Appendix 1
Memoranda submitted by the Scotland Office
INTRODUCTION
1. The UK Government welcomes the Sixth Report
of the Scottish Affairs Select Committee Session 2007-08 on 'Employment
and Skills for the Defence Industry in Scotland' and the Committee's
recognition of the many benefits of UK Government investment in
the defence industry in Scotland. The Committee's inquiry provides
an important body of evidence demonstrating the value of that
investment to Scotland. We are proud of our role in helping to
develop Scotland's strong skills and manufacturing base.
2. The Committee has raised a number of issues
which it believes need to be addressed.
RESPONSE TO CONCLUSIONS AND RECOMMENDATIONS
1. We are concerned that over 10 months elapsed
between the confirmation of the carrier programme and a contract
being signed. In January 2008 the Chief Operating Officer of Defence
Equipment and Support said that they were "very close to
being ready" to sign a contract and yet, five months later,
the contract had still not been signed. (Paragraph 28)
3. The manufacture contracts for the Future Aircraft
Carrier (CVF) were signed on 3 July 2008, with the newly-formed
maritime company BVT Surface Fleet and other companies in the
Aircraft Carrier Alliance. Due to the complexities of the project,
there were detailed contractual negotiations. These had to conclude
before the contract could be signed.
4. We also needed to ensure that the best alignment
of annual expenditure, work timetable and commercial arrangements
had been achieved, and that Industry had the confidence to move
ahead with the creation of the BVT Surface Fleet joint venture.
2. Although the Government has repeatedly
said there will be no delay to the construction phase of the project,
continued delays to the contract signing have caused concern.
We have been told that the CVF programme is vital to maintaining
employment in Scotland and the skills necessary for naval ship
building. We are concerned that a delay in the construction of
CVF and a gap in workload could lead to job losses and damage
the ship-building skills base the UK needs to support if it wishes
to retain sovereign capability in key areas. (Paragraph 29)
5. The UK Government welcomes the Committee's
finding that "the defence industry, particularly the ship
building industry, is in a more stable position than it has been
for some time, largely due to the CVF programme." We would
like to reassure the Committee that there has been no slippage
against the high level milestones for the CVF project: when construction
starts at the yards, when the blocks move to Rosyth for assembly
and when the ships are accepted off contract. The contractors
of the Aircraft Carrier Alliance signed a legally binding agreement
with the MOD on 3 July 2008 to deliver a carrier in 2014 and another
in 2016. This allows them to achieve their 'In Service' dates.
6. Up until this point, we had focused on minimising
risk to the project, ensuring that we had a full awareness of
the costs and timescales involved and a complete understanding
of the project. This enabled us to take the Manufacture decision
with total confidence. We also ensured that work towards production
continued (under the Demonstration phase contracts) whilst work
was proceeding on the Manufacture contract.
7. A sustainable industrial base is necessary
to maintain appropriate operational sovereignty in the UK. The
Defence Industrial Strategy (DIS) sets out industrial policies
which aim to promote such a base. It also sets out the importance
of sustaining skills in the UK Maritime Sector. Scotland has many
of the skills categories required to underpin these strategic
capabilities.
8. The Aircraft Carrier Alliance anticipates
around 1200 workers will be employed on CVF work at BVT Surface
Fleet and the current workforce for Babcock Marine (Rosyth) will
rise to around 1600 with the majority engaged on CVF. The CVF
project is also continuing to drive apprentice and graduate recruitment
and training in Scottish yards and we are confident that Industry
will meet the need for some 2,800 workers in Scottish shipyards
at the peak of manufacture.
9. There remain considerable additional opportunities
for 2nd and 3rd tier suppliers in Scotland to compete for engineering
and construction work, including some relating to the carriers'
upper blocks and superstructure. Scottish industry has already
secured a number of significant contracts for the supply of equipment.
3. Delays during the construction phase and
beyond could cause problems, both operationally and to manufacturers.
The MoD must be vigilant to the possibility of delays and take
robust action to avoid or limit any further delay in the project.
We recommend that the Ministry of Defence review how it communicates
the progress of defence programmes to limit confusion and concern
about possible delays. Uncertainty about progress has led to scare-mongering,
which has been destabilising to the workforce and the wider community.
(Paragraph 30)
10. The MOD communicates progress on equipment
programmes both to the workforce and the wider public in an effective
and efficient manner. There are various methods by which the MOD
ensures that key information on defence equipment programmes is
made available to the UK Parliament, the public and stakeholders.
11. The MOD's annual report to Parliament on
progress in equipment procurement (Major Projects Report) is informed
by regular internal and external scrutiny into its equipment programmes.
The Report provides a record of performance across the 20 largest
post-Main Gate projects and the 10 largest pre-Main Gate projects,
measured by value and based on forecast future procurement expenditure.
Furthermore, the House of Commons Defence Committee regularly
takes evidence from MOD Ministers and officials and undertakes
inquiries into specific equipment programmes. The National Defence
Industries Council also provides a forum for communications with
senior industry representatives.
4. Given the importance of shipbuilding to
the Scottish economy, delays to the CVF programme could impact
disproportionately on Scotland compared to the rest of the UK.
The Scotland Office, therefore, needs to make the case to other
Government departments to ensure the potential consequences of
any delay are clear, particularly to the MoD. (Paragraph 31)
12. We welcome the Committee's recognition of
the importance of the shipbuilding industry to the Scottish economy
and note that 90% of orders for the shipbuilding industry in Scotland
are from the UK Government, which will be investing some £14bn
in the UK shipbuilding industry over the next 10-15 years.
13. The Scotland Office is in close and regular
communication with Whitehall on a range of matters, helping to
ensure that Scotland's interests are considered at the highest
level. The MOD is fully aware of the importance of the CVF programme
and, as set out above in paragraph 6, has taken pro-active steps
to minimise the risk of delays.
5. We welcome the confirmation that work on
the Joint Sea Based Logistics (JSBL) ships and some of the work
on the Solid Support (SS) ships will go to British yards. We believe
Solid Support ships should also be built in British yards since
ensuring a steady forward load is vital if Scottish, and indeed
UK, shipbuilders are to be able to plan their workforce and the
skills-mix of their workforce effectively. The only circumstances
in which we can envisage accepting that the JSBL or SS ships should
be put abroad would be if there were capacity constraints, but
we believe that this should be avoidable with prudent planning.
(Paragraph 40)
14. We have not taken any decisions on the procurement
strategy of the Joint Sea Based Logistics (JSBL) and Fleet Solid
Support (FSS) elements of the Military Afloat Reach and Sustainability
(MARS) programme. We are currently discussing the details of how
much of the JSBL and FSS work will be undertaken in the UK by
BVT Surface Fleet as part of a long term programme of work under
a new business agreement with the MOD.
6. We are concerned that there appears to
be a significant amount of confusion over the status of the MARS
tankers. The decision to classify the tankers as commercial vessels
had previously been explained with an emphasis on capacity issues.
This led to a widespread belief that the tankers could be pulled
back to the UK if the CVF programme was delayed. This now appears
not to be the case. (Paragraph 41)
7. Uncertainty about the timing of the CVF
has increased concern about the first MARS vessels being built
outside the UK. We recommend the Ministry of Defence clarify what,
if any, strategy there is to cope with delays in the current ship
building programme and ensure critical skills are maintained.
(Paragraph 42)
15. The contracts for the work on the CVF programme
were signed on 3 July 2008. Together with the formation of BVT
on 1 July 2008, this provides the impetus for the real change
needed to ensure we have a vibrant, competitive and sustainable
UK maritime sector which will be fundamental to sustaining our
key warship building capability in the future.
16. Difficulties in demonstrating that the Future
Tankers (FTs) meet all the relevant criteria to be declared as
military vessels meant that the MOD has not declared an EC Treaty
Article 296 exemption. Article 296 allows EU Member States to
exempt defence contracts from EU procurement rules if this is
necessary for the protection of their essential security interests.
Of course, the applicability of Article 296 to the FSS and JSBL
elements of the MARS programme will be considered in due course.
17. The classification of a vessel does not determine
how it is procured—in this instance, the FTs are being procured
in accordance with the EU Public Contracts Regulations 2006 and
the requirement was advertised in the Official Journal of the
European Union. After careful evaluation, it was announced on
21 May 2008 that four bidders have been selected to go forward
to the next stage of the planned procurement of the FTs. The bidders
are Fincantieri (Italy), Hyundai (Republic of Korea), Navantia
(Spain) and a consortium of BAE Systems (UK) with BMT DSL (UK)
and DSME (Republic of Korea). None of the bidders have proposed
building the FTs in the UK.
18. Given that there will be a lack of UK capacity
during the timescales when the MARS FTs are needed—and that
key industrial maritime capabilities will be sustained well into
the next decade by the CVF and the Type 45 programmes—an
open competition will secure value for money. Opportunities will
exist, however, for UK companies to play an important part in
the extended supply chain for the FTs.
8. We recognise the important role aerospace
and non-naval defence companies play in providing economic development
and high skilled jobs in Scotland, and the role of MoD as a major
employer in Scotland. We support necessary MoD reorganisation
but the MoD must ensure there is clear communication and consultation
with staff and other stakeholders both before and during any changes.
(Paragraph 45)
19. The MOD recognises its role as a major employer
in Scotland and the UK Government welcomes the Committee's support
for necessary MOD reorganisation. The MOD's procedures ensure
that MOD staff are fully consulted and informed on internal reorganisation
requirements.
20. It is the MOD's policy that any internal
change that affects more than 30 staff requires Trade Union consultation.
This ensures that staff affected by internal change are clearly
informed in a timely and appropriate manner and given the opportunity
to comment on them before they are implemented. For example, Defence
Equipment and Support (DE&S) has consulted regularly with
the Trades Unions on a national and local basis during development
of its PACE (Performance, Agility, Confidence and Efficiency business
change programme).
21. Externally, we endeavour to provide stakeholders
with as much information as possible about proposed changes. For
example, the announcement of the MOD's Head Office Streamlining
was communicated widely across Government, to the Houses of Parliament
and to the media. The Consultation Document was also published
on the internet.
9. We believe the Modern Apprenticeship programme
is a valuable alternative to higher education and provides young
people with a chance to develop practical skills. We are persuaded
that, although the funding structure in Scotland differs from
that of England and Wales, 16-19 year old apprentices in Scotland
do not attract significantly less funding than apprentices in
England and Wales. (Paragraph 59)
22. Training is a devolved matter, falling within
the responsibility of the Scottish Executive. The UK Government
is concerned that the Scottish Executive has allowed Modern Apprenticeship
funding to fall behind that available in England, which will increase
to £1 billion by 2010-11. The UK Government shares the Committee's
view that the Scottish Executive should not neglect its responsibility
towards Scottish apprentices.
23. We are pleased to note that the CVF programme
has resulted in increased apprentice and graduate recruitment
and training in Scottish shipyards. BAES Surface Fleet Solutions
(now BVT Surface Fleet) recruited 120 apprentices on the Clyde
and Babcock Marine recruited 56 apprentices at Rosyth in 2007.
Both companies have announced that they will recruit a further
70 and 56 apprentices respectively this year. We would urge the
Scottish Executive to provide the financial support needed so
that Scottish apprentices can meet the sector's requirements and
expectations and maximise the opportunities afforded by the UK
Government's continued investment in the shipbuilding industry
in Scotland.
10. We welcome the work that BAE and SEMTA
are doing to develop apprenticeships for adults. However, we are
concerned that apprentices aged 20 or older do not receive full
funding. We believe that it is vital for Scottish industry to
look at upskilling throughout the workforce, including mature
workers who were not able to access apprenticeships as school
leavers. We urge the Scottish Executive and Scottish Enterprise
to consider increasing funding for adult apprentices. (Paragraph
60)
24. As noted above at paragraph 22, training
is devolved to the Scottish Parliament. We support the Committee's
conclusion and would urge the Scottish Executive not to overlook
mature Scottish apprentices and instead provide a firm commitment
to meet their needs. The UK Government is responsible for training
in England and has committed to increase spending for adult skills
and apprenticeships to £4.3 billion a year by 2011, helping
to deliver an increase in spending of 17% on adult learning. Scotland
requires a solid skills base for the growth of its manufacturing
industry and this is compromised by the Scottish Executive's policy
towards Scottish apprentices aged 20 and over.
11. The Scottish Executive must ensure that
industry continues to see Scotland as a good area for investment
due to the highly skilled workforce. Scottish Enterprise also
has a role to play in promoting Scotland to industry and working
to develop existing Scottish industry. We are concerned that Scottish
Enterprise has not been sufficiently pro-active to date and hope
that the re-launch of Scottish Enterprise on 1 April 2008 will
lead to greater success in promoting and supporting Scottish industry.
(Paragraph 69)
25. We support the view that the Scottish Executive
and Scottish Enterprise must be proactive in helping maintain
a highly skilled and innovative workforce so that Scotland keeps
in line with the rest of the UK and remains an attractive place
to invest.
12. We urge all stakeholders, including the
Ministry of Defence, Skills Development Scotland, the Scottish
Enterprise and defence companies to work together to promote careers
in the defence sector and support the work of education providers
in widening access to skilled employment or further training.
We urge the Scottish executive and local authorities to examine
the apparent biases within the education system in favour of the
academic stream and urge them to take appropriate action to boost
the standing of vocational options. (Paragraph 70)
26. The UK Government is committed to the sustainability
of the defence industry in the UK and Scotland and has contributed
to the industry by providing numerous training opportunities and
significant investment.
27. The MOD's investment and programmes have
benefited both Scottish Universities and Scottish companies. The
MOD announced a 'Competition of Ideas' to inspire the best innovators
from across Britain to bid for a contract to develop their ideas
and help meet key defence challenges. This resulted in three companies
operating in Scotland and three major Scottish Universities (Glasgow,
Edinburgh and Herriot Watt) receiving contracts.
28. EMRS, based in Edinburgh, received £5.9M
of MOD funding last year. EMRS places contracts throughout the
UK and last year this included contracts with Scottish organisations
totalling over £1M. C4ISTAR also ran two programmes at Herriot
Watt University in Edinburgh.
29. The MOD recognises that a long term suitably
skilled workforce is central to the delivery of the DIS. This
requires a co-ordinated approach to strategic workforce and skills
planning between the MOD and Industry. The MOD is working jointly
with Defence industry employers and the Skills for Business network
to: identify the future strategic workforce capability that we
need; improve the future supply of common defence sector skills
through recruitment, training and development action; and provide
a common demand signal for recruitment, training and education
provision. By being clearer about the strategic skills required
to underpin the DIS, we will help skills providers to identify
strategic investments, such as new learning facilities.
30. Under the auspices of the National Defence
Industries Council (NDIC), a joint MOD and Defence industry strategy
is also being developed to mitigate the skills shortage risk.
13. Many defence companies currently operating
in Scotland have invested significantly in their facilities there.
That makes relocation south of the border unlikely in the short
to medium term. We recognise that the possibility of constitutional
change will throw into doubt the long term sustainability of the
Scottish defence industry as, under the current business model,
MoD orders are the foundation of any additional business. (Paragraph
76)
31. The UK Government strongly endorses the Committee's
concerns and the importance of MOD orders to the defence industry
in Scotland.
32. The Committee is right to say that "the
issue of constitutional change affects the future sustainability
of the Scottish defence industry". The MOD's planning and
strategy is based on current constitutional arrangements and does
not account for a Scotland separated from the rest of the UK.
There is a strong manufacturing and skills base in Scotland as
a result of sustained investment by the UK Government. 5,000 full
time equivalent jobs in 2005-2006 are estimated to be generated
as result of direct expenditure on equipment by the MOD. In 2005-06,
an estimated £550 million was spent on equipment with companies
based in Scotland and with whom MOD directly contracts.
33. The MOD's activity also helps to sustain
a company's critical mass even if it is also engaged in the supply
of goods and services to other clients. Many companies based in
Scotland, engaged primarily in the supply of equipment to the
MOD, have also developed products and expertise that enables them
to access global markets for products with defence and civilian
applications.
14. With a limited amount of guaranteed work
after the CVF programme it is possible that the majority, or the
entirety, of the work for the Joint Venture could be carried out
in the VT yard in the south of England rather than Scotland. We
urge the Ministry of Defence, BAES and VT to ensure that any decisions
are communicated clearly and early to the workforce and consulted
on. The Scottish Executive and Skills Development Scotland must
ensure that education and training in Scotland continue to produce
a highly skilled, highly motivated workforce. The Scotland Office
must promote the strengths of Scottish industry and make the case
within Government for a continued industrial presence in Scotland.
(Paragraph 81)
34. Paragraphs 10 and 11 above describe MOD's
procedures for communicating progress on defence equipment programmes
both to the workforce and the wider public. Furthermore, the DIS
update process will continue to provide Industry with ongoing
clarity to facilitate restructuring, rationalisation and investment
in the capabilities and skills needed to ensure the long term
health of the UK's defence industrial base. Industry also recognises
the importance of consulting its own workforce and stakeholders.
35. We have already established that a sustainable
industrial base is necessary to maintain appropriate operational
sovereignty in the UK and that Scotland plays an important part.
Scotland has many of the skills required and we urge the Scottish
Executive to be proactive in maintaining this highly skilled workforce.
The defence industry in Scotland is in an attractive position
if it builds on these skills, is competitive, and provides value
for money.
36. We see no danger to the future of the Clyde
shipyards but plans rest with Industry. A large workload is underway:
the Clyde shipyards are building the Royal Navy's Type 45s and
will be building sections of the future aircraft carriers, providing
thousands of jobs for Scotland and the UK. This will ensure that
the industry remains sustainable and healthy well into the next
decade.
37. The significant and sustained investment
provided by the UK government will assist the Scottish defence
industry to become more efficient and competitive. We expect them
to use this strong foundation as a spring board to win further
commercial work outside of defence contracts, including export
contracts. Through the support of UK Trade & Invest, the
UK Government plays a crucial role in assisting all UK defence
sector companies to secure export contracts. The position of the
UK Government on the world stage also places the defence industry
in Scotland in a strong position for securing future contracts.
The Scotland Office will continue to promote and communicate Scottish
interests at the highest level.
15. While the Joint Venture is guaranteed
a certain amount of work, defence companies need to increase their
non-MoD order book. We urge the MoD to work with companies during
the design stage of defence programmes to ensure that, if possible,
designs can be adapted for the export market. (Paragraph 86)
38. The impact of defence spending to Scottish
industry is far reaching, creating and sustaining large numbers
of highly skilled jobs whilst also enabling many companies concerned
to develop additional applications for export and civilian markets.
The UK Government is committed to working closely with the UK
defence sector in support of its export campaigns. The DIS recognised
that Industry's priority is to produce systems that meet the MOD's
requirements and that this may not always factor in export potential
at the design stage. However, the development of through life
capability management heralded by the DIS offers the opportunity
to consider features to enhance exportability at the design stage.
16. The defence industry is vital for Scotland.
As well as contributing to the economy the defence industry also
provides skilled employment opportunities. The defence industry,
particularly the ship building industry, is in a more stable position
than it has been for some time, largely due to the CVF programme.
Scottish engineering and manufacturing is supported by a highly
skilled workforce. However, once the carriers have been constructed,
there are a number of challenges that the industry will have to
prepare for. (Paragraph 87)
39. The UK Government welcomes the report and
endorses the Committee's view that "the defence industry
is vital to Scotland. Defence and aerospace industries generate
nearly £2.31 billion in sales and together with the MOD support
almost 50,000 jobs and a record number of apprentices". Scotland
is benefiting from a sustained period of MOD investment.
40. We also welcome the Committee's recognition
of the benefits of the DIS to industry and the MOD. The DIS is
driven by the need to ensure that the capability requirements
of the Armed Forces can be met, now and in the future at good
value to the taxpayer. This is in recognition that a change of
approach was needed in order to sustain the industrial capabilities
that are vital to maintain our national security. DIS gives a
clearer view of the MOD's priorities and allows Industry to make
informed decisions on the skills and capabilities they require
to meet those priorities.
41. Post CVF, the challenge that the MOD and
Industry face in the maritime sector is to develop an enduring
industry that delivers affordable, sustainable and efficient maritime
build, equipment and through life support to meet the operational
needs of the Royal Navy today and in the future. The Maritime
Industrial Strategy is designed to assist the maritime defence
industry in the UK, including Scotland, to address these challenges
and indeed to be more competitive when tendering for new work
and pursuing export drives.
17. Those challenges include the potential
impact of possible constitutional change with consequential loss
of automatic access to the UK home market, limited success to
date in the export market and the formation of a Joint Venture
which could lead to more work being carried out in England. To
prepare for these challenges, all stakeholders including the Ministry
of Defence, the Scottish Executive, Scottish Enterprise, Skills
Development Scotland, the Scotland Office and industry, need to
work effectively together to ensure that Scotland's engineering
and manufacturing base continues to be world class. (Paragraph
88)
42. The UK Government is wholly committed to
a sustainable UK defence industrial base as set out in its DIS.
43. In contrast to many other countries, such
as Norway and Finland, Scotland's shipbuilding industry is primarily
a warship building industry with the specific skills and manufacturing
base needed for such an industry. The Committee will be aware
that 90% of orders for the shipbuilding industry in Scotland are
from the UK Government, which will be investing some £14bn
in the UK shipbuilding industry over the next 10-15 years. However,
our planning and strategy is based on current constitutional arrangements
and does not account for a Scotland separated from the rest of
the UK in any way. Constitutional change would also have a wider
negative impact on employment in Scotland as 18,500 civilian and
military personnel are directly employed by the MOD and a further
estimated 12,500 additional people are in jobs generated by the
presence of MOD bases, personnel and infrastructure.
44. Scotland's culture of innovation and its
strong engineering and manufacturing base means that it is well
placed to succeed in competitive global markets. The UK Trade
& Investment Defence and Security organisation continues to
maintain strong links to MOD and offers all UK-based companies
access to military and civilian professionals as well as links
to a worldwide network of defence attaches and embassy commercial
staff. This is an extremely valuable resource to the UK defence
industry and one that has helped the UK become the world's leader
in defence exports in 2007, with a record £10 billion of
new business and a 33% of market share. We are confident that
the UK defence industry will continue to build on this success.
As established in paragraph 37, the position of the UK Government
on the international stage places the defence industry in Scotland
in a strong position for securing future contracts, particularly
in comparison with smaller countries.
September 2008
| 
