Letter from Ian King, Chief Executive,
BAE Systems, to the Chairman of the Committee
Following last week's evidence sessions involving
the Chancellor and the Chief Secretary to the Treasury, I thought
I should write to you to put the record straight on the industry
position in relation to the aircraft carriers, and complex warship
programmes more generally.
The current situation has to be understood against
the background of a decision made by the previous Government in
the 2005 Defence Industrial Strategy that strategically the UK
should sustain the ability to design, build and support complex
warships in this country. The Chief Secretary made clear, in giving
evidence to the Committee last week, that the Coalition Government
has endorsed that decision.
Two things flow from that strategic decision.
The first is the need for a mechanism to ensure the key industrial
capabilities required to fulfil that strategy are sustained in
the UK. The other is the need to ensure that the taxpayer knows
that the capability is being sustained in the most cost effective
way. This necessitated the consolidation and transformation of
the industry against a long term ship design, build and support
programme.
BAE Systems stepped up to the plate by investing
£500 Million of our shareholders' money to meet the Government's
requirement for a consolidated industry. And we agreed with the
Government that we would rationalise and transform the way capability
is delivered, provided that the Government had in place a long
term plan for shipbuilding which gave us the certainty needed
to justify our investment. That plan was predicated on the two
aircraft carriers, new frigate and minor war vessel programmes,
and the support of the existing fleet.
This was the basis on which the 15 year Terms
of Business Agreement was signed by BAE Systems and MOD in 2008.
We agreed with the Government the key industrial capabilities
that needed to be sustained, and the guaranteed minimum annual
cost of achieving that.
We also committed to save a minimum of £350
Million from MOD costs in the period of the agreement, with the
aim of achieving as much as £900 Million. The target for
savings in the first year of operating the TOBA was £25 Million.
In fact, we achieved £70 Million, which is a strong indication
of the potential value which can be achieved over 15 years.
TOBA's also exist with other parties for surface
ship and submarine support. With respect to the SDSR, the savings
targeted for the submarine enterprise will only be achieved through
a long term programme which optimises every efficiency out of
the organisations involved in sustaining that capability.
The carrier programme itself was already well
advanced when the TOBA was signed. The ships are designed and
now well into construction. This is an immense industrial undertaking
with work being undertaken in six UK shipyards. All of the key
systems for both ships have been ordered—which is the most
efficient way to do it—and the entire UK supply chain is
engaged in delivering them now. The programme is contracted through
an innovative Alliance contract, and is based on best practice,
and a joint commitment from the partners in the Alliance: BAE
Systems, Babcock Marine, Thales and MOD.
We would be delighted to host the Committee
to ensure that their final report is based on firsthand experience
of how far the programme is advanced and I attach photographs
which illustrate the extent, scope and complexity of the construction
undertaken so far on the first ship.
A very false impression has pervaded the debate
that this activity could be stopped without financial or commercial
consequences. This betrays a fundamental misunderstanding of the
long term nature of complex warship design and construction, and
the advanced state of the programme.
Let me now turn to the criticism that the company
held a gun to the Government's head before their final decision,
an allegation which I totally refute.
My letter to the Prime Minister of 5 October
did not seek to tell him and his colleagues what decision they
should take about a carrier strike capability for the UK. That
is not for me to judge or to comment on, however I do have a responsibility
to the Government, and to the company's shareholders and employees,
to ensure that any such decision takes full account of the commercial
and industrial consequences which would result. That is what my
letter sought to do, factually and straightforwardly.
What my letter highlighted and stated was that,
if one of the two largest warships ever built in this country
is taken out of an agreed forward shipbuilding programme, it could
not be replaced sensibly with alternative work; nor without profound
effects on the Government's strategic aim to maintain complex
warship building in this country. It was a fact, based on clear
evidence.
Successive Governments have taken the strategic
view that this country should sustain its ability to design, build
and support complex warships. This cannot be achieved without
taking a long term view of the national industrial capability
required to meet that objective.
The industry needs certainty to justify the
long term investment required for major programmes which cannot
be switched on and off overnight. It also means having an enterprise
in place that continually seeks to reduce costs and to deliver
capability more effectively and efficiently.
I am absolutely clear that the arrangements
in place provide this country with real value or money, and will
continue to do so for as long as the UK wants to design, build
and support complex warships. We will sustain outstanding skills
and technology; advanced manufacturing capability; and a platform
for UK success in the export market. I hope that this will be
recognised in any report made by the Committee.
9 November 2010
| 
