5 The Future of Defence in Scotland
71. Most of the witnesses we have heard from have been broadly positive about the future of defence in Scotland but there are some issues that affect the sustainability of the sector, such as the possibility of constitutional change and questions about how much of the Joint Venture work will be carried out in Scotland.
Constitutional change
72. There is ongoing discussion within Scotland and the UK about the possibility of constitutional change. We recognise there are strong views on this matter, but the costs and benefits of the Union, and the questions of whether Scotland should remain part of it, are outside the scope of this inquiry.
73. Throughout the inquiry we have heard that MoD orders are vital to sustain naval shipbuilding in the UK. We have been told that MoD orders are also important to non-naval defence companies. Nigel Stewart of BAE told the Committee that "UK Government orders and support are critical to us as a warship building business,"[82] and that without Royal Navy orders "There would not be a ship building business."[83] David Lockwood said that, while Thales "would not be dead without Royal Navy business; we would certainly have an interesting cost challenge in that part of the business."[84]
74. The Minister suggested that an independent Scotland would not receive a significant amount of UK naval work. She told us that "one of the things that we have to consider when we are having orders is our operational sovereignty and it is true we have some arrangements on some projects with other countries but operational sovereignty is always a factor and is very important to us and one of the things we would have to consider."[85] It is unclear what naval requirement an independent Scotland would have and whether this would make up for the loss of UK MoD orders.
75. Warrick Malcolm suggested that, while companies could move facilities fairly easily:
What ties them to Scotland are things like the education and the skills and the people and so on, and the support that they obviously receive from people like SBAC Scotland and indeed from the Scottish Government, which is extremely important. But it is the people, the skills and the innovation that are indeed attracting people to Scotland; and as long as that stays competitive they will stay in Scotland.[86]
However, there has also been significant investment in some facilities which could make relocation unappealing. BAE investment in the yards at Govan and Scotstoun over the past seven years include £8.8m for new tidal gates at both yards, £3.2m for the extension of existing pits and construction of new pits at Scotstoun and £1.9m for upgrades to preparation and fabrication facilities.
76. 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.
The Joint Venture
77. The Joint Venture (JV) is a proposed company to be formed from parts of BAE Systems and VT Group. The Joint Venture will include the two BAE shipyards on the Clyde, Govan and Scotstoun, and VT facilities in Portsmouth. BAE and VT would have equal voting rights on the board of the Joint Venture. Once the JV is formed it will become Britain's largest naval shipbuilder.
78. The nature of the Joint Venture also poses questions regarding the future of the defence industry in Scotland. Vic Emery told us that:
... the future workload provided by the MoD to the industry at large will be much smaller than it currently is and, therefore, across the United Kingdom there is an over capacity of shipbuilding capability, therefore some rationalisation will need to be taking place.[87]
This echoes the view expressed in the Defence Industrial Strategy that:
Industry restructuring and consolidation is likely to be a key feature of any improvement programme, and fundamental to creating a viable and sustainable business to meet anticipated steady-state demand.[88]
79. The formation of a Joint Venture between VT and Babcock is one of the requirements for the CVF programme. While the JV would have a guaranteed level of work for 15 years it is expected to be about one-third of the work level at the peak of the CVF build. VT is based in Portsmouth while BAE has yards around the UK.
80. It is possible that the Joint Venture could result in less work being carried out in Scotland. Vic Emery of BAE told the Committee:
... from a shipbuilding point of view the defence Industrial Strategy calls for a consolidation of the industry across the whole of the UK. How that gets divided between north and south of the border is a long way from being decided.[89]
81. 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.
Future workload
82. Nigel Stewart suggested that the level of work guaranteed under the Joint Venture is expected to be one 5,000 tonne vessel per year and a new design every five years.[90] The Future Surface Combatant (FSC) programme, which is likely to provide some work for the Joint Venture, is still at the concept stage and has not gone through the initial gate process. The target in-service date for the FSC is 2018-2020.
83. Additional work could come from export contracts. Nigel Stewart told us that "BAE [...] are at the moment looking at a number of significant export prospects."[91] However, the UK ship building industry has only had limited success in winning export contacts in the past. Vic Emery told us that BAE had not won an export contract in the past 3 years.[92]
84. Hans Pung, Head of Research in Defence and Security, RAND Europe, suggested that part of the reason for "mixed success" of UK shipbuilders in exporting ships was a "misalignment of the market for export ships and the requirement of the MoD for the sorts of naval warships that are produced."[93] Royal Navy operational requirements mean that UK naval ships are more complex than those of many other countries and so have a limited appeal as export products. Dr Tyler told us that, for the Future Surface Combatant the aim was to:
Develop what I call the chassis of the ship, by which I mean the hull and the basic marine systems in the ship, which will be intrinsically exportable allowing those companies to hopefully be successful in that area. We might put a more complex weapons system ourselves onto those platforms in order to satisfy our own requirements, but those companies are becoming very successful these days in taking a more modular approach to the way that they build these ships which will allow them to put different weapons systems on for a different customer in a different part of the world and to be internationally competitive on that basis.[94]
85. There are also non-naval programmes which could provide work for Scotland. These programmes include the Future Rapid Effect System Utility Vehicle (FRES) and the Future Integrated Soldier Technology (FIST) programme. Work on FIST is ongoing and a 'preferred design' for FRES was announced on 9 May 2008. However, given the difficulties over the 2007-2008 planning round it is unclear whether either of these programmes will go ahead and what the timescale may be.
86. 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.
82 Q 9 Back
83 Q 11 Back
84 Q 14 Back
85 Q 509 Back
86 Q 219 Back
87 Q 397 Back
88 Ministry of Defence, 2005, Defence Industrial Strategy, p. 74 Back
89 Q 340 Back
90 Q 50 Back
91 Q 6 Back
92 Q 334 Back
93 Q 277 Back
94 Q 498 Back
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