? The policy is that we cannot export our nuclear submarines currently, and for understandable and obvious reasons, so we have the home market and that we must satisfy. Mr Ludlam: If I can just add to Murray's point, I think all of us find when we bring either youngsters in or somebody in their first or second change of career they are very excited by the work that they are given. It is a challenge for engineers, they thoroughly enjoy it and I think they would then welcome the future of a long-term programme and the future of a long-term programme actually would then spur on that innovation that they bring. Engineers do enjoy the challenge, and submarines certainly give that challenge. Mr Whitehouse: One of the key issues going forward is that to actually be able to attract young people into this particular industrial segment it is going to be very important that, as the civil programme potentially starts up again, they can see and believe that there is a vibrant and relatively sustainable and stable programme going forward, whatever its size, rather than one that, if you like, is turned on and off depending on the exact circumstances of the day. I think this tension that will probably start to arise with the MDA work with the civil programme and the military nuclear sector is actually going to make that aspect of being able to look forward and see a forward submarine programme much more important perhaps than heretofore. Q10 Mr Crausby: Murray's point that you can still get cotton in other parts of the world is the core of it, really, is it not? We cannot leave this to market forces. We can still get cotton but if we let this go then we will not be able to buy nuclear submarines. So does the Government have a role in ensuring that this is in some way supported, to ensure that we maintain a minimum base? The question I would like to ask is about what that cost would be and the size of that. In personnel terms, for instance, how large would a minimum design base need to be and to what extent should the Government prop that up and pay for it? Mr Easton: I never believe that the Government alone has the responsibility; industry also has and we have our part to play. Affordability is a huge issue that is very prominent just now, and I like to think that within industry we are making a very serious and significant response to that. If you look at what should the Government do, as has been mentioned by Peter Whitehouse, continuity of work is all for not only us as the designers and builders but, also, for the entire supply chain who depend on us. If we do have fluctuations people will leave us for very challenging work elsewhere. They want to work in the submarine business and we have to ensure that even if there is a further delay, or any delay, in the submarine ordering programme it will have a significant and, I think, very catastrophic impact on our ability to design and build and, therefore, for this country to have its own nuclear submarine design and construction. Q11 Mr Crausby: I know it is a difficult question but I am asking the question how many and how much, really, as to what the size of the design base should be; what are the minimum numbers of people and how much would that cost the industry without the support of orders? Mr Ludlam: I do not think it is easy to give a size but some of the points that we each consider as we look to invest in each of our businesses - and I will separate manufacturing again from design - on the design side, to preserve the level of skill that we need we think a eight-year design refresh is quite important; so every eight years it would be quite interesting to retain the skills to do a new design. Certainly when we have looked forward in Rolls-Royce, we have anticipated that a two-year, 22-month, or something of that order, manufacturing drumbeat would be the sort of size that we could work to. So if the Government were to help, a long-term programme based around those sorts of parameters would be quite useful to us, to allow us then to take our part in industry and say: "With that as a horizon we can now size (?) the businesses accordingly", and at that point I think we could give a much more reliable estimate of what would be necessary to keep the skill base and actually keep quality manufacture, because quality manufacture is the important thing, Q12 Mr Crausby: We went 16 years between Vanguard and Astute. Are you saying that is too long? Is that really what caused the problems of Astute? Mr Easton: We have undoubtedly haemorrhaged skills and experience during that gap that you are talking about. We currently stand at 150 designers or professional engineers, the design end, and some 300 draughtsmen in support of them taking that three-dimensional information and making two-dimensional information for production. They are absolutely critical to us, and that is the core that certainly in Barrow we must maintain. We can supplement that; we can with computer graphics out-source, but it has to be very selective because of the skills and the understanding of the people that you require. So I completely agree with you, it is fundamental that we sustain it. We have fluctuations in the programme and these fluctuations naturally, were there any delay, will be very significant to us. Q13 John Smith: You referred to retaining these skills and the role of Government almost exclusively in terms of continuity of work and making sure the work is there. Do you believe the Government could go any further? Currently, we have the Defence Training Review; there is going to be a major announcement shortly and if it goes according to plan there is going to be the creation of a huge Tri-Service military school of engineering. Could you envisage a role that Government, or the MOD, could play in supplementing or assisting you in retaining skills or providing skills for the future? Mr Easton: I think you make an exceptionally good point, and in fact we have been in dialogue recently with the customer, the Ministry of Defence, because it is imperative that we actually bring operating experience into the design in order that the design is most cost effective, it suits what the operator needs and, also, for through-life maintenance because they maintain it through life at sea before it goes to a place like DML for maintenance. We need that experience to be integrated. For any future boat I consider it very, very important that there is integration, and yes, they could supplement some of the resources. The core resources that we have with the understanding on what build techniques there are and what design capabilities are needed is fundamental. However, you are quite right; it can be supplemented. Q14 Mr Borrow: Mr Murray, you mentioned the use of surface ship work to help with the peaks and troughs of submarine work. I got the impression that you are working on the basis that the surface ship work would supplement existing submarine work. Would it be possible to retain and maintain the skill base if there was a clear gap in submarine work and substitute for that surface ship work, or would that not be possible? Mr Easton: If I gave the impression that surface ship work would supplement our current requirement for submarines then that was erroneous, and I apologise. What I meant to say was, effectively, where there are also gaps in the programme. For example, the design of Astute is not complete but, as your Committee saw when you visited, it patently exists and we are in the final stages of commissioning a complex first-of-class. Therefore, we have designers that will increasingly throughout 2007 finally become available. What do we do with them? If we are to retain them there must be work. There is the possibility naturally of surface ship work satisfying that what will be a surplus at that time - it is not yet but it will be at that time. Yes, it very definitely can compensate in those areas. The only problem I foresee is that although that satisfies the demand in engineering and the design and drawing end (if you, for example, talk about the aircraft carrier that would satisfy that and we have plans to become actively involved in that), in fact, though, in production we are out of sync and the carrier does not fill the hole that any delay in any of the submarine orders would generate. In fact, it makes it worse because it supplements our demand for submarines - the point you made - and then the trough is even deeper. So we really cannot, as an integrated business, cope with a delay to the submarine programme. Mr Ludlam: If I can make a slightly separate point against the question (I think it probably applies to each of us, but I will be very specific), let me take the pressure vessel area. In Rolls-Royce we make pressure vessels; we made them in the commercial business, then we made them in the nuclear business for the civil plants and then we went back to the commercial business. As the commercial business was getting more and more competitive and we came back into the nuclear side, what we found was that we had lost some of the skill necessary to build nuclear plants, and we went through a fairly tough period of producing lower quality than one would expect to see on Royal Navy submarines, and it took us a long while before we got that right and then could send things out of the factory. If we are not using the skills in the right environment and in the right domain I think they do erode; you have got to keep practising. It is a slightly separate view, and we have probably all got specific areas like that in each of our businesses that would see that same effect. Q15 Mr Borrow: So the existence of a short gap may not have a significant effect on skill levels, but the longer the gap the greater the loss of skill ---- Mr Ludlam: The level of skill begins to reduce. Q16 Mr Borrow: Also, the greater the likelihood that people with those skills would go elsewhere because they wanted to build submarines rather than do something else. Mr Easton: Or they wanted a high technology challenge. Good engineers go for good engineering challenges. Job progression. Mr Whitehouse: It is also a very important part of the affordability equation. Our business is integrated, we have a nuclear and a non-nuclear maintenance workload and an industrial workforce of 2,200/2,300 that we move between the two. If we look at the submarine population going forward, we are talking about 7 SSNs and 4 SSBNs. Statistically, that is a very small number. So we will see going forward, on a three-year rolling basis, an enormous variability in our nuclear load: peak load to minimum load a factor of 4:1 on a three-year cycle. It is essential to help with the affordability equation in the support area; at the end of the day, 70 per cent of the cost of one of these things is in service and when it is being supported, not in build. It is essential that we will have access to non-nuclear workload to help cope with that extreme variability in the nuclear throughput, otherwise the unit costs are extreme and the affordability problem becomes perhaps unmanageable. Q17 Mr Borrow: Can I pursue the issue around the numbers involved in each of the specialist skill areas. I think, Mr Murray, you mentioned that your existing staffing level is about as low as you could see as being sustainable, but you were not in a position to identify one particular area of skill as more important than another. Would it be possible to give details of the minimum numbers in each specialist area that would be needed to sustain that skill base? Even if you have not got it now, would it be possible to make those figures available? Mr Easton: Indeed, I am perfectly happy to support that and I commit to do that after the hearing. We can be talking about single numbers of people with the skills: four radiation physicists or half-a-dozen people with the structural design capability - it is down at those levels, it is not big numbers at all. We co-operate, obviously, and make proposals to the Ministry of Defence, our customer, to try to modify what can be a disadvantageous situation to them or to us. As an example, we were talking about is there a delay, is there a gap? The gap between the first and second, second and third Astute submarines was 18 months each, thereafter 24 months. That is the way they were originally contracted. We have modified that in a proposal to the Ministry to 22 months and 22 months, as Steve Ludlam mentioned. The reason for doing that was to optimise the resource profile so that we did not create big demands and then we had surpluses. So we have proactively looked at this ourselves and made a proposal. It actually reduces the number of people slightly that are employed in Barrow but it was better for the whole programme. Q18 Chairman: Peter Whitehouse, could you provide the same sort of information in relation to Devonport, please? Mr Whitehouse: Yes. Chairman: Moving on to decommissioning, David Hamilton. Q19 Mr Hamilton: You will be aware that in July the Prime Minister agreed that a decision will be taken at some point whether we continue with the nuclear deterrent or not. I do not know whether that will be a free vote or whether there will be a whip - I am not too sure but I can have a good guess! Everybody will be watching to see how that goes. My question is really about decommissioning and the maintenance skills required, because it is not something you just close off, you would have a long-term feed-out (?) if that were to be the case - it is important to understand that. If a decision was taken to abandon the construction of nuclear submarines what skills and infrastructure would have to be kept for the maintenance work? Peter, I think you are probably the best person for that. Mr Whitehouse: If the submarines continue to operate until a date when they begin to phase out, essentially, the profile of our workforce and the infrastructure - the physical facilities that we need - would be not too dissimilar from where we are today if there were to be further refits during a phased run-out, perhaps during a transition to perhaps even a different type of delivery system. Thereafter, if a programme were stopped then the key thing is that our facility at the moment has the unique capability to actually move the irradiated fuel out of the NSRP and package it ready for transportation to Sellafield. That would be, obviously, a markedly different workforce size and skill mix compared to where we are today because we are refitting at the moment. We would need to keep the site licensed with the NII and, therefore, a lot of the infrastructure teams would not look markedly different from what they do today. So infrastructure, probably, very similar in terms of maintaining the site licence and keeping the facilities capable of doing the work they do. In terms of workforce, it would move progressively towards focusing on all of the things that are needed to actually safety-justify the de-fuelling operation, keep all the environmental consents and other authorisations in place to allow the de-fuelling operations to happen, and thereafter to actually then begin to address the issue of disposal of the actual hulks. Q20 Mr Hamilton: Could you give us an estimate of how many people that would require? If you cannot, could that information be passed across: present workforce to what would be required if that was to come about. Mr Whitehouse: Indeed. Q21 Willie Rennie: I get a sense that the excitement in this area is all around building new vessels and that decommissioning would not be that attractive for those that you require to do the job. How much is that the case and what would be required in order to attract those individuals? Mr Whitehouse: It is not particularly about excitement, it is about the scale of the operation that would be carried out. The numbers of people would be markedly reduced from where we are today as a maintenance and refit site. I think the key issue would be the tension, perhaps, that we would see with the ramp-up of the NDA work within the civil sector. In fact, as a business ourselves we are looking at NDA activity to actually help mitigate the variability of workload that we see from the submarine programme; we are looking at the NDA sector to deploy some of our skills and keep people that we need in the long term effectively and productively employed during lulls in their military workload streams. At the end of the day, things would have to be done; we would be in there in a common pool looking for common skills with the NDA programme, and that is something we would have to address at the time. Q22 Willie Rennie: Is there the kind of kudos, though, attached to that in the same way as the kudos to building new vessels? Are people attracted to that? Where do the best people go? Mr Whitehouse: As it stands at the moment, we have very little difficulty in attracting young men and women, graduates and apprentices, as Murray has described, into our business to carry out the maintenance work. In many respects it is every bit as complex as the build programme but with the complexity focused in different areas. There is a lot of challenge for both our non-industrial and our industrial workforces in what we do as the refit site. If the submarine programme were to wind down at some point in the future then the skill mix, the numbers of people, would change markedly, and that is something we would have to address at the time. It is a different type of activity; it is one that does still have very, very significant challenges in it and requires some very specialised skills. Mr Ludlam: I could perhaps take a slightly different view? If a decision were to be taken not to build any more submarines and we were into an in-service support and decommissioning phase, I think inevitably a decision would also be taken to freeze the level of knowledge that we have and certainly freeze the level of skill that we have got with that knowledge. That then probably affects engineers because if they are not growing in their knowledge it is less exciting for them. It also probably affects the military capability, too, because we may face, in service support, some issue that we have not developed the knowledge to address immediately, and therefore the availability of the submarine could be affected. It is a slightly different view, I think. Robert Key: Can I ask Mr Whitehouse this: as you know, there is a Royal Naval base review going on. If the Government decided to close the Devonport Royal Naval base, could your operation at DML move to any of the other bases which might be kept open? Q23 Chairman: Could you see if you could answer that on the very narrow basis that Robert Key has asked it, because we will come on to the base review later. Mr Whitehouse: In terms of the physical infrastructure that we have at Devonport it is highly specialised, it is just been extensively modernised and extended and I think the key issue would be the affordability of the re-creation of that infrastructure. That would, in practical terms, preclude moving the irradiated fuel-handling capability, the refuelling capability anywhere else. Those docks, the fuel-handling infrastructure, the cross-site services are just so extensive I find it inconceivable that it could be affordable to move it anywhere else. Q24 Robert Key: Could DML continue to operate if the Naval base was closed? Mr Whitehouse: There is the issue that I outlined to your colleague of the very significant peaks and troughs in our load going forward, as we drop to a single SSBN refit stream. I said a ratio of about 4:1, peak to trough, in terms of industrial throughput. The key to actually keeping submarine maintenance affordable, in my view, hinges on a decision to actually sustain the current programme and move to a successor SSBN. If that is the decision, then I believe that decision to maintain the programme, to build a successor system, should be a pivot point around which decisions on the Naval base, base porting, should actually revolve. If that is not the case and if decisions on where surface ships are base-ported and, hence, their in-service maintenance are taken out-with that submarine context then both the affordability of the submarines and the affordability of the surface ships will suffer because of the integrated nature of our site. Q25 Chairman: You are talking about the decision to build a successor SSBN as though it were a decision that had been taken, which of course it has not. Can we consider for a moment the consequences of there being no Vanguard successor? What would happen to the skills base then? Mr Whitehouse: So far as our site is concerned, if the existing system were run on for its projected full service life, which in parallel throws up the requirement for a number of SSNs to operate with the SSBNs, then irrespective of a successor decision being positive the affordability of the submarine flotilla in that run-out phase would suffer just as badly as I have just described. The costs of in-service support, the deep maintenance, the long overhaul periods would escalate overall across multi-year periods if we are unable to actually deploy the industrial workforce on other work streams at Devonport during the troughs in the workload. Mr Jenkins: The point there - I am going off a little bit - is the assumption that we are going to maintain the existing fleet. If we are not going to have a replacement the next question is: why have we got the fleet? So how much will it cost to decommission them in the shortest time possible and wrap it all up? I thought you were going down that road, but you probably were not. Q26 Chairman: I was going to ask if we were not to have a Vanguard replacement would we be able to build nuclear powered submarines - SSNs rather than SSBNs? Murray Easton, would you like to answer that? Mr Easton: Absolutely we would be able to build them, yes. Our designers, as I mentioned earlier, Chairman, will be available in number increasingly throughout next year, 2007, and 2008. Clearly they are available then and very experienced at what they do; they can apply themselves to any other nuclear submarine demand. I am not aware that there is one, with the possible exception of the potential successor programme. If the successor programme does not go ahead then, obviously, depending on how many Astute submarines there are, our production facility at Barrow will grind to a halt. Chairman: Thank you. Moving on to the Astute and the potential successor, as it still is, Willie Rennie. Q27 Willie Rennie: One of the reasons, I understand, for the early problems with the Astute programme was the extended gap between the Vanguard and the Astute programmes and, therefore, the loss of construction and design skills. What happened to those skills after completion of Vanguard, and which skills were hardest to reconstitute back at Barrow? Mr Easton: What happened to the skills? If we look to some 14,000 people and how did we get to 3,500 and where did they go, effectively they dissipated into the rest of the manufacturing community in Britain. I faced a similar problem, actually, when I was in your constituency when we looked to British shipbuilders who employed 110,000 people and thought: "They don't now so where must they be and can we attract them?" They literally dissolved into the manufacturing and industrial community. However, they also lose their skills; so they are not match fit, they do not keep up that skill capability. That is the crucial thing for us. Where have people gone? I really could not tell you. A lot of the manual employees, the skilled dexterous people that we have, go offshore; they go offshore and then, depending on the fluctuations of demand in that industry, could come back. They would not have practised what they need to for our business but they may come back. The problem is much more acute in terms of the white collar; when they move away they do not tend to come back. So, whether it is designers, whether it is draughtsmen, whether it is supervisors, planners - all those key skills - nuclear safety experts, they go away, and we do not attract them. Q28 Willie Rennie: Why is that then? Surely, if they can easily transfer somewhere else they can easily transfer back again. What is stopping them? Mr Easton: Stability of employment, I think, generally. Most of us like to know the mortgage is going to keep getting paid, and they go for that stability. They try and avoid fluctuating demand, as naturally we do in business as well. Q29 Willie Rennie: Have you learnt any special lessons during that period then, about how to handle that change and those gaps? Mr Easton: The lesson learned - and I think one of my colleagues mentioned this already in the hearing - is that we try and employ as much flexibility as we can, but recognising the demand for quality is such that you need people often to be practising their particular skill - white collar or blue. There is a lot of flexibility and there is a lot of co-operation - I mentioned earlier even between the companies. I think, arguably, when you have got 14,000 people there is a lot more opportunity for people to move around, but when you are down to 3,500 then, frankly, it is very difficult often to identify those opportunities. Stimulating work for people and making it attractive, Barrow-in-Furness, for example, has a particular geography about it - naturally it is in a 33-mile cul-de-sac - we have to make it, you said, exciting earlier. It is exciting; it is very enjoyable and the employees that we have enjoy working there - the majority of them; I dare say not all - but it has got to be challenging work, and that more than anything - people want to be valued. Q30 Mr Jenkins: Going on from that constant nature and how you would like to have a constant nature of work - we all would - as an industry have you come together and developed a timeline as to what is now proposed or planned, whether carriers, submarines, 45s, etc, and what would be the optimum arrangements, for those orders to give you some constant work across industry, therefore lowering the price and not returning to the old boom and bust scenario? Have you done that? Mr Easton: We are motivated by the customer, certainly, to come together often, and we do, and we share resource plans with them as to how we can, with the Ministry of Defence, obviate the, as you say, "boom and bust". The fact of the matter is that some of those projects, like the carrier, are so high in their resource demand and often with dissimilar skills, as we have talked about earlier, that that can create difficulty. If I look to Steve Ludlam and Rolls-Royce, unfortunately they do not want nuclear reactors in the carriers, so that is not going to be too helpful. We have, in the rest of the industry, certainly, got an opportunity to be flexible in terms of what work goes where, and we try to co-operate just on the grounds of affordability or the projects will never happen. Q31 Mr Jenkins: So the answer is no, you have not got a timeline with the industry? Mr Easton: We have a timeline for ourselves, and I can furnish the Committee with what our resource plots are. Q32 Mr Jenkins: Yes, please. Mr Ludlam: If we look at what we have discussed in the submarines business overall, as a collaborative issue, we have looked at, really, some simple points: a 22-month manufacturing drumbeat, an eight-year design cycle, a new class of two years, seven years, seven years and two years - the first two years being the concept, seven years of design, seven years of manufacturing and two years of commissioning. Those are the sort of lines of time we have put down to start to think about how the size of our businesses should look and what investments we can make to keep that size to meet that demand. It is not something that we have been given it is something we have discussed as, probably, an optimum position. Q33 Chairman: Do you believe that the Ministry of Defence has the capacity and the skills base within it to manage that, and do they understand the sorts of things that they ought to be talking to you about? Do they have that skills base themselves? Mr Easton: In a word, yes. They have fewer people who understand it than they used to have - they have reduced the number - but I have to say we co-operate very, very closely with them, and it is a very constructive dialogue with the Ministry of Defence, in terms of resources, demands and, therefore, programme timing. Mr Ludlam: A number of the new contracts that each of us are looking at involve a great deal of collaboration with the MOD: the joining together of teams, the collocation of teams, the secondment of MOD personnel into particular jobs within our industries, all to make sure that together, as an industry, including the MOD, we retain the skill that is necessary to take this forward. Q34 Chairman: When people are seconded from the Ministry of Defence into your industries, do they ever return to the Ministry of Defence? Mr Ludlam: Yes, they do. Q35 Chairman: Just checking. Let us assume, for the purposes of this question, we are going down the line of a new SSBN. Would it need a new design of nuclear reactor, and if so why? Mr Ludlam: The current design of nuclear reactor was designed in the late-70s/early-80s and whilst it is very safe and it has the power that is necessary for the current military capability that we are looking for it is likely that the safety regime as we go forward will get tighter and tighter. Without going into some of the more secure areas of conversation, a new design of reactor would be quite important to make it what we might call a "passive" plant. So the biggest issue with a nuclear reactor is when you are not using the power to move around or for electricity it is still generating heat and you need to take that heat away. Largely speaking, you would do that using a pumped flow system and electricity is required for that. If you lost the electricity the pump flow is not there and it is much harder to take the heat away. So a new design of reactor would aim to avoid pumped flow systems and a more natural process of taking the heat away and, hence, it would be much safer. Also, the amount of fuel, so to speak, we have got in the tank is becoming more and more important for the military operations that are going on. So we probably might choose to look at the reactor core and see just how many more miles per gallon we could get from that reactor core. I think a new reactor is possible; it is possible on safety grounds. In doing all that, the affordability changes, too, so when we have looked at a new reactor design compared to the old reactor design, we are looking at something like, perhaps, 10 or 20 per cent improvements in affordability through a new reactor design too, because of the way that we would remove some of the components on the plant that we could basically design out and, again, make the plant better to operate and safer to operate. Q36 Chairman: So a new design would be not only safer but it would be cheaper? Mr Ludlam: We would be aiming to make it safer and cheaper, and within that new design sustaining the industry as well. Q37 Mr Borrow: It is an eccentric question. In the early-90s the United States Government commissioned an inquiry into the possibility of closing down the Electric Boat company to see was it possible, if you did not need to manufacture any nuclear submarines for a while, to shut the whole facility down and then several years later start it all up again and what the implications would be. The result of their study was that it was not a good idea and they did not pursue it. Has any thought been given to that as an option in the UK by the industry? Mr Easton: I am aware that many people contemplate a wide range of scenarios, some of them practical and some of them not. Most people depend on that (as I understand it, the study you refer to is a Rand Corporation study) as one indicating the catastrophic effect that would be inevitable. Looking even at the delay, they did actually cancel one Seawolf boat - one of the class - and then terminated that class. The class was expensive, but it was made a lot more expensive by cancelling a boat, because obviously the overheads just went exponential. It could be one reason why the American boats are significantly more expensive than the ones that we produce in this country. So, no, I do not think it is a good idea either. Q38 Linda Gilroy: The Defence Industrial Strategy identified affordability as a key consideration in the decision over the potential Vanguard and Trident successor. In earlier answers to various questions you have given us some insight into what industry is doing to reduce costs, including the through-life costs. Are there any things that we have not touched on in those earlier questions that you would like to set before us as to what industry is doing in that respect? Mr Easton: Indeed. Affordability, I mentioned earlier, is a massive issue which we recognise fully and proactively, certainly, in BAE Systems Submarines. In 2005 we took 31 per cent out of our overheads; in 2006, this year, we set ourselves a target of taking 10 per cent out of the cost base - so overheads, materials, labour, right across the base - and we will achieve that. That has been generated by a number of lean design studies, lean manufacture, even a lean office study. So we have involved people from outside industry - for example, car manufacturers, technologies that would not normally be seen as associated with our business but from whom we can learn. We also worked very closely with the Ministry of Defence, but I think most importantly I would highlight that affordability has been assisted when you look at the materials component of the price of a submarine. Up until very recently, certainly in both one to three of the Astute class, materials would comprise about 50 per cent of the value. It has, in fact, now gone up to about 60 per cent simply because our overheads and our productivity have gone in the opposite direction. What do we do? We proposed change to the whole supply base by our initiative of getting together (I believe you are going to take evidence today from several of our colleagues in Strachan & Henshaw, Alstom and MacTaggart Scott) with a group of ten companies in a key supplier forum who have looked at what we actually need rather than what we ask for. Often, the Navy or even ourselves, as designers, say we want something but to ask the supplier what you need, often, you get a different answer. That has been a hugely constructive forum, it has met five times already - the sixth occasion is imminent - but we have invited the DPA, the DLO and the DTI, so we are trying to get government bodies to co-operatively work with us, and of course they are. We have had exceptionally good results from that, and I think it is an example of the submarine enterprise working very well together as a team to tackle the affordability issue. Q39 Linda Gilroy: As far as through-life costs are concerned, I appreciate one of the things from the Devonport point of view is that, like cars, submarines are requiring a lot less attention in the mid-life. Have you been building in further potential savings for through-life costs? I must admit I was a little worried when I saw some of the amazing things you were doing, as far as the modular vertical ways that you brought over from Electric Boat and some of the very long pipe runs that were being done, as to how accessible these were going to be when it comes to through-life support. I suppose my general question is: to what extent have you been co-operating to make sure that these things do not build in difficulties but actually make additional savings of through-life cost support? Mr Easton: You make an extremely good point but we do actually have a very active engagement between the three companies here, to be honest. The supply chain is a fairly small family but, in particular, the three companies giving evidence work exceptionally closely together, very co-operatively. In particular, if you look at through-life maintenance, to take the example that you used yourself, long pipe runs, you can tend to look at that and say: "Well, that is maybe not the best for getting each section of pipe out in the future", but quite clearly what it does is reduce our UPC because we are reducing the number of joints; it is simplifying the operation because the number of leaked parts are reduced significantly and if come the day they need to get a section out then, of course, they can cut the pipe and put in couplings. That is how we would have designed it in the past, with far, far too many couplings. So as a repair procedure (I am sure Peter will better explain than myself) they are very resourceful at taking out sections of a system that we may have put in in a larger piece. Q40 Linda Gilroy: Would you like to comment? Mr Whitehouse: It is fair to say that one of the biggest issues I have seen in 20 years there is this tension between initial production costs, procurement costs, and what that might mean for the in-service cost as and when we start to carry out these major overhauls at the ten-year period. I think it is a fact of life that there is always going to be that tension between the two areas, but, as Murray says, there has always been, and increasingly so, very intensive dialogue between the two facilities, and indeed with Rolls-Royce, over the impact of those decisions that are taken at the design and build stage on the in-service support regime. Q41 Chairman: We raised that with the Chief of Defence Staff (Procurement) one month ago, so I hope you are involving him in this issue as well. Mr Easton: The three IPT leaders for both new build, nuclear and submarines when in operation are involved in dialogue with us and, I believe, co-operate. Q42 Mr Hamilton: On something that Murray indicated earlier on, and it is Linda's point about reducing costs, I worked for the National Coal Board, a massive organisation, and one way they reduced the costs was by pushing them down to the sub-contractors by saying, "If you want to come forward with the designs and so on", and the costs are passed on to them rather than doing the costs themselves, and we will be taking this up with the small companies next. What type of dialogue do you have with the small companies and is it the case, and I know big companies tend to do it, that they do, as a way of reducing their costs, push it on to others to do that? Do you do that? Mr Easton: The best example I can give you is actually from one of the next gentlemen to give you evidence, Joe Oatley of Strachan & Henshaw, part of the Weir Group. We have an example there where the submarine is nothing without a system for discharging its weapons and they provide that and it is absolutely crucial to the design and operation of the submarine. We started a series of lead design projects where we were looking, quite intrusively in process analysis terms, at what it is that we actually do to the design. That was fine for us looking introspectively, but the second project that we picked actually was the weapons-handling system and I am sure he will endorse my view that we worked exceptionally closely with them and it was not a matter of pushing the costs, but what ideas did they have which could affect the costs. Sometimes we impose design requirements on them that they, the manufacturer, or the supplier in that case, do not believe are necessary and getting into a more healthy dialogue rather than, "This is what I want. Make it. Give it to me". It is hugely more collaborative and co-operative now than it has been ever before, I believe. Q43 Linda Gilroy: Again you have all, I think, touched on the close work that you are doing with the MoD to try and get efficiencies and drive out costs, but are there further things which, in your view, could be done in that respect? In particular, if I can address the question to Mr Whitehouse, is there sufficient joined-up thinking between what we have been discussing this morning and the Naval Base Review? I do not know if Mr Easton wants to touch on the MoD question first. Mr Easton: We talk about lead design and how can we change things. Clearly we require the Ministry of Defence's acquiescence to what changes we would make. It may affect the specification or there may be compromises because in some instances their specification may be considered to be out of date or there is a different way of looking at it, so they have to be part of that team. We need them, as indeed they do, to very actively consider some of the smarter, brighter ideas that come up. It is a relatively conservative business, both the designing, building and operating of a nuclear submarine for the best of reasons because it is so safety-critical and demands such high performance, but that does not mean that we cannot engage a lot of progressive thought and clearly the Ministry have to be a part of that, but they are engaged and I believe it is ---- Q44 Linda Gilroy: And you would absolutely agree that you would want them to be? Mr Easton: I absolutely want them to be. It is fundamental and we cannot do it without them. If I look to where next, how much more can we do with the Ministry and, coincidentally, with the three companies represented in front of you, we are in very active dialogue currently and have been for the past three months, at actually our initiative, to see how better we can collaborate with the customer as a team of four to make these vessels more affordable. Chairman: I am sure that is not entirely coincidental. Q45 Linda Gilroy: There may have been some dialogue on that. Mr Ludlam? Mr Ludlam: If I can give two other dimensions of working with the customer, first of all, there is the dimension of the joined-upness with the research and development, so it might not necessarily be a bad thing, a long pipe run. As long as it has been designed with research and development sat behind it that justifies the life of that pipe run, it may not necessarily be a bad thing for in-service support, so I think joined-up with R&D, it is getting far better now between ourselves, the MoD and the connections that are necessary to drive that forward. The second thing, I think, is the commercial arrangements we are now entering into with the MoD. The commercial types of contract that we are able to take, each of us, are more innovative, they are challenging, they are very output-driven and require a huge amount of innovation on the part of both the MoD and on the part of the companies to actually make the profits that the businesses want to make, so I think that is a great thing the MoD have brought in working with them. It really forces that innovation and, as I said earlier, the engineers love that and that brings out some of the best ideas. Q46 Chairman: The Naval Base Review, Mr Whitehouse? Mr Whitehouse: I think the question was whether there was sufficient joined-up thinking in that. I think it is early days at the moment. It is a fact, I believe, that we own the dockyard, it is integrated and co-located with both a nuclear and a non-nuclear operational naval base and we have, as DML, a very clear understanding, we believe, of the way that the cost structure and the economies of scale can be affected by decisions that are not directly associated with the dockyard business. There is an interaction between the naval base, how many ships are operated from there, how many submarines are operated and what that does for the in-service support budget in both nuclear and non-nuclear domains. I think in the spirit of joined-upness, now that that picture is becoming clear, and obviously there is an interaction with the issue that is being discussed today, the future of the submarine programme, it is incumbent on us to actually ensure that we communicate clearly with the MoD as to how we believe decisions about naval bases could affect in-service support costs, and we will be doing that, you can be assured of that. Chairman: Are you content with that, Linda? Q47 Linda Gilroy: Yes, and, as that develops, perhaps you can let the Committee have a note of the scale of what is involved in that. I believe the work on that is ongoing and I do not know whether you can do that at the moment or whether it will be available in the foreseeable future. Mr Whitehouse: Probably within the next few weeks. Linda Gilroy: Perhaps the Committee could have a note on that then. Chairman: If you could give us a note on that, we would be most grateful because we will be keeping a close eye on it. Q48 Robert Key: Earlier you told us that the nuclear submarines operated by both the United States and France are considerably more expensive than our British nuclear submarines, but, Mr Easton, you said that, for understandable and obvious reasons, we cannot export our submarines. Now, at least two of the companies here today have extensive historic links with the United States. Could you say if there is any realistic prospect of greater design collaboration with the United States on submarine design? Mr Easton: Yes, there is. There has been some dialogue, and it continues, between the two countries certainly at industrial level, though I cannot speak for government level between the two ministries of defence. I perceive there is a lot of co-operation, but I cannot give you any specifics; that would be for them to say. Certainly with colleagues in Electric Boat, as a result of them supplementing some of the resource that we required in the early stages of the Astute programme, we have developed very good relationships with them and there is a testing comparison often on prices and techniques between the two companies. Is there more that could be done? There is already a very healthy dialogue. Q49 Robert Key: Is there anything anyone would like to add to that? Mr Ludlam: I could add by talking about the Defence Industrial Strategy which declares the need for a sovereign capability, so whilst collaboration could occur, I think we would here in the UK need to maintain a level of skill, a level of knowledge, to be able to stand alone in order to through-life-support a nuclear submarine. Q50 Robert Key: Lord Drayson indicated to the All-Party Shipbuilding Group quite recently that there might be export possibilities for our aircraft carrier, the new aircraft carrier. If you can do it with aircraft carriers, why can you not do it with submarines? Mr Easton: You can do it with submarines, you just cannot do it with nuclear submarines. Q51 Robert Key: Because of the nuclear technology question? Mr Easton: Yes. Q52 Robert Key: So has there been any discussion with France, moving on to France because you mentioned the United States and you said yes, they have at an industrial level, so has there been any industrial-level contact or discussion between BAE, Rolls-Royce or DML and France? Mr Easton: We have, over the past six months, had direct links with DCM, the state-owned sector in France, and that is particularly in relation to the supply chain within the bounds of security and classification in dialogue with the French because there is some restriction on us in that respect when we are talking about nuclear technology. However, with much of the supply chain where it is not nuclear, we have perceived certainly half the difficulties with a very fragile supply base in this country to see whether or not we can make it slightly more secure and affordable, the submarine, by identifying with the French whether there is any common equipment, whether they make the same components that we do and, if so, what their costs are. That dialogue is under way. Q53 Robert Key: How about Rolls-Royce? Mr Ludlam: For Rolls-Royce, specifically on the nuclear side we are subject to the 1958 Agreement and the 1958 Agreement process requires companies like Rolls-Royce to seek government permission if we want to talk to a nation other than the UK about nuclear matters. Therefore, on the nuclear side we have not sought that permission, so there have been no specific discussions on the nuclear side with the French. Q54 Robert Key: DML? Mr Whitehouse: I think exactly the same constraints apply to us. We have had discussions with the French over both the approach that they are taking to the procurement of their new class of SSN and the sorts of commercial models and related matters that they are developing to try and actually produce better affordability, but it has really been in that sort of domain that we have been talking to them. Q55 Robert Key: You mentioned a little earlier the understanding, the informal arrangements between your three companies over design and that you work pretty closely together and were comfortable working together. Is there any way that you could make that more formal in terms of pooling design resources? Mr Easton: I mentioned that we have an initiative which has been running for some months now in terms of identifying the principles of collaboration between the three companies in order, frankly, that we can pool resources and that we can optimise, for the purposes of affordability for the submarine enterprise, the skills and capabilities in all of the three yards and, yes, that is the purpose of the dialogue, so that is what we are pursuing now. Q56 Robert Key: Is the Ministry of Defence doing enough to assist you in that? Mr Easton: They are a participant. They are the other part or corner of the square, the three of us and the Ministry. It is a team of four. Q57 Robert Key: Is there any evidence of partnering arrangements, which the Ministry of Defence are very keen on, in this area? Mr Easton: At this point in time, I think it would be premature to say what form the collaboration will take, except that it is highly co-operative just now and we are focused on concluding agreed principles of collaboration. Obviously all three companies here are very enthusiastic at the prospect of working very closely together. We perceive a shrinking market, we want it to be sustained, and, at our initiative, we are doing as much as we can to secure that. Q58 Robert Key: Anything to add? Mr Ludlam: Certainly. I think the affordability challenge that we face and the availability challenge that we face is the very driving force to give that innovation that is necessary and it makes the whole collaborative venture much more interesting to take forward. Chairman: That is the end of the questions we will be asking you, but could I finish your bit of it by saying to all three of you, thank you for your hospitality in hosting the Committee and showing us what you do, BAE and DML in the past and Rolls-Royce, I think, perhaps in the next fortnight or so. We are extremely grateful to you and it has been extremely helpful for this inquiry as for others, so thank you very much indeed. Memorandum submitted by MacTaggart Scott & Company Limited Examination of Witnesses
Witnesses: Mr Ron Grant, Managing Director, MacTaggart Scott & Company Limited, Mr Jim Morrison, Unit Managing Director, Alstom, and Mr Joe Oatley, Managing Director, Weir Strachan & Henshaw, gave evidence. Q59 Chairman: May I start again by welcoming you to the Committee and saying thank you very much indeed. We will try not to give you a particularly devastatingly hard time, but you are very welcome in front of the Committee. Would you like to, as before, introduce yourselves, say who you are, what you do and why you do it. Mr Oatley: My name is Joe Oatley. I am the Managing Director of Strachan & Henshaw. We are a systems engineering business operating in both the defence and the civil nuclear sectors, based in Bristol, with about 500 employees, the majority of whom are engineers. About two thirds of our business is defence and the vast majority of that is submarines. Our role within the submarine world is to provide the weapons-handling and launch system for all the conventional weapons on a submarine. We have been doing that for the last 34 years within the UK. We provide design, manufacture and in-service support, so we cover the whole breadth of that. We also provide that system to the Australian submarines and most recently to the Spanish submarines also. We also have, I know you have not talked about it, but I guess it is relevant to any successor, a piece of work at AWE where we are supporting the refurbishment of those facilities. Q60 Chairman: So you do the weapons and the launch system on the Astute programme, amongst others. Mr Oatley: Yes, Astute amongst others, Trafalgar, Vanguard, Upholder. Mr Morrison: My name is Jim Morrison. I am the Unit Managing Director at Alstom Power Steam Turbine Retrofits UK. We design, manufacture and supply steam turbines for the nuclear submarine programme. Steam turbines for submarines is not our core business. We have been pursuing a strategy lately of being able to continue support for the manufacture of the forthcoming steam turbines for the forthcoming submarines, pursuing a strategy of being able to hold on to, what I call, our 'know-why', that we are a position where we are not actively trying to replace the essential skills or know-why within our organisation. Q61 Chairman: Did you say you were not actively? Mr Morrison: Not at the moment. Our strategy at the moment is to be able to simply hold on to, and retain, the key skills and the processes and the methodologies to be able to continue the support of the existing Astute programme. Mr Grant: I am Ron Grant. I am Managing Director of MacTaggart Scott & Company Limited. We are a privately owned, limited engineering company on the outskirts of Edinburgh. We employ around 250/260 people and whilst we have been in existence for quite a long time, we are very much conscious of the need to stay abreast of the changing market. The volume of our business which is associated with defence is probably around 95 per cent, but since around the mid-1980s we actively set out to grow our export side of the business and we currently export something like 60 per cent of our output, so defence is a major component of our business, albeit one, I would say, not necessarily wholly dependent on having the domestic market. In fact we have found in our travels around the world, seeking to sell our wares which are essentially bespoke equipment, that we very much need the visibility of a domestic shop window in order to be allowed to be part of the export market and it could be said that one can be part of a domestic market without necessarily being part of the export business, but you certainly cannot be part of the export business without having a visibility in a domestic market. The nature of our equipment covers both surface ship and submarine equipment. On submarine equipment, which we have been involved with since our inception at the turn of the century, it is non-hull-penetrating masts, which are high-strength, low-weight, non-pressure-hull-penetrating, capable of carrying a variety of payloads from the optronics to communications heads, through infrared, radar, snort induction and diesel exhaust, and in fact we manufacture the complete suite of non-hull-penetrating masts which are currently on Astute and we have also trialled those into other submarines. We have an early derivative of that presently in the Australian submarines and there has been interest in that design of mast in the USA as well which we are actively trying, subject obviously to the usual controls of export IPR and intelligence, so masts is the key element of our business. Quiet, stealthy hydraulic motors and pumps and power packs, these are also very much a key component of our business which we have supplied around the world. Q62 Chairman: When you said "the turn of the century", you meant the previous century? Mr Grant: Sorry, 1898 we were in fact established. Q63 Mr Borrow: The Committee would be interested to try and get a handle on what specialist skills your companies have got, whether you did work on the Vanguard programme as well as the Astute programme and what stresses and strains of the gap between those programmes there were for your companies. The large companies we have heard about this morning, but in terms of your companies with specialist skills, to what extent were you involved with the Vanguard programme, to what extent are you involved now with the Astute and how did you manage the gap between those two programmes? I think we would be interested in trying to get a grip on the mechanics of that. Mr Oatley: Our involvement on Vanguard was the same as it is on Astute, to provide the weapons-handling and launch system for all the conventional weapons on that submarine. The key skills that we have break down into what I would broadly call 'design, manufacture and in-service support' because we operate in all three areas. Within design, our engineering skills are systems engineering, structural design, shock and stress, mechanical engineering, control systems, quite similar in a way to a lot of BAE's skillset, within construction it is specialist welding, specialist assembly and fitting, testing and within the support arena we have some very experienced fitters, people who can remove, refurbish and reinstall the equipment, so those are the kind of specialist skills that we have and we need. Obviously there was a very large gap between Vanguard and Astute. We were probably more fortunate, whether by design or hard work, I am not sure, because we won a contract from Australia to provide a system on the Collins-class submarine which filled some of the gap between Vanguard and Astute and there were also a number of key upgrade programmes within the support element through that period, a key one of which was the fitting of the Tomahawk missile, and that kept a number of our key design resources engaged through that period. Therefore, whilst we undoubtedly had a dip, we were able to keep all of the design team together through that period with those programmes. Mr Morrison: We had the same scope of supply for Astute as we did for the Vanguard. With respect to our skills, essentially the skills that you require are the same as the skills for building steam turbines for power plants. However, the specifications are substantially different for submarines than they are for normal power plants, these being the materials because of the safety concerns, the long life, the inaccessibility to the plant, the different configurations, different operating speeds where normal power plants run at an operating frequency, whereas submarines cruise and they change speeds, the noise, the vibration characteristics, the methodologies that we employ and the justification of safety cases to the MoD. These are substantially different from what we do on normal steam turbines, so essentially it is the same set of skills, but the specifications are very, very different. With respect to how our numbers have evolved, when I took up my position in Rugby three years ago, we had a dedicated naval department of essentially 27 to 30 people. We currently do not have a naval department anymore. We have integrated those people into our core activities essentially because the department was not sustainable through the order intake. The reason for integrating them into other departments is that we are acutely aware of how important our product is for the future of submarine build and this was essentially to try to keep the essential skills that we require to produce the future boats, so we have retained the skills, but we have essentially dispersed them into our mainstream activities, and what we do is we cluster them to be able to produce future boat sets. That maybe gives you an idea of the way that our business has evolved through the submarine programme. Q64 Linda Gilroy: Can you try and describe to me, because I am not quite clear about this, the extent to which those skills, as you were describing, needed for safety justification, very high skills, are used in the sort of broader work that you have just described for us? Is the full skill range used in the presumably civil work that you are doing in that department or are there aspects of what they would do on nuclear ---- Mr Morrison: No, outwith the naval arena, they are only using a subset of the knowledge that they have for the production of steam turbines for power plants. Q65 Linda Gilroy: So how do you prevent the degrading of their skills that would be used for naval nuclear steam-raising plants? Mr Morrison: We are essentially going down a path to try to outsource certain components. The package that we produce is a steam turbine and condenser generating set. The steam turbines is really the core business for my wider operation and those we are retaining in-house. The condenser sets, we no longer produce those for the commercial world and we have effectively sub-contracted that to other areas of business in the UK. Effectively we are looking at what we can produce and then coming up with a strategy to be able to put our package together. Mr Grant: The key skill sets which MacTaggart Scott has to retain are its familiarity of design for the environment and the interaction of materials operating in that environment. Whilst we supplied equipment in much the same suite as I mentioned earlier on into the Vanguard class, I have to say that Astute very nearly put us out of business simply by virtue of the delay between Vanguard and Astute and the difficulty in actually keeping a design team together, focused, affording the R&D which we were keen obviously to bring to bear in order to be a player in the Astute programme. The master technology which I mentioned just now was a complete departure for us in terms of materials and technology because it is essentially GRP as opposed to a metal mast and it has now gone through subsequent evolutions of research and development looking at use of carbon fibres to further enhance strength, reduce weight and obviously give the submarine designer the flexibility to put the fin where he wants to in the submarine as opposed to the obligatory location at the centre of gravity, so retention of those skill sets was vital to us. We went through a three-year period of actually declaring a loss by in effect having a design team treading water involved with the research and development which was, to our small company, at a very high level and not affordable. We subsequently learned that we needed to grow our export defence activity in order to afford our investment into research and development and that is another key factor in the inter-dependence of participation in the two markets. Q66 Mr Crausby: In the event that Her Majesty's Government decided not to procure a replacement for the Vanguard submarine, what effect would that have on your business and to what extent would you be able to maintain the core skills that would enable you to participate in any future nuclear submarine programme? Mr Grant: We would have great difficulty in retaining those skills and, to a large extent, that is down to who we are and where we are. We are actually in an area where the manufacturing industry has declined quite substantially. Our investment in graduate sponsorship and in training is quite considerable. In order to bring the new blood into the industry and obviously to give us the young ideas for tomorrow, I think if we found a major dislocation in UK submarine procurement, then that gap would have a significant effect on retention of our more skilled personnel and our ability to maintain current levels of training and R&D. Q67 Mr Crausby: To what extent would you be able to transfer those skills to, say, other work, to surface ships, for instance, and retain them in that way? Mr Grant: We are involved in surface ship work, yes, but that still requires some special skill sets of its own. We do not necessarily have designers who are multi-skilled in both surface ship activity and in submarine because the skill sets are different. Q68 Chairman: Mr Morrison, what are your answers to these questions? Mr Morrison: What effect would it have on my business? Naval business represents approximately 3 per cent of our sales, so in the bigger scheme forward for my company, it would not have a dramatic impact. With respect to us being able to hold on to our skills that we would require to continue the future Astute boats, that is obviously dependent on when future orders come through and also, to a large extent, how our core business continues to be successful. Q69 Chairman: I have the impression that you have rather written off defence as a real money-maker for your company because other things seem to be going better. Would that be unfair? Mr Morrison: No. What I would not like you to come to the conclusion of is that we are not committed to supplying future boat sets for the future. Q70 Chairman: No, that was not the conclusion. Mr Morrison: I would like to make that perfectly clear, that we are doing everything we can to be able to sustain that skill base. Q71 Chairman: But you sound as if you are doing it out of public duty rather than in order to make money. Mr Morrison: That would be an accurate assessment. Q72 Chairman: That is a funny way for a business to behave, is it not? Mr Morrison: Well, as I say, it is not a loss-making business for us. We have restructured the naval organisation and we have in fact removed it as an independent department and we have integrated it into our core activities, so we have tried to lessen the impact of our reliance on naval orders while still retaining the capability, but our future clearly lies in the power business. Q73 Mr Hamilton: If I have interpreted it correctly, essentially you have a responsibility to the workforce and the company ---- Mr Morrison: Yes. Q74 Mr Hamilton: ---- and, therefore, what you are doing is diversifying because you do not get the contracts as often. There is not a process on which they can depend in the future. That sounds exactly what we should be talking about in relation to all companies, not only in engineering, about diversifying in a way and looking at the export market because they cannot depend on the market in the UK. That seems quite logical to me. Mr Morrison: Prior to us receiving an order this year for boat four, the last order that we received was in late 1998. Q75 Chairman: David Hamilton has, I think, correctly rebuked me. Mr Oatley? Mr Oatley: In terms of if there were to be no Vanguard replacement, the effect on us, I guess, would depend on what happened in terms of Astute replacement and the timing of that. We currently have a large design team working on a new system for an export boat in Spain, so we have continuity through that. If there were to be a long period before there was an Astute replacement, I think it would have a catastrophic effect on our ability to design a new system. That could be mitigated by ongoing design work in support of the existing fleet for upgrades and the like, but, as I say, it would depend largely upon the timing of the next design cycle. Q76 Mr Crausby: Do you have a view on the eight-year gap that Mr Ludlam mentioned in comparison to the 16 years between Vanguard and Astute? How did that affect you, the 16-year gap between Vanguard and Astute? Mr Oatley: I think the eight-year gap is about right and if you look back prior to the large gap between Vanguard and Astute, eight/nine years is about what occurred. As I said in an earlier response to, I think, David's question, we were fortunate in that long gap between Vanguard and Astute in that we secured an export contract out of Australia to provide a system to the Australian Collins-class submarine. We also had a significant upgrade programme to install Tomahawk missiles into the existing fleets and those two contracts kept our design resource, at least at a minimal level, busy through that period, so if it had not been for the export order, I think we would have been seriously damaged by that gap. Q77 Willie Rennie: As you have evolved such stress of diversification into other markets and exports as well, what is the kind of anchor that keeps you in this country if that depends on MoD work which becomes less significant? Mr Oatley: I think from my point of view the UK is still our core business. There is no doubt that providing the weapons-handling and launch system to the UK fleet is our core business and the reason we have been able to win export orders is because that is our core business, and because we have developed a leading product for the UK Navy, we have been able to sell that overseas, so it is still our core and it will remain so. The other key thing that keeps us here is the in-service support element of that, and I would think this applies across most of the supply chain, and it is very important that we have both the design and supply element and the in-service support and it would be very difficult for us to continue if we did not have all of those elements as a business. It is our core still in the UK, but it needs to be across the whole realm of supply and support. Without that, I think it would not be economic. Mr Grant: We are a private limited company and, without wishing to sound too melodramatic about it, we are very proud to be a British company, arguably even prouder to be a Scottish company at times, but perhaps I am not best equipped to be commenting on that particular aspect of it! We are a major employer in the area and the reason why we can be successful is because we have a workforce which basically does not have walls between departments and there is good interaction between design, manufacturing and support staff, and there has to be in an organisation such as that which we are trying to do. Frankly, the concept of moving our business off British soil just does not --- Q78 Mr Crausby: It is not on the agenda? Mr Grant: It is not on the agenda, never has been. Mr Morrison: We are part of the global organisation. However, the specific product that we produce in Rugby is steam turbine retrofits and in fact it was ourselves that essentially created a world market for steam turbine retrofits, so we are at the very, very hub of Alstom activities and we have the key skills and competencies for this market and we are very strongly placed within the Alstom network to retain our position in Rugby. Q79 Mr Crausby: What kind of industries are really in competition for the skill base that you have got? Where do workers go when they leave your company? Mr Oatley: For us, the biggest competition is the aerospace market and if you look at our design engineers and the questions earlier about how exciting and attractive the submarine market is for engineers, and it is, it is very much seen as a high-end engineering, exciting, interesting place to be. The other high-end, interesting, exciting place to be as an engineer is typically the aerospace market and, particularly with us being located in Bristol, we have strong competition particularly from Airbus for our design resource, so that is where we predominantly lose people to. Mr Morrison: We have actually got a very, very high retention rate, so it is not a real issue for us and, if we do lose people, it is generally to other players in the industry. Mr Grant: On the manufacturing side, we do have a problem retaining staff in whom maybe we have invested in training up to the latest numerical control technology in machine tools, the latest concepts of ERP, and generally on the manufacturing side they will move into a sub-contract machining activity which is essentially a make-to-print, as opposed to a bespoke design, activity. Oddly enough, and perhaps it is a feature of young people seeing the grass as being greener, we do actually get a fair proportion of them back. On the design side, the majority of our design staff tend to move south into aerospace or into offshore oil and gas. That is the major problem for us. Q80 Mr Hamilton: My question is the one that I asked the people at the beginning and they were the major companies and we are now talking to SMEs. In the time that I have been on this Committee, I have visited a number of places throughout Scotland and one common complaint that came from all the smaller companies was the way in which they were being treated by some of the major companies where they are sub-contracted out to. Naturally that is a very delicate issue, but, coming from a large industry, I realise that is exactly what the National Coal Board did to small companies. Do you have direct access to the Ministry in relation to any contracts that are being done or are you moving towards a position where you are becoming dependent on the sub-contract with major companies because the Ministry is actually having direct negotiations with the major companies rather than taking the bother to talk to some of the smaller companies? Do you have direct access? Mr Oatley: On Astute, we contract with BAE, but we have a large amount of direct contact still with the Ministry people at all levels and we find them very supportive. I would say that historically the relationship with BAE would at times be the way you have described and I think in the last, and Murray Easton referred to this earlier on, 18 months to two years both they and we have worked very hard to try and change that and to work much more in a partnership arrangement rather than a confrontational supplier/customer sub-contract relationship. The reason we have done that is to try and generate more value for the end customer driven by essentially trying to get a more cost-effective product and it has been very successful as a result. Mr Morrison: I have not noted any great differences between the way that we have contracted for boat four as compared to boats one to three and, therefore, I would not have thought that our relationship with our sub-contractors would have changed significantly, if at all. I would reiterate what Joe has just said about the relationship with BAE and through the Key Supplier Forum and that we are beginning to try to work together. With these boats we only negotiate with BAE and BAE negotiate in turn with the MoD, so we do not have a great many interfaces through the Astute programme directly with the MoD. Mr Grant: We still contract directly with the Ministry of Defence and indeed we are in a partnering agreement with the Ministry of Defence for the through-life support and post-design services for most of the equipment which we are presently involved with. What I would say is that I would like to endorse the comments of Joe Oatley. The Key Supplier Forum, which Murray Easton made mention of earlier on, really has got us quite excited because for the first time I think we are seeing an environment where we can actually get around the table with private contractors, have access to the Ministry at the same time and to the Navy, and it is, I believe, starting to yield genuine benefit in both lower costs and obviously ultimate affordability. I picked up one of the questions from the earlier presentation with regard to what through-life costs really mean and whether people were recognising it for what it was, and I think there is still an issue of an obsession with acquisition costs without fully understanding the implications through life. I think the Key Supplier Forum, in giving us better focus and allowing us certainly to have a better design focus, the efficiencies that come from that will yield lower costs and affordability, and we are very excited and pleased to be part of the programme. Q81 Robert Key: Mr Grant, do you think the Ministry of Defence understood how close your company came to closing down? Mr Grant: I think it understood it, but I am not sure whether it was necessarily the highest feature on its agenda at that particular time, bearing in mind at that time the Ministry of Defence was substantially downsizing itself and looking at new methods of contracting and engaging with industry. Q82 Robert Key: The Defence Industrial Strategy identifies affordability as a key element in the decision over any potential Vanguard and Trident successor. Do you think that the Defence Industrial Strategy has taken on board the significance of through-life costs in the way you were just describing? Mr Grant: Yes, I do, but I think that it is a culture change which is not going to happen overnight. Q83 Robert Key: And that is being addressed in the Key Supplier Forum, is it? Mr Grant: Yes, it is. Q84 Robert Key: Do you, Mr Oatley, agree that the Key Supplier Forum is a helpful innovation? Mr Oatley: Yes, without doubt it is. I think I would echo what Ron Grant says about the need for more emphasis on through-life support and I still think that not enough attention is paid to the cost of through-life support. Even with the good work we are doing on the Key Supplier Forum, still the main, by an order of magnitude, focus of that is unit production costs rather than through-life costs, so I still believe that there is not enough attention paid to the full through-life costs of the programme. Q85 Robert Key: Mr Morrison, do you agree with that? Mr Morrison: We have had an approach from the Key Supplier Forum for all the reasons that I have spoken about. What we have tried to do with boat four and for future boats is really to get a design freeze. We have had the drawings, we have had the design and it is really a question of us being able to handle our supply chain, so what we have tried to do is tried to shy away from design changes and that really precludes us from beginning to look at changes in the design for through-life costs. Q86 Robert Key: Do you think the Ministry of Defence, for all that it requires, understands the distinction between the very large main contractors and the small sub-contractors in the industry on which the main contractors depend? Mr Grant: I think it is starting to understand because of its participation in this Key Supplier Forum as well. It is possibly having a vision of interaction between prime contractors and the second tier of sub-contractors which perhaps it had not paid too much attention to before and I think there is an awareness coming from the Key Supplier Forum particularly that it is a team approach which very much needs coherence in all sectors of the chain. Q87 Robert Key: Mr Morrison, you were shaking your head in disagreement. Mr Morrison: No, sorry, a personal twitch, I think! Q88 Chairman: Is DML on the Key Supplier Forum? Mr Morrison: No. Mr Oatley: Well, the Key Supplier Forum is an instigation of BAE's, not the Ministry's and it is focused upon the key suppliers to the Astute programme and DML are not a key supplier to the Astute programme, so its instigation was very much upon looking at the supply chain for the Astute programme and trying to work more closely with that supply chain to get, as I said, actually a better unit production cost. That was the main focus when we set off with the Key Supplier Forum. Q89 Chairman: Here you are talking about the need to look at the through-life maintenance and, thus, the costs of support and yet the people who are actually doing the support are not on the Forum that discusses this. Mr Oatley: There are a number of DLO representatives who do come to the Forum. Q90 Chairman: DLO representatives? Mr Oatley: So there are Ministry of Defence people who are involved in the support costs and obviously many of the suppliers, ourselves included, are providing the in-service support of their own products, but yes, the main focus of that group is production costs, not through-life costs. Q91 Chairman: Is this an issue we should take up with BAE Systems? Mr Oatley: I guess I would question whether it is an issue for BAE Systems or an issue for the Ministry. Q92 Chairman: But you said it was a BAE Systems' initiative. Mr Oatley: It is indeed and the intent of it or my understanding of the intent of the Key Supplier Forum when we set it up was to really focus hard on making the Astute programme affordable because the key issue we had a year ago was that the programme was looking like it was unaffordable and may not be able to continue at its projected cost, so we had a very urgent need to all sit down and try and understand how we could work together to make the Astute programme, in terms of its unit production costs, more affordable, so that was its pure objective when we started, so I guess yes is the short answer to your question. Chairman: We shall pursue this further. Q93 Linda Gilroy: Education and training, you have touched on a number of issues which probably give us some insight into the industrial skill areas in which there are significant shortages. Is there anything from the experience of your companies that you want to add to what you have already said about what areas that affect your companies there are skill shortages in? Mr Oatley: I think this is common across many industries in the UK at the moment, that there is a definite engineering skills shortage. We have a significant graduate training programme and we brought in 14 graduates this year and we continue with that every year, so we do not have too much difficulty in attracting new engineering talent into the company. Our key issue is retaining it once we have trained it up. I think Ron Grant mentioned this earlier, that one of the other key aspects is the experience and knowledge of the application in which that engineering is used and the submarine application is particularly challenging. We have a rule of thumb that it takes about ten years to become truly proficient in the submarine environment, so there is a very long lead-time between injecting new talent at the bottom and their becoming really very proficient in that environment and that is the big problem, that if you lose a lot of people who are experienced, it takes a long time to replace them. Mr Grant: We have a very active apprenticeship scheme, we also sponsor graduates and we also have graduates not of our direct sponsorship coming in for work experience from time to time. We also do a lot of work in local schools, the purpose here being to raise the profile of engineering in the manufacturing industry because there is still a perception among young people coming through school that engineering is not necessarily a particularly attractive route to be going down and the manufacturing industry perhaps means getting dirty, so we do work hard to try and bring youngsters in from local schools which I think is an important feature of our training. We also train Navy personnel. We have various specialist test facilities on our site. For example, on our handling equipment, we have industrial reference equipment which enables the Navy to replicate obviously in-service experiences and carry out testing on-site, so not only training on our own personnel, but investment in training of Navy personnel is also a key element of our activity. Mr Morrison: We have only begun to embark on recruiting young graduate engineers after many years of restructuring, so I think it is a bit early for me to be able to respond to you. Q94 Linda Gilroy: So from what has been said, I take it that it is sort of general engineering skills, getting people started in your industries, rather than specific areas that we have been talking about earlier on? Mr Oatley: It is the specific areas where I would have a concern. We can, and do, recruit young general engineers and then train them in those specific areas, but, as I said earlier, the time to do that is quite considerable and we can lose those people with specific skills to different industries because they are still very employable within a different industry as a senior engineer, so it is those specialist skill areas where I focus my attention in terms of retaining key skill sets. Chairman: I think that is it, unless anybody wants to ask any other questions. Thank you very much indeed to all three of you. It has been most helpful and most interesting. |