Select Committee on Defence First Special Report


APPENDIX 18

Memorandum from the Ministry of Defence concerning the future of Royal Ordnance Bishopton (25 July 2000)

BISHOPTON

  In response to your letter of 30 June, I attach a self-explanatory memorandum setting out the Ministry of Defence's views on the letters from the Transport and General Workers Union concerning the safety and cost-effectiveness of alternative suppliers of propellant, should Bishopton close.

  I must apologise for slightly overshooting your deadline.

FUTURE OF ROYAL ORDNANCE BISHOPTON

  1.  The Committee asked for the MoD's views on the substance of two further letters and a memorandum[7] that Jack Dromey of the TGWU has written to the Chairman of the HCDC. The MoD's detailed response to this latest correspondence is at Annex A.[8] However, it may also be useful for the Committee if the MoD sets out its more general views on some of the issues involved in this debate. In this note, therefore, we also comment on the safety/stability and cost effectiveness of alternative sources of propellant, the MoD's latest assessment of the financial case for selecting SOMCHEM for the AS90 ammunition propellant contract, and the operation of the MoD/Royal Ordnance Partnering Agreement.


SAFETY STABILITY

  2.  There has been much speculation by both the RO Bishopton Trades Unions, and the Scottish press on the safety of alternative sources of supply for propellant being evaluated by RO. Three are three main factors to be considered. Firstly, the MoD has a detailed and thorough acceptance programme for munitions designed for use within the MoD. The MoD Ordnance Safety Group (formerly the Ordnance Board) are uncompromising in the safety standards they require and they will have access to all the relevant trials data for scrutiny and evaluation. If there are technical shortcomings, these will be exposed at that stage.

  3.  Secondly, the alternative sources being investigated by RO are well-respected companies with high international standards of expertise. It is inaccurate to assume that only RO Bishopton can produce propellant to the required standard. Even now Muiden Chemie of Holland (an RO subsidiary) manufactures propellant for small and medium-calibre ammunition that is currently in service with the MoD, and SOMCHEM of South Africa has been chosen to manufacture propellant for the Modular Charge System for artillery shells. Furthermore, overseas procurement of many other items in the Defence inventory is not unusual, as our many collaborative projects demonstrate.

  4.  Lastly, it is absolutely normal for any new product to require improvement and modification during the development process. RO has said that the initial trials of propellant samples provided by WNC-Nitrochemie indicate a need for changes to be made, but this is not unusual, and RO have assured us that the development programmes in question remain on course for successful completion, Indeed, RO has confirmed that the problems identified had been resolved prior to the TGWU Memorandum. There is a remaining issue concerning a minor amount of soot deposit left in the barrel after firing, but the cause has been identified, and work is in hand to eliminate the problem.

COST EFFECTIVENESS

  5.  The MoD has a responsibility to obtain best value for money for the taxpayers' expenditure on Defence. Whilst safety and reliability remain our top priority, we cannot spend money unnecessarily to support a privately-owned facility for which the owners see no commercial future. RO, and its parent company (BAE SYSTEMS), have made it clear that RO Bishopton will close on 31 May 2002, and that they can meet their production needs from other sources. The Committee has already noted the declining world market for munitions and the compelling reasons for RO to restructure to ensure their future survival and competitiveness. It is for RO to make the commercial decisions necessary to reduce costs whilst, at the same time, maintaining quality and reliability and achieving world benchmark prices for munitions.

  6.  There are some costs of some £2 million that will fall to the MoD associated with re-qualification of propellant that is sourced from elsewhere after a break in production. However, such extra costs have to be set against the larger cost reductions associated with the sourcing of propellant from other manufacturers. As an example, we understand that the current world market price for propellant for the CHARM 3 Training round for Challenger 2 is less than half the cost of manufacture of the material at Bishopton. BAE SYSTEMS assess that they would need to invest £11 million in RO Bishopton, and increase production from 350 tonnes per annum to 1,000 tonnes per annum, to make their products competitive. We also understand that there is no customer for this scale of production.

  7.  Therefore, whilst funding has been set aside to meet anticipated requalification costs, this does not alter the overall cost benefits of the RO restructuring exercise. The MoD will monitor RO very closely, but we currently have no evidence to suggest that prices will increase as a result of the impending closure of RO Bishopton.

FINANCIAL CASE FOR THE SELECTION OF SOMCHEM OF SOUTH AFRICA

  8.  The Extended Range Ordnance Modular Charge System contract was placed with SOMCHEM on 31 May 1999 following MoD Equipment Approval Committee and Ministerial approval. Your Committee also examined the details of this contract. The financial basis of the case that led to the decision to contract with SOMCHEM for the propellant has not changed since that previously advised. The Committee may also wish to note that the MoD's view about security of supply from South Africa also remains unchanged.

OPERATION OF THE MOD/RO PARTNERING AGREEMENT

  9.  Following two years of negotiation, the MoD/RO Partnering Agreement was signed on 16 December 1999 and came into force on 1 April 2000. The agreement covers the management of design, manufacture, supply and through-life support of ordnance and munitions (including disposal by sale or demilitarisation) for which RO (Weapons and Munitions) Ltd and RO (Small Arms Ammunition) Radway Green is either the Design Authority or Licensee. The agreement covers a 10-year period. In the three months since the Agreement came into force, a Joint Steering Committee, an Integrated Stakeholder Team, and a number of Working Groups have been formed, and much good work has been done already which will deliver benefit for both MoD and RO. This work is being actively progressed.

  10.  The Agreement is based on the MoD providing RO with a guaranteed volume and value of business in order that they can restructure with the confidence necessary to create a viable company capable of delivering long-term value for money at world benchmark prices. As part of the process that led to the partnering Agreement, the MoD undertook a detailed assessment of the potential implications of RO ceasing to operate. This assessment concluded that the RO Partnering Agreement was the most cost-effective way to proceed. The scale and scope of the necessary restructuring was, and remains, a commercial decision for BAE SYSTEMS.


CONCLUSION

  11.  The MoD's discussions with RO have provided no indication that our future munitions requirements cannot be met in terms of timescale, quantity, quality and, most importantly, safety. Moreover, RO are committed to driving down costs (and therefore the cost to the MoD) to achieve world benchmark prices. Funding set aside for re-qualification costs does not alter the MoD assessment that the arrangements with RO will produce the best value for money over the longer term. The case for the selection of SOMCHEM of South Africa for the Extended Range Ordnance Modular Charge System remains unchanged. The MoD remains confident that the recent innovative Partnering Agreement with RO will bring benefits to both the Department and the Company; the restructuring of RO, however, is a matter for the Company.


7   TGWU letters JEJD/RCM dated 14 June 2000 and 27 June 2000. Back

8   p 16. Back


 
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