House of Commons - Scottish Affairs

Select Committee on Scottish Affairs Sixth Report

3 Current Defence Programmes

12. Current naval programmes are expected to fill capacity until around 2014, with the peak of the CVF build programme occurring in 2013. In addition to naval shipbuilding and integration, Scotland delivers through life industrial capability, from design to repair and refitting work, in the aerospace, defence and naval sector. The Scotland Office told us that 15 upkeep projects were due to start between summer 2008 and winter 2009/10.[11]

13. The major naval programme currently in the build stage in Scotland is the Type 45 programme. HMS Daring, the first of class, has completed stage 1.1 and stage 1.2 sea trials. Stage 1.3 trials are due to take place in August 2008 and the ship is expected to come into service in December 2009. Steel has been cut on all five remaining vessels and the final vessel is due to come into service in 2012.[12]

14. The MoD has developed a number of Defence Technology Centres (DTCs) around the UK. They say that DTCs are:

...world class centres of excellence conducting innovative, cutting edge research for enhanced UK Defence capability. They are exemplars for research collaboration between Government, UK Defence, Small-Medium Sized Enterprises, and Universities.[13]

The Defence Technology Centre on electro-magnetic remote sensing is led from Edinburgh by a consortium including Selex Sensors and Airborne Systems and Thales.

Future Carrier Programme (CVF)

15. The Future Carrier programme was announced in July 2007 by the Secretary of State for Defence and Scotland. The two carriers, HMS Queen Elizabeth and HMS Prince of Wales, are expected to come into service on 2014 and 2016 respectively and cost Ł3.8 billion. Despite speculation in early 2008 that the carriers would be delayed, on 3 March 2008 the Secretary of State told the House that there was no change to the planned in service date.[14]

16. The carriers will be built using modular construction. This is the first time such a construction method has been used on this scale, although the Type 45 build employed some modular construction. The Royal Academy of Engineering said that this approach "represents a serious step up in construction complexity".[15] The design uses four 'super-blocks', which will form the base of each carrier and several smaller upper blocks. The allocation of the blocks is as follows: hull lower block 4 at BAE Systems Govan; 3 at BAE Systems Barrow; 2 at VT Group Portsmouth, and the bow (lower block 1) at Babcock Rosyth. The bow block is the smallest of the main blocks and Babcock will also build some of the upper blocks as well as being responsible for the assembly and integration work on the carriers.[16]

17. It is clear that with work on two of the four main blocks, some of the upper blocks and the assembly of the carriers being awarded to Scottish yards, the CVF programme is important to ensure the future of ship building in Scotland. It is also important further down the supply chain with a variety of small and medium enterprises expected to benefit from subcontracted work. Nigel Stewart told us that BAE Systems had:

...actively gone out to the supply chain in the whole of the UK to look at what capabilities there are there so it can be built in the UK. [...] Certainly I think all suppliers in Scotland or England or whatever have had the opportunity to register with the alliance so when the competitions come out they will be able to compete for that work.[17]

Ken Munro, Head of Human resources, Babcock Engineering Services, said that "all the industrial partners have been encouraged to engage with their local enterprise companies [...] and engage their local supply chains. I have no reason to believe that that is not going on across all sectors."[18]

Delays to the CVF Programme

18. Despite the announcement in July 2007 that the CVF would go ahead, the contract for the carriers was significantly delayed. This has been a recurring theme in the evidence that we have taken. Neither BAE nor Baroness Taylor were able to clarify what caused the delay or give an indication of when the contract would be signed.

19. On 29 January 2008, the Defence Select Committee asked General Sir Kevin O'Donoghue why the CVF contract had still not been signed six months after the Secretary of State confirmed the programme would go ahead. General O'Donoghue said "We [the MoD] are not quite ready to sign the contract. There are some commercial issues with the joint venture. The BA Systems and VT joint venture needs to be set up and that is rolling at the moment".[19] He went on to say that "there were some commercial issues in which the Defence Commercial Director was still engaged, and one of those is the joint venture".[20] He was unable to clarify what the other commercial issues were.

20. David Gould, Chief Operating Officer of Defence Equipment and Support (DE&S) at the time, told the Defence Committee that:

...the joint venture in effect is a delayed sale. Therefore, if BA Systems guarantees a price it needs some statement about future work. It has had that letter; it has been signed and sent to them, so there should now be no impediment to pretty quick progress on the formation of the venture and contracting for the ships.[21]

Mr Gould insisted that the delay was not due to a stand-off between industry and the MoD. He said in January 2008 that he would be disappointed if the CVF contract was not signed before his departure from DE&S in March 2008, and that he was confident it would be.[22] He also told the Defence Committee that "I think we are very close to being ready to go."[23]

21. On the same day as the Defence Committee took evidence from General O'Donoghue and David Gould, this Committee heard from Nigel Stewart, New Business Manager at BAE Systems. He suggested that BAE and VT were ready to form a joint venture and that:

In terms of where we are at, the talks are at a very advanced stage and we are really just awaiting now confirmation from the Government of the signature and the timing of the CVF contract, assuming it is on the terms as currently agreed.[24]

The Defence Committee note that:

It appears that the formation of the Joint Venture between BAE Systems and VT was a factor behind the delay, but the MoD's view on why this had not happened did not appear to match that of industry.[25]

22. The uncertainty over the timing of the contract, and the lack of clarity on what caused the contract to be delayed, led to concerns among the workforce that the construction phase of the CVF programme will also be delayed. Harry Donaldson, GMB Regional Secretary, said that "there is a genuine concern that any delays in that would impact or potentially impact on jobs and skills".[26]

23. There has also been some suggestion that the delay could have been the result of an unusually difficult Government spending planning round. Following reports in early 2008 that some MoD programmes would be delayed or cancelled, Prospect told us that there were "certainly concerns [...] over the Future Rapid Effects Systems contracts, all of which we were hoping would be resolved in the next few days but we are still waiting to hear definitively. At this point in time, there is considerable uncertainty".[27]

24. The Financial Times claimed in April 2008 that the MoD had "dragged its planning round past March, the end of the financial year, because officials are struggling to reconcile a tight budget with their operational needs, contractual commitments and the political priorities set by Minister".[28] Giving evidence to the Defence Committee, both General O'Donoghue and David Gould accepted that the 2007 Planning Round was particularly difficult.[29]

25. In late April, the Secretary of State for Defence told the House that:

When we have achieved the necessary alignment of the work schedule, the commercial arrangements and other related matters, we will set the date for signing the manufacturer contract.[30]

When asked about the delay in signing the contract, Baroness Taylor echoed the Secretary of State's comments and added, "We are talking very directly and very openly with industry and with those involved about the details of the arrangements. There is not a long way to go".[31] However, she was unwilling to give any further detail about the alignment and commercial arrangements that still needed to be clarified. The Committee heard that:

We [MoD] are discussing with the companies at the moment and [...] we are not going to have those discussions in public. We know that the companies are as keen to move forward as we are and that is why we are having very close contact with them and very close discussions with them. [...] I can tell you that we have not lost a day at this stage, but in terms of when a contract will be signed, I cannot add anything to what the Secretary of State said just yesterday on the floor of the House.[32]

26. On 20 May 2008 the MoD "gave industry the green light that it was ready to go-ahead with contract signature for the two new super aircraft carriers".[33] The reaffirmation of the Government's commitment to the CVF programme is welcome. However, we still await the formation of the Joint Venture and a signed contact for the CVF construction and urge the MoD to sign a contract as soon as possible.

27. If the CVF programme does not go ahead, or if it is significantly delayed, there is the potential for a loss of skills. In 2006 the Defence Committee carried out an inquiry on The Future of the UK's Strategic Nuclear Deterrent: Manufacturing and Skills Base. They concluded that, due to the industry's requirement for skilled, specialist workers, retaining the skills base would be essential to maintain capability. A gap between programmes could erode the skill base and it might not be possible to re-establish skills in the UK once they were lost.[34] We consider that there is a similar risk to the skills base required to build complex naval vessels. Nigel Stewart, New Business Director for BAE Surface Fleet Solutions said:

Our business is a high level technology business. [...] the Type 45 destroyer, the aircraft carrier, the frigate—are complex products so it is very important that we continue, and always continue, to invest in skills and training. You cannot build the type of product we have got with an unskilled workforce.[35]

28. 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.

29. 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.

30. 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.

31. 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.

Military Afloat Reach and Sustainability (MARS)

32. The Military Afloat Reach and Sustainability (MARS) programme comprises of 3 classes of ship. These are:

six fleet tankers for delivery between 2010 and 2016;

two fleet solid-support ships for delivery in 2017 and 2019; and

three joint sea-based logistics vessels for delivery in 2018, 2020 and 2021.

The MARS tankers are needed urgently as current Royal Navy tankers are single-hulled and under EU regulations single-hulled category 2 and 3 tankers must be withdrawn by 2010.

33. On 12 December 2007 an invitation to respond to an expression of interest to supply up to six fleet tankers appeared in the European Journal.[36] There has been some concern from UK shipbuilders about the decision to put the MARS tankers to international tender. BAE told us that:

... until such a time as core workload for UK Industry is defined and committed and all key industrial capabilities secured, it would be premature to remove options, such as the Fleet Tankers, that may be required to safeguard UK capability.[37]

34. Article 87 of the European Community Treaty says that:

... any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market.[38]

Article 296 exempts defence procurement from competition law. It allows that:

... any Member State may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material; such measures shall not adversely affect the conditions of competition in the common market regarding products which are not intended for specifically military purposes.[39]

35. The MARS tankers have been dealt with by the Government as commercial rather than naval vessels. In a letter to the Chairman on 3 June 2008 the Minister stated that:

The MOD operates in accordance with UK and EU procurement law which means that the requirement for the FT contract must be competed unless a valid exemption applies—including the exemption offered by Article 296 of the EC Treaty. In the first instance, it will always be MOD's decision as to whether or not an Article 296 exemption should be applied (including any determination as to whether a naval or auxiliary ship is deemed 'warlike' or not, in accordance with Article 296). That decision can, however, be legally challenged by industry or the European Commission if either (or both) feel that an exemption has been wrongly applied. The lack of UK capacity and the difficulties inherent in demonstrating that the FTs meet all the relevant criteria have negated the need for MOD to currently declare an Article 296 exemption for the design and build elements of the ships. The applicability of Article 296 for later aspects of the MARS programme will be considered in due course.[40]

36. GMB suggested that "the MARS programme should dovetail with the Carrier and Type 45 contracts to enable work to be sustained in the yards for as long a period of time as possible."[41] However, they accepted that this would, in practice, mean delaying the tankers which are urgently needed.

37. CVF and MARS are the two major MoD shipbuilding projects due to take place between now and 2020. The first wave of this programme is an order for 6 tankers to be in service by 2016. In addition to the uncertainty over the timing of the CVF programme, there are concerns about the decision to open procurement of these ships to manufacturers from outside the UK. When asked about this, Vic Emery, Managing Director, BAE Surface Fleet Solutions said:

...the industry needs some certainty going forward, either in the form of the aircraft carrier programme or a replacement for that programme if it were not to go ahead on its original dates and if there was some other delay to the programme, who knows? You need to be able to have some mechanism of filling the void in the unemployment which that would create.[42]

38. If the CVF project were to be delayed, Baroness Taylor told us that not only would it be legally difficult to replace CVF work with work on the tankers because "once you have actually advertised that contract it would be quite difficult to redefine it"[43] but also difficult from a practical position because the MoD "do not have a design that we can just slip in for these fleet tankers so it is not as simple as it might superficially appear".[44]

39. Although the Minister explained that the MoD did not believe the tankers were naval vessels, Dr Andrew Tyler told us that other ships in the MARS programme were, at least in part, covered by Article 296. He said that:

... the Joint Sea Based Logistic ships are considerably more complex than the tankers and indeed the Solid Support ships, to the extent whereby we have put those inside the boundaries of the scope that will go exclusively to the UK yards. The Solid Support ships, in our judgment, are a simpler ship—they are more complicated than tankers but they are a simpler ship—and I think there is a judgement to be made at the time [...] about how we treat those.[45]

Dr Tyler confirmed that both the Joint Sea Based Logistic ships and the Solid Support ships were part of the heads of terms for the terms of business agreement for the Joint Venture.

40. 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.

41. 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.

42. 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.

Non-naval defence programmes

43. We have focused, during the inquiry, on naval defence work in Scotland. However, there is a significant aerospace and non-naval defence industry in Scotland. Thales UK, Selex Galileo and BAE all have Scottish facilities that undertake non-naval defence work.[46] We recognise, however, that much of the non-defence work is dependant upon a base-load income from defence work to share costs and ensure viability. In 2006 Ł1,669m of the total orders for the sector were aerospace and non-naval defence compared to Ł614.2m for naval companies.

44. The MoD provides 18,500 service and civilian jobs in Scotland and supports a further 12,500 indirectly. Prospect the union expressed concern that "there are some question marks over the future of that as a result of some very major reorganisation plans within the MoD which do appear to be having a much greater impact on Scotland than they do on other areas of the UK." When asked about this point the Minister said that the "MoD is going through a phase of streamlining but is not based on any geographical preferences."[47]

45. 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.

11 Ev 86 Back

12 www.baesystems.com/Newsroom/NewsReleases/autoGen_108129144147.html Back

13 www..mod.uk/DefenceInternet/AboutDefence/ Back

14 HC Deb, 3 March 2008, col 1441 Back

15 Ev 103 Back

16 www.mod.uk/DefenceInternet/FactSheets/ProjectFactsheets/FutureAircraftCarriercvfProjectInformation.htm Back

17 Q 62 Back

18 Q 63 Back

19 Defence Committee, Tenth Report of Session 2007-08, Defence Equipment 2008, HC 295, Q 114 Back

20 Ibid., Q 136 Back

21 Ibid., Q 146 Back

22 Ibid., Qq 151-152 Back