Examination of Witnesses (Quesitons 40-59)
MR DAVID LOCKWOOD, MR KEN MUNRO AND MR NIGEL STEWART
29 JANUARY 2008
Q40 David Mundell: Is that likely to be the shape of things to come in all aspects of ship building into the future? Is such an alliance a within Scotland alliance or is likely to be a broader UK or even European or global alliance?
Mr Munro: Certainly for the moment it is a UK alliance. I suppose to some extent there are some global partners in it; I am looking at my Thales colleague. Whether it expands beyond that or not I would not like to say.
Mr Stewart: The CVF alliance was put together under unique circumstances, as we said earlier. These will be the largest surface warships we have ever built in the UK and they cannot physically all be built in one location. It relies on Babcock, Thales, BAE, VT and the Ministry all working very closely together for a project that is unprecedented on the warship side. The alliance structure very much addresses that particular issue for the carrier; it does not necessarily mean that that construct will carry on for all future programmes, but it has certainly been very positive and effective on the carrier programme.
Q41 David Mundell: From what you are saying effectively an alliance approach has worked in that sense. Those parts of it are not privately reflecting that this is not a positive way to go forward.
Mr Stewart: The alliance was a new concept when we embarked on it in the defence site two or three years ago and for any new concept there are areas where we are not quite sure how that will pan out. The alliance has been in operation for two or three years now; I think it is positive and it is probably the only way to go forward where we currently are on the carrier programme because we are heavily inter-dependent with each other. Certainly if you look across the major yards in Rosyth and Ken's yard in Babcock and our yards on the Clyde then we are working very, very closely together and we need a contractual framework that allows us to do that, which the alliance does.
Mr Munro: Although this is a first partnering arrangement between ourselves it has been tried and tested at Rosyth in the re-fit organisation where we work with an alliance to re-fit the naval carriers that currently exist and that works very successfully.
Mr Lockwood: Thales is certainly fully committed to delivering within the alliance framework so I think we would support Nigel's remarks.
Q42 David Mundell: We have had reports that the VT group and BAE are expected to form a joint venture shortly. In terms of that joint venture how will that benefit the Scottish ship building industry and how far progressed is that joint venture?
Mr Stewart: The joint venture will be very positive for Scotland and for the whole of the UK in terms of ship building because what it is doing is looking at how we can consolidate the industry and the joint venture is very much dependent on a partnership arrangement with the Government which we referred to in the terms of business agreement which you will perhaps have seen referred to. The joint venture and the 15 year partnership with the Government goes hand in hand and I think, as your colleague said, it is very much about stability and working together for the long term. I think the joint venture, the carrier and the terms of business agreement are all intrinsic, one cannot happen without the other. I think that is the way forward for the UK ship building industry which will be a smaller business after the carrier. Having stability in the partnership is very positive. 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.
Q43 Mr Wallace: It is a nice phrase, the alliance concept; it has never been done before has it? In the past in ship building you have had a project lead or a director, paid a management fee effectively by the MoD or client, systems integrators and all sorts of things.
Mr Stewart: Yes.
Q44 Mr Wallace: Who is now project directing? Is the MoD actually going to try? How is this whole project actually going to be led? It is all a bit woolly. Who is the lead?
Mr Stewart: As you say it is new to the defence industry and we needed to have clarity of how it was going to work, but within the alliance there are a number of partners but the joint venture will be taking lead on some of the overarching design, build and integration work but we run it with a joint alliance team with representatives from all parties. The joint venture plays a key part in the alliance and that is how the CVF contract is structured.
Q45 Mr Wallace: When it comes to strategic decisions, who is in the chair for that? The MoD?
Mr Stewart: There is an alliance management board with a senior representative from each of our organisations so if it is a strategic issue that needs to be referred to the alliance management board then there is a monthly meeting held with senior members and they will take the decision at the alliance management board.
Q46 Mr Wallace: In the past it would not have been like that, would it? It would have been very much controlled by one of the contractors on behalf of the client and it would have been quite clear. It does sound like it is a highly complex ship built by a committee with the MoD—that great public procurer—in the chair.
Mr Stewart: It is also a different relationship. If you take a Type 45 or some other contract where you have a specific prime contract with very specific requirements that can be built in one yard and one facility, this is a different arrangement. Because of the unique nature of the carrier we have had to find a contracting structure that fits that, but you are right, we need to have clarity in terms of leadership and decision making. Two years ago we all had far more concerns in terms of how would this actually work in practice. It is complex, it is different but I think we are all a lot more positive now that this can succeed than probably we were a couple of years ago.
Mr Munro: It is certainly tried and tested. If not Within the naval ship building industry, particularly in the oil industry, I do believe we are represented by some people who have worked in those industries before and are taking knowledge and experience of working with alliance arrangements, certainly on the alliance management board and the alliance management team.
Q47 Mr Wallace: We have talked a lot about the carrier, but what about Trident and Thales Electronics. You would be hoping to benefit from the next Trident project.
Mr Lockwood: Yes, indeed.
Q48 Mr Wallace: You have done the last boats.
Mr Lockwood: We have done all of the periscopes and electronic masts ever.
Q49 Mr Wallace: So a good submarine order is going to help Thales in Scotland.
Mr Lockwood: Absolutely.
Q50 Mr MacNeil: Mr Stewart, you were talking about a smaller industry after carriers; how much smaller is the ship building industry going to be?
Mr Stewart: We do not know exactly the size; when we get the joint venture formed that is very much going to be for discussion between the joint venture and the Government. Certainly at the moment the business in the long term partnering arrangement is sized on a 5000 tonne ship every year. We have to then consider what we can get from export work, what we can get through life support. It is all part of the discussions we need to have when the joint venture is formed.
Q51 Mr MacNeil: Is your work solely government contracts?
Mr Stewart: At the moment ours is all Government, yes. We do do a small amount of commercial work in our Portsmouth facility but by far the greatest is government work either for the UK or for other governments.
Q52 Mr MacNeil: Would you be optimistic in future of pulling in maybe other commercial work outside government work? Would you be able to compete in that environment?
Mr Stewart: I think they are a different skill set, commercial ship building and the technologies and the sophistication of war ship building. Very much for the early years of the joint venture we will focus on what we need to do in terms of government warships. That does not stop the possibility of looking to expand into other sectors later, but certainly for the early years we will focus on that.
Q53 Mr MacNeil: How close would you be to competing with commercial ship builders if you put your mind to it?
Mr Stewart: Competing with them for what? A warship or a commercial ship?
Q54 Mr MacNeil: A commercial ship.
Mr Stewart: We have never actually gone into competition with anybody from commercial ships so it is quite difficult to speculate on.
Q55 Mr MacNeil: Is there idea where you might be in the commercial ship building at all?
Mr Stewart: The commercial ships are built to different standards and different capabilities so it is like us building tanks in one facility and building motor cars in another. They are both vehicles but they are very different products, very different skills sets. I think it is quite hard to comment on that. They are good in their field of commercial ship building; that is not what we do.
Mr Munro: Warships are highly technical, highly complex platforms. They are completely different from a commercial ship.
Q56 Mr Davidson: Can I ask in terms of the joint venture, as I understand it the terms of business agreement between the alliance and the MoD, it would promise 15 years of work. Can you clarify for us why, from a company's perspective, 15 years is thought to be an appropriate figure on this?
Mr Stewart: As we talked earlier, the naval projects are few in number but very long in duration. If you look at things like the aircraft carrier and the Type 45 from start to completion the next generation ships are going to be the future surface combatants which are going to be over that kind of period. I think for stability it is really important to look over that period and also the terms of the shareholders' agreement between BAE and VT is also based on a business plan arrangement of 15 years.
Q57 Mr Davidson: Over the last 15 years can you remind me how many owners the Govan yard has had?
Mr Stewart: You can probably tell me that better than I can.
Q58 Mr Davidson: It really is quite a large number of owners and it has gone from boom to bust and panic and so on and there have been headlines in the Evening Times that they will be closed in two weeks and the like. What will this terms of business agreement do?
Mr Stewart: What the terms of business agreement is looking at is stability. What is important to the ship building business is exactly as you are saying, it is not continual boom or bust where we never quite know where the next order might come from. It is very difficult, you cannot invest in apprenticeship or in the infrastructure of the business. What it will do is give the UK ship building industry a level of guarantee over 15 years which much better helps us to plan our business.
Q59 Mr Davidson: Would it be an exaggeration to say that every night BAE system give up a prayer "Thank you for Lord Drayson" since he was the man who devised all this? This is going to put BAE Systems in a far better position in ship building than they have ever been in before. Is that correct?
Mr Stewart: We fully supported the defence industrial strategy which is very important across all the sectors, not just the naval sector. We see it as very positive and the way forward for the sector.
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