Memorandum from the Ministry of Defence
concerning the future of Royal Ordnance Bishopton (25 July 2000)
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
1. The Committee asked for the MoD's views
on the substance of two further letters and a memorandum
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.
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.
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.
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.
SOMCHEM OF SOUTH
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.
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.
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
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