Select Committee on Work and Pensions Minutes of Evidence

Examination of Witnesses (Questions 82 - 99)




  82. Good morning, gentlemen. Can I welcome you this morning to the Scottish Affairs Select Committee at Westminster. As you know, we are currently carrying out an investigation into employment in shipbuilding on the Clyde, mostly at the behest of Mr Robertson, who represents a shipbuilding area. We are glad to see you, Mr Phillipson. We understand you are not long in your position and, therefore, we are really very grateful to you for coming along this morning. We aim to finish your session by 11.15, but if you feel at the end there is anything you want to say that has not been covered please indicate that to me. Could you introduce yourselves and tell us your position for the record?

  (Mr Phillipson) Thank you. I am the Managing Director of the Sea Systems Group within BAE SYSTEMS. My colleague, Simon Kirby, was formerly the Managing Director of the Marine Business Unit and is now the Managing Director of the Type 45 programme.

  83. In your written evidence, BAE SYSTEMS explained that the original plan for a thousand redundancies was "part of an overall restructuring and due to a shortfall of work in the near term". Why did BAE SYSTEMS announce a thousand redundancies on Clydeside in July 2001 when around half of that figure now looks more likely?
  (Mr Kirby) First perhaps I need to explain a bit of the background behind the announcement last year and the restructuring that formed our Three Yard Strategy, and the fact that the announcement was based on the Three Yard Strategy. If you go back two years, the business had two shipyards, one in Barrow which we know as VSEL and the Scotstoun yard which was known at the time as Yarrows, and that was under the Marconi business. In December of 1999, the business bought the Govan yard off Kvaerner. At the start of 2000, Marconi was merged with British Aerospace to form BAE SYSTEMS and during 2000 BAE SYSTEMS, having this new business with three shipyards in it, undertook a strategic look at how it was going to best deploy those three shipyards, and I think headlines out of that strategic review were the fact that there was a history of under-investment in the yards; over capacity in the three yards; and lack of clarity on workload that those yards were going to launch into. Really, on a history of the Clyde, commercial shipbuilding in the Kvaerner yard and frigates/warship-building in the Yarrow's yard. Also, the frigate programme in Yarrows which has gone on since the mid-1980s, even in the late 90s, was not delivering a profitable business. So they are headlines around where the business was in 2000. That then led to a strategic review which really is outlined in the Task Force Report which I am sure you have all read, and that strategic review really came into a plan then of Govan being a steelwork centre of excellence, the Scotstoun yard being an outfit, manufacturing and first-of class Type 45 centre of excellence, and the Barrow yard being an assembly and submarine centre of excellence. So we then had a strategic plan for the three yards which I am sure you have read about in the Report, and the summary was robust in terms of a plan. Going into that through 2000 we did not have clarity on what workload we were going to put through that three yard plan. The key points really were the ALSL announcement and the Type 45 announcement which then gave us clarity of what base workload we had to support the Three Yard Strategy. That came out from an ALSL point of view in November 2000 and then in July of last year the Type 45 announcement was made which we welcomed because that was a significant change in the way we procured warships in the UK. The business plan that drove that showed a short term problem on the Clyde in terms of workload, and the ALSLs did not fully bridge that short term gap to the Type 45 workload. At the time that was a thousand people too many on the Clyde compared with what workload we had to bridge the gap to the Type 45 programme kicking in in 2004. We did a number of things to try and mitigate that number, and really the real clarity we needed was a Type 45 decision which we made in July—which we welcomed because it gave us the base workload to underpin our ten year business plan but unfortunately it did mean we did not have sufficient workload on the Clyde so the announcement was made at the same time.

Mr Lyons

  84. On the question of the thousand redundancies, there is a view quite widely held I would say among people in shipbuilding that what you basically did was exaggerate the situation to a scale of about a thousand and attempted to do two things: one was to build political pressure through the trade unions who responded through redundancies and get some action that way, and almost promote orders that way as well. What do you say to that?
  (Mr Kirby) That may be a view but it is certainly not the position. We have a pretty robust way of business planning but ultimately we are in a multi-project business environment. Programmes change as you go through the life cycle of an overall programme but the thousand people last year was the information we had available at the time. History has said that, as we are today, over 500 people left the business and we have been able to work very hard and mitigate round about 16 per cent, I think, of the thousand in terms of redundancies. So that may be a view but it is certainly not the intent of the announcement made last year. Absolutely not.

Mr Robertson

  85. Moving on to your Three Yard Strategy, during evidence taken, the one thing that was obvious was that none of them had any faith in the company's Three Yard Strategy. Ron Culley said, "I am sure anyone designing a shipyard from scratch would not go about it in this way",[1] and the Union said less polite things. Could you comment on that?

  (Mr Kirby) I think it is fair to say that in July last year there was some scepticism around on the Three Yard Strategy. Since then we have done a lot of work with the Task Force. In fact, we have taken a number of the Task Force into confidentiality agreements and taken them into a lot of the detail behind the strategy. We had to form a strategy that addressed the underutilisation, the efficiency levels, and return our three yards to profitable business. We believe we have done that: that is underpinned by a business plan that involves investment linked to order winning. What I would say is that you have made one quote there, and there are several other quotes from within the Task Force that do agree it is a robust and coherent strategy—from both Mr Culley and a number of trade unions officials as well. There are always different views on these matters and there is no doubt it is a significant change in the way we deploy our three shipyards to that history has shown, but there are several examples within the world of shipyards that have gone down this type of strategy.

  86. Have you got to a stage where you have a strategy written in tablets of stone or, as most companies always do with plans, are you always revising and looking at it? In effect, do you look at this strategy on a day-to-day or month-to-month or year-to-year basis?
  (Mr Phillipson) I think it is really important that you appreciate the level of detail that the Task Force went into to understand the strategy and why it was appropriate. Their documentation of that strategy in the report is excellent. It makes it clear that they support the strategy. For all Ron Culley might take the view with a blank sheet of paper you might not end up here, given where we have come from and the state of the market, the Task Force chaired by Ron Culley did agree this was the best thing for us to do. It also recognised that that strategy was dependent upon various things happening in the future—for example, winning new business. As we progress through the implementation of that strategy, if we are able to achieve the assumptions we made in deriving that strategy, we will continue with it. If we do not, we will have to reconsider. The situation today, a few months down the road, is that we have taken the ALSL order and the Type 45 order; we are on track for that strategy, but if it is to be delivered over the next ten years, which was the timeframe documented in the Task Force Report, we have other decisions which are not entirely in our hands. If we are successful in winning the business we seek to win, then we will expect to maintain that strategy.

Ann McKechin

  87. The Clyde Shipyard's Task Force recommended as one of its top recommendations that the UK Government should re-state its shipbuilding policy. The Shipbuilding and Marine Industries Forum is currently considering a draft plan. Would you like to indicate what further clarification you would be looking for on shipbuilding policy for the future?
  (Mr Phillipson) I know you are following our interview with the Minister and I would be interested to hear whether you ask him that question. The policy is reasonably clear and it is the policy of UK Government to build military hulls in the UK. What is not quite so clear is the detail behind that, and one particular area where I would wish some clarification is whether it is MoD policy that we are simply assemblers of metal or whether we must have the capability to design and build ships. So a very specific clarification for me would be what is the extent of that policy of building hulls in the UK and, very specifically, is there a requirement for us to maintain a design capability or does UK not consider that to be important. I would really like some clarification on that.

Mr Duncan

  88. The Clyde Shipyard's Task Force Report's recommendation 7 suggested that, "The DTI should continue to engage with the MoD to consider the industrial implications of procurement strategies", and recommendation 8 indicated that there were perhaps lessons for Government therein. How do you feel that procurement strategies could be improved?
  (Mr Phillipson) One of the challenges of a business of this kind is that to continue to deliver the complexity of products that are required, for the budgets and timescales available, demands the best in terms of skills and facilities. Developing those skills and facilities demands investment. We live in a market where we have predominantly one customer—the UK Government. Other customers are small by comparison. If you are selling Mars Bars you can guess what the market will be—it averages out—but it is very difficult to guess when you have one customer and his decision-making is so significant to what you do. It is very difficult to make investment in skills or facilities if you are faced with uncertainty. What the Government has done in the past few months, which we are very pleased about, is they have given us a significant measure of certainty about the Type 45 programme, and in the discussions about deriving the 45 strategy, which took nearly two years of intense discussion with MoD, industrial issues became significant. One significant factor was that these are big ships; investment is required to build them; you cannot make investment without certainty so we agreed on a six-ship programme with MoD. The DTI does contribute to those discussions and it does contribute to export discussions. I think the progress on 45 is very significant. It is the right direction to go in. I think the right issues were put on the table and I think it was a good decision, but what I would say to you is we need more. There is still significant uncertainty in our business; there are significant decisions we need to take about investment for the future where I think we need more reassurance about what MoD's intentions are, and that is a conversation which goes on, and the DTI supports those conversations, and in principle there is support—for example to export discussions and DESO[2] and things of that kind. The mechanisms are there. What we need to do is make sure they work fully and there is a proper appreciation of how difficult it is to maintain capabilities and facilities when there is uncertainty. I think at the moment we are making good progress on these discussions; Type 45 was a watershed; the whole approach of smart acquisition makes it easier to have those discussions, and I am optimistic that the MoD will pay more and more attention to those issues given some of the very big decisions in the future. A particular example I might quote to you is the carrier. You know we have made some announcements about our preference of where we would like to build the carrier, and we have leased Inchgreen to give ourselves a facility to do that. If we need to start making investment in either design capability or manufacturing capability to meet MoD's programme for that carrier, we need some reassurance that they want us to make those investments. If at the end of the day they decide they do not want to use our facilities or our people, that would make those investments nugatory. We cannot take a punt on a decision about sourcing a programme as big as that and we are talking to MoD about how they will approach the procurement policy and how they can give us some reassurance in timescales that would allow us to take investment decisions. So I am optimistic but it is vitally important that we recognise that we do have a fundamental partnership between the customer community and the supply community in this industry; we have to recognise that.

Mr Robertson

  89. Have you any concerns about the Government's procurement policies?
  (Mr Phillipson) Yes.

  90. What are they?
  (Mr Phillipson) In a nutshell they concern the investment decisions I have talked about. If you look at many other shipbuilding industries, whether civil or defence related, they have often had a different sort of relationship with their customer community, which has given them more confidence about investment. If you look at the history of the British shipbuilding industry over the last thirty years or so, stability is the one thing we have not had. It has been very different with a background of short term decision making to take business decisions, and as it has turned out we are not in something like the cruise liner industry where you have a healthy market with lots of people buying. We have basically one customer and their decisions are life and death for individual shipyards. Over the last few years we have seen those life and death decisions; we have also seen people, frankly, being over-optimistic on some of their bids because they see these as being survival issues, and sometimes the MoD has got very good value for money as a result of that, but what they have not done is to have the industry in a position where it could continue to invest for the future. So I do have concerns. However, I am also optimistic that currently we seem to have some very level-headed sensible conversations, and Type 45 for me really was a watershed. The decision to move from some of the early views on procurement strategy to the six ships strategy we have, although you might say from a Scottish point of view having a large piece of the ships being built on the south coast might not be ideal for Scotland but, from a national point of view, it gave three yards, two companies, the ability to make investments with some certainty. We do need more of that; we need procurement policy to continue paying adequate attention to the difficulties you have in maintaining skills and facilities if you have not got some certainty.

  91. Do I gather from that that you do not think the policy is consistent?
  (Mr Phillipson) I am not sure I know how to answer that. It is not consistent. It changes over time. If you look, for example, at many of the changes that have come about with smart acquisition and smart procurement over the last two or three years, the relationship between MoD and suppliers has improved markedly over that period, and we can now consider things and discuss things much more positively and creatively to find win/win solutions than was the case perhaps four or five years ago. So you are continually seeing detailed changes in the policy. In terms of the macro policy, it is not clear to industry where the UK MoD feels it is necessary to preserve a national capability. I made the comment earlier about ship design. Frankly, I do not think the future of the UK is welding together hulls to somebody else's design. We need to be in the high value-added business where we can also have some skills we can export and create more business from export. That means we need a whole product capability and I am not sure at the moment whether UK policy stretches that far. We know, for example, at the moment they are competing a carrier programme at the prime level between a French company, that can quite rightly claim experience in building aircraft-carriers more recently than British industry, and a British company. I am not part of that competition; I am waiting for it to end so that one of these guys can tell me whether he wants to use our shipyards, and we do not know that. If the UK policy is they are going to weld steel to somebody else's design, they may not need my design force. If they do not, it would be helpful if they tell us all now.

Mr Sarwar

  92. MoD advised shipyards to become as "innovative, efficient and productive as possible in order to compete for MoD commercial and export orders". BAE SYSTEMS has pledged 75 million pounds investment in Govan and Scotstoun yards over the next ten years and it is very clear that German yards are successful because of the high level of investment and this is the view of Scottish Enterprise, that the success of this strategy depends upon how much investment BAE SYSTEMS makes in the yards on the Clyde. Has sufficient investment been made in the Clyde shipyards to ensure that they are innovative, efficient and productive?
  (Mr Phillipson) The really simple answer is no. These yards have been starved of investment for a very long time; this industry has been starved of investment. If you look at the investment in skill base, in developing people skills and not just facility skills, it does not put us up on the world stage alongside the best facilities around the world. It is our view that, if we are able to implement the strategy we outlined with the Task Force, we will be able to equip these yards to do the work we anticipate them undertaking and they will be adequately equipped to do that work. The difficulty we have as a company is our investments have to be justified in the eyes of our shareholders, so there has to be business which will recoup those investments. Many of the investments you see in overseas yards were not made against that background. You can argue about how various things are financed and certainly at the moment within the European Union we have a set of rules about subsidies and grant-aid and things of that kind which appear to be fairly clear; but they were not always of that clarity, and there certainly have been situations in the past where facilities have been invested in by agencies other than the company; and the costs carried by somebody else. Frankly, we have such a facility ourselves: the Devonshire dock hall in Barrow was largely written off over the Trident programme and we still have the benefit of using that facility, but we clearly have not had the ability to make the levels of investment in the past that some of the continental or Far Eastern yards have had. Some of those yards are nationalised with the different demands coming from their national government, and I could quote some of the French yards that really do not make money at all, ever, and that is tolerated by their owners. My owners regrettably cannot tolerate that. We are a public company and investments have to be related to the business we can get. If we can deliver the strategy we have, we will have yards that are more competitive and better equipped than today and they will perform well on the programmes of work they have in front of them. That is the intent of the strategy and we believe we can justify that £75 million worth of investment against the business we have identified in our strategy.

  93. I am not sure I have the answer yet. You have one order from the Government for a Type 45 destroyer and your part of the bargain was that you invest £75 million in those yards. Are you saying this is not enough to justify a £75 million investment?
  (Mr Phillipson) No. I have to draw your attention to the detail of the Task Force report. It was very clear; we have a plan for £75 million worth of investment over the next ten years based upon the strategy we were following. That strategy also very clearly requires us to win other business. The investments that are required for the Type 45 are not £75 million. Now I did see in the evidence to the earlier hearing some comments about apparent vagueness of our investment plans. Our plans are not vague: we have very detailed views about investments we would like to make but some of them are commercially sensitive. An example is the carrier programme. When we met with the Task Force we were not ready to go public about our approach to building the carrier. This is a competition both at prime level and at the shipyard level: there are various people making plays to build that carrier: one of the things we wanted to do was build it on the Clyde. To do that we had to secure appropriate facilities. Fortunately the Scottish Executive were very helpful and via Clyde port we have been able to arrange a long term lease for Inchgreen, which is just down the river from our facilities, and we announced a few weeks ago that we have leased it, and what our pitch is, our strategy, for building the carrier. Until we had secured that lease we were not ready to make that announcement. Inchgreen carries with it a number of other investment requirements, which are part of the £75 million. They are justified by the aircraft carrier programme. I cannot commit to those investments today: I do not need to today—they are in the ten year plan—and within that plan we will know whether we will have the opportunity to build the aircraft-carrier or not. That is one of the key decisions which was identified to the Task Force as underlying our future strategy, as were successes in some export programmes. Now, we are working extremely hard to deliver the order intake; we are very active in the export markets at the moment; and with MoD and the carrier prime contractors—I am optimistic we can achieve the business plan which we outlined to the Task Force. A year or a few months down the road we are on target for our investments; we planned to invest £9.6 million this year, we are on target to make all of those investments; we have delivered the ALSL and the Type 45 orders; I will not comment in detail in public but I can see export orders that will deliver what we need to do in the medium term; we are in detailed discussions and are getting support from senior politicians in the UK to help with those export opportunities, and I can see a carrier programme which I think is going to need our facilities and our people, and we are talking to MoD about getting surety about our role in that programme. So this is not a one-off strategy but one that requires things to happen and, as they happen, we can justify the investments.

Mr Robertson

  94. The unions have voiced the opinion that the bidding you have done for some of the ships recently have not been done in good faith, and you did not really want to win the orders in the first place but you felt you had to put bids in. Could you comment on that?
  (Mr Phillipson) I am disappointed by the comment. I think some of the people who have made those comments, when we sit and talk to them and talk through what we have done, do not necessarily sustain those views. We have been bidding very aggressively to put work into these yards. There are instances, I have to say, where we do not sometimes understand why we do not win bids. We have instances where we have put bids in barely covering the direct cost—certainly not making a profit and not recovering all of our overheads, and sometimes it appears as if contracts go elsewhere for prices that barely seem to cover the materials, let alone the labour. The difficulty you have in this industry is that many yards are filling gaps. Commercial work for us, for example, is in that category. We are fundamentally a warship-builder; the skills for warships are not the same as for commercial ships but sometimes it is appropriate for us to bid for commercial work to fill a gap, and frankly we will do that by underbidding. We will not expect to make the level of profit on a commercial bid that arguably my shareholders would like me to. So we will bid sharp, and others will do the same. We do not know their cost structures, or their situations. Sometimes they will undercut us because they are in a position to take a bigger loss on that bid than we are. We cannot take unlimited losses. We do bid very sharp.

  95. They refer to the Task Force document which even the Scottish Task Force said was a bit vague, and they said particularly in the case of Scotstoun yard that part of the investment had already been done before the investment had been announced in the Task Force document. Are we hiding investment in a previous time, so the money spent is not as stated?
  (Mr Kirby) No, that is not the case. In the Task Force document there is an overview of what investment we plan to do in the short term within the £75 million. Within this year's plan there is £9.6 million worth of investment, broadly 50/50 between the two sites, which has been committed to be spent this year, and we are quite happy to submit an additional paper to the Committee in terms of what forms that £9.6 million, and also what forms the investment over the next two to three years to support the Type 45 programme.[3]

  96. That would be very helpful but, if I can prove you are wrong and you did have that investment spent before the Task Force paper went to press, would you reinvest more money?
  (Mr Kirby) That £75 million is defined in the report. I am quite happy to take you through that. I am absolutely confident that £9.6 million is this year and I can give you that full breakdown -

  97. That is not what I was asking you. If I can prove you invested that money before the agreement was made, will you reinvest it?
  (Mr Kirby) I am not sure I understand when the agreement was made. We make investments around programmes. We have an ALSL programme; we have a Type 45 programme and the investments are specifically around those programmes.

  98. Again, I will press the point and probably, Mr Phillipson, you should answer this question. If I can prove to you that that money was invested before any agreements were made regarding the Task Force, will you re-invest that same amount of money and make that £75 million back up to £75 million?
  (Mr Phillipson) Let me be very clear. We will make investments appropriate to support our business. The business plan, as we explained to the Task Force, demands and justifies an investment plan over the next ten years which we calculate to be £75 million. We have committed that, if we can achieve the business strategy that we are seeking in the market place, we will make the investments to support that strategy. We had a detailed view about what we saw that £75 million going on, and we still have that detailed view. I regret I will not indulge in an abstract conversation about what was or was not said at what point in time, but I will happily talk you through where we see the £75 million going. If necessary we will supply that as commercially sensitive information, and we did share some of that with some of the Committee but it is commercially sensitive and is not in the public domain. Many of the investment plans for this year were explained in great detail on the Task Force report; they were published; and we are on with those investments.

  99. I have to say that we have voiced the opinion before, not just in this Committee but with many MPs, that your company do not tell us the whole story, and I have to say that the good faith you are not showing by not investing this money, if it can be proved that this was previous investment that had to be done in the first place which has nothing to do with the Task Force report, it means I have to say that we cannot take on board some of the things you are saying. I ask you again, if I can prove to you that this investment was going to be invested long before the Task Force sat, will you bring that figure up to the agreed £75 million stated within the Task Force agreement?
  (Mr Kirby) Can I clarify the background to that? The £75 million was not a deal done with the Task Force; it was a business plan we formulated and described earlier during 2000 and 2001 which forecast an investment programme against time and, on day 1 of the Task Force, I presented to them an overview of that investment. So it was centred around the investment programme—not a deal done with the Task Force. It coincided and the Task Force were very supportive of the fact we were doing it, but it was a separate business planning exercise.

1   See Ev 12. Back

2   Defence Export Services Organisation. Back

3   See Ev 48. Back

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