Evidence submitted by BAE Systems Surface Fleet Solutions Ltd.
INTRODUCTION
1. BAE Systems Surface Fleet Solutions (BAE SFS) welcomes the opportunity to submit evidence to the Scottish Affairs Committee inquiry into the Defence Industry in Scotland.
2. BAE SFS is one of the largest defence contractors in Scotland with approximately 3,300 employees based at its shipbuilding sites at Scotstoun and Govan on the Clyde. The business also has operations based at Filton and Portsmouth.
3. The BAE SFS business is the design, build and support of complex warships and naval auxiliaries for the Royal Navy and overseas governments.
4. Since 2000, the business has delivered a Wave Class auxiliary and three Bay Class auxiliaries to the Royal Fleet Auxiliary together with three Offshore Patrol Vessels for the Royal Brunei Navy.
5. The business is currently engaged on a £2.9 billion programme to build a class of six Type 45 destroyers for the Royal Navy. The first of class Daring recently started sea trials and is expected to enter service in late 2009, a further two ships have been launched and all six ships are now in production.
6. BAE SFS is a wholly owned subsidiary of BAE Systems PLC.
7. BAE Systems is in negotiation to form a Joint Venture with VT Group aimed at merging BAE SFS with VT Group's shipbuilding and support businesses based at Portsmouth along with the existing Joint Venture, Fleet Support Ltd. that manages the Portsmouth Dockyard.
8. Negotiations are also ongoing with MoD aimed at securing a Terms of Business Agreement (ToBA) for this new joint venture business. The intent of this agreement would be to provide a 15 year partnering agreement with MoD, where key defence industrial capabilities can be sustained in the UK, by guaranteeing a minimum workload for the JV.
SUMMARY
9. BAE SFS welcomed the July 2007 announcement of a planned £3.8 billion investment in new aircraft carriers (designated CVF) for the Royal Navy, a programme originally endorsed in the 1998 Strategic Defence Review. Proceeding to contract for this programme will be fundamental to sustaining skills and capability in design, production and support over the next four years.
10. If as appears likely, BAE SFS is awarded production work on the aft block for each of two aircraft carriers, this work should provide employment across a broad range of skills, assuming it is contracted in a timely manner. It does not however provide a significant boost to employment; rather it provides continuity of employment and key skills retention as the Type 45 destroyer programme scales down and moves from production into the in-service support phase.
11. After CVF, the next Royal Navy programme is for classes of frigates designated Future Surface Combatant (FSC). The projected demand is for a single FSC every year. The current estimates suggest a throughput of about a third of the current Type 45 loading assuming no other work is going through the facility.
12. MoD has decided to open up the sourcing of the MARS programme of naval auxiliaries internationally and has recently commenced that process by listing the Fleet Tanker programme in the European Journal. Therefore UK Industry may no longer rely on these complex auxiliaries to sustain industrial capability.
13. Under the ToBA, MoD is planning to sustain key naval industrial capabilities in the UK It is yet to be determined, what proportion of this capability would be located in Scotland in the long term.
14. However, it is clear that significantly reduced capacity is required after CVF and considerable industry rationalisation can be expected. The industrial capability that BAE SFS has created on the Clyde may be at risk.
ECONOMIC FACTORS
15. In 2006, the Fraser of Allander Institute (FAI) at the University of Strathclyde conducted a study to assess the total economic impact of the BAE SFS business in Scotland on the Scottish economy.
16. The main findings of this report were as follows:
— It estimated that the 2,860 jobs provided by BAE SFS at Govan and Scotstoun in 2006 supported an additional 1,633 jobs in other industries in Scotland. BAE SFS therefore supported a total of 4,493 jobs across Scotland as a whole. This means that every one direct job at BAE Systems supports 0.57 jobs in other industries in Scotland.
— The study also estimated that the £73.7 million worth of wages paid to BAE Systems SFS employees supported an additional £34.0 million worth of wages in other parts of the Scottish economy. This means that every £1 paid directly in wages to BAE Systems employees supports £0.46 worth of wage income elsewhere in Scotland.
— The study also estimated that the £133.2 million worth of output created at Govan and Scotstoun supported an additional £105.0 million worth of output in other industries in Scotland. This means that BAE Systems operations at Govan and Scotstoun supported a total amount of output of £238.2 million across Scotland as a whole.
17. Since this 2006 study, employment has increased at BAE SFS. Currently it has 3,353 employees based in Scotland, made up of 458 engineering related employees and 2,895 production/staff.
18. Over the past five years BAE SFS has recruited over 500 apprentices on its award winning Modern Apprentice scheme. At the same time it has recruited over 60 graduates.
19. Analysis of the BAE SFS supply chain for the Type 45 project indicates that there are over 400, predominantly UK based companies contributing to the Type 45 programme, with over 500 sub-contracts placed for everything from complex weapons systems through to catalogue items and on-site services. 37% of the UK sub-contract value of Type 45 has been placed in Scotland.
20. The BAE SFS role on Carrier will be focused on the build of a particular block and the overarching leadership of design and integration teams within the Alliance (see below). Most of the supplier selection and management will be carried out by the Alliance (also described below).
INTERNATIONAL OPPORTUNITIES
21. BAE SFS has a successful track record in the international market, with sales to Malaysia and Brunei in the 1990's worth over £1 billion. However, the market is intensely competitive, driven by political as well as technological factors and is becoming more difficult with emerging economies seeking to establish indigenous capability and European competitors focussing more effort on international sales to offset reduced domestic demand.
22. The Royal Navy brand is a very important discriminator for UK suppliers in the international market, along with DESO support. BAE SFS notes with particular interest the Government's plans to restructure DESO.
23. Currently BAE SFS is negotiating a contract with one overseas government which will hopefully lead to a significant order in 2008. Such work would greatly assist BAE SFS in sustaining key industrial capabilities which are otherwise at risk due to a decline in UK business. BAE SFS is in early stage discussions with a further two overseas governments.
24. A key factor that inhibits the Company's ability to achieve success in international markets is the highly specialised nature of Royal Navy ship designs. International customers generally require ships that are multi-purpose whereas UK naval vessels tend to be single-role. As a result, UK contractors have to develop separate designs for the international market. This places UK business at a considerable disadvantage compared with overseas competitors who are able to offer multi-purpose designs in service with their own domestic navies.
25. Another emerging difficulty is the increasing complexity of MoD contracting arrangements and involvement of third parties in the design process. This is leading to situations where IPR ownership can be confused and export exploitation inhibited. This is the situation with the Bay Class and the aircraft carriers, but we would hope that by working with the MOD and other industrial partners we can avoid such difficulties with the Future Surface Combatant.
FUTURE AIRCRAFT CARRIER (CVF)
26. CVF is a programme to build two 65,000 tonne aircraft carriers for the Royal Navy. The reported budget is £3.8 billion.
27. The programme is being managed via an alliance. The alliance partners are Babcock, BAE Systems, VT, Thales and the MOD. The ships are planned to be built in blocks at various locations in the UK and brought together in the large dry-dock at Rosyth. This contracting strategy creates both risk and opportunities as it is a new structure which has yet to be proven within the defence sector.
28. BAE SFS responsibility would be to construct the aft blocks to hanger deck level. The anticipated value of production work across the two ships is circa £265 million to BAE SFS. In addition, BAE SFS is to contribute to the design programme to the value of circa £59 million and support the integration work at Rosyth, estimated at £37 million. Within the Joint Venture with VT, BAE SFS will also be involved in procurement activity of materials and equipments and management of the upper blocks procured from third party subcontractors. The labour value of CVF work to BAE SFS over the programme period would be approximately £360 million.
29. It should be noted that the estimated £360 million relates to the work that BAE SFS has been invited to bid for on CVF and will be done predominantly in Scotland. Other BAE Systems businesses have also been invited to submit bids into the CVF Alliance. The Alliance is taking responsibility for major equipment/materials selection, although a proportion of these will be procured through BAE SFS.
30. Whilst CVF would provide detailed design work and block production work for BAE SFS employees it offers limited opportunity when compared to say Type 45, for the business to exploit its front end concept design skills or back end system integration skills. However, staff from the anticipated Joint Venture, including staff from BAE SFS, will be involved in the integration work on Carrier. It is these high value added capabilities that the Defence Industrial Strategy identified as strategic capabilities for retention in the UK (DIS Figure B2(ii)).
31. CVF does not provide any real opportunity for BAE SFS to export. The international business secured to date, namely licensing the CVF design to the French Navy, did however provide funds to MoD to help support the programme.
MILITARY AFLOAT REACH AND SUSTAINABILITY (MARS)
32. The Military Afloat Reach and Sustainability (MARS) programme comprises a total of 11 support ships across three different classes with a procurement budget reported to be in the region of £2.5 billion.
33. The three ship classes within MARS are; Fleet Tanker, Fleet Solid Support and Joint Sea Based Logistic. All ships will be manned and operated by the Royal Fleet Auxiliary. The Fleet Tanker ships are the first to be procured.
34. At the MARS Industry Day on 24 October 2007, MoD explained that the MARS Fleet Tankers are not complex, are not required to sustain sovereign capability and that European competition is the appropriate procurement mechanism.
35. On the issue of UK build, MoD referred to DIS pp70 and the fact that there is no longer any requirement to build all warships and RFA vessels in the UK.
36. MoD also stated that whilst it considered the Fleet Tankers to be "warlike" it did not consider the Fleet Tanker procurement to be essential to the national security interest and therefore EU Article 296 did not apply. Without Article 296 exemption, MoD is unable to direct work to UK suppliers.
37. As a result, on 12 December 2007 MoD placed an advertisement in the Official Journal of the European Union (OJEU) inviting expressions of interest in supplying "up to 6 Fleet Tankers" with an estimated value of £800 million.
38. BAE SFS considers that until such time as the 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.
39. Further, BAE SFS is concerned that the Fleet Tanker procurement approach may set a precedent that will inhibit MoD from invoking Article 296 on other naval programmes.
FUTURE SURFACE COMBATANT (FSC)
40. Future Surface Combatant is a planned programme to replace the capabilities currently provided by the Type 22 and Type 23 frigates.
41. The programme is at an early stage and as yet the requirements and hence the design have not been finalised, but it is encouraging that MoD seems cognisant of the need to consider industrial capabilities in its procurement decisions for FSC. Issues such as batch sizing, production frequency and design refresh cycles are being given consideration.
42. Indications are that there will be three different classes of FSC, ranging both in size and complexity, from complex warships through to simple patrol vessels.
43. The business is currently anticipating an overall demand for FSC equivalent to a single Type 23 sized vessel every year. Such a rate is about a third of the current build rate of Type 45; ie a 3,500 tonne vessel every year compared to an 8,000 tonne vessel every nine months. This workload would be insufficient to maintain shipbuilding capacity at both Glasgow and Portsmouth.
44. It should be noted that FSC will need to commence within the next two years if it is to sustain key industrial capabilities in design. Combat system engineering skills in particular are a critical resource that need careful management and which are not easy to sustain (eg by CVF or MARS). BAE SFS looks forward to exploring FSC opportunities with MoD as soon as possible.
45. It is encouraging that in the case of FSC, MoD appears willing to consider adopting "export friendly" characteristics in the design. However, because the concept design will make use of a new Naval Design Partnership concept, in effect a UK wide industry design club, there is not yet clarity over whether the main UK contractors would have full design rights to exploit FSC in international markets.
Vic Emery
Managing Director, BAE Systems Surface Fleet Solutions
January 2008
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