Evidence submitted by the Ministry of Defence
Letter from the Rt Hon Baroness Ann Taylor PC, Minister for Defence Equipment & Support to Mohammed Sarwar MP, Chairman of the Scottish Affairs Committee
Thank you for your recent letter about employment and skills for the defence industry in Scotland, following the evidence I provided to the Scottish Affairs Committee on 29 April 2008.
The Military Afloat Reach and Sustainability (MARS) programme received formal approval to enter its Assessment Phase in July 2005. The planned contractual route for meeting the MARS requirement was the formation of an alliance. A review of the procurement strategy for the programme was carried out in 2007, however, and, as a result, the three classes of MARS ships—Fleet Tanker (FT), Fleet Solid Support (FSS) and Joint Sea Based Logistic (JSBL)—will now be procured separately. This reflects the urgent need to deliver the FTs and the desire to keep the other two aspects of the programme flexible.
Given the significant investment by MOD in the maritime sector over the next few years, through projects such as the Type 45 Destroyers and the Future Aircraft Carriers, the FTs are not required to sustain the Key Industrial Capabilities. In order, therefore, to build the FTs within the required timescales, we are running a competition for their design, build and outfit. In procuring FSS and JSBL we will, of course, consider the need to sustain the Key Industrial Capabilities. You may wish to know that on 21 May 2008 we announced that four bidders (Fincantieri, Hyundai, Navantia and a consortium of BAE Systems with BMT DSL and DSME) have been selected to go forward to the next stage of the competition that will continue to run throughout 2008.
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.
The competitive procurement process for the FTs could, in theory, still be curtailed at this late stage and awarded to a UK contractor instead. In practical terms, however, the MOD would be taking a significant risk of legal challenge by doing so, given that the procurement process is already underway. A successful legal challenge by industry or the European Commission would have financial and political consequences. In that context, I should reiterate that the FT competitive procurement is fully compliant with Government policy and will deliver best value for money for taxpayers and provide modern equipment to support Defence outputs.
Finally in relation to MARS, although a final design for the FTs does not yet exist, a concept design has been shared with industry and has been used by the MOD to forecast costs and test the practicality of the requirement. The next stage of the FT competition will generate more detailed proposals from industry, leading to a mature and fully costed design.
Turning to the future maritime spending, I can confirm that MOD investment in the UK shipbuilding industry is some £14 billion over the next 10-15 years. The overall Defence Budget is some £34.1 billion in 2008-09, rising to £36.8 billion in 2010-11, but we do not disaggregate this by geographical region. Similarly, our equipment programme is broken down by projects, not by the location.
Scottish industry is providing a vital contribution to defence to our current and future capability, both as prime and as sub-contractors. Procuring and supporting equipment, however, forms only a part of our business. We must also remember that the MOD maintains a considerable presence in Scotland. We employ some 20,000 people (both service and civilian) there and maintain some 25,000 hectares across 374 Scottish sites. All of this amounts to a large investment in Scotland that is set to continue for the foreseeable future.
I hope this is helpful.
Baroness Ann Taylor
Minister for Defence Equipment and Support
3 June 2008
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