Select Committee on Work and Pensions Minutes of Evidence

Examination of Witnesses (Questions 140 - 159)



Mr Duncan

  140. Just to link in with the discussion we have just had, you have expanded on the UK build guarantee effectively, if I quote you correctly, as being the fabrication and assembly of new warship hulls. Before I ask specifically about procurement, could I ask: what is it particularly about fabrication and assembly of new warship hulls as opposed to the technology and equipment that goes on in the warship that means it is treated differently and that those other items are not treated in the same way?
  (Lord Bach) In short, it is because we want to preserve British shipbuilding. That is the answer to that question. As previous governments did, we want to preserve British shipbuilding. If the hulls of British warships were not built in the United Kingdom, then we would not be preserving or helping to preserve British shipbuilding.

  141. It is useful to have that on the record but I think it is self-evident from the last question that defence procurement in this area is a political matter with a large or a small "p", albeit in a sensitive area. Why are procurement methods so convoluted, complicated and perhaps expensive? What scope is there for improving the methods of procurement in this area?
  (Lord Bach) I think there is always scope for improving procurement methods, but what we have to concern ourselves with at the MoD when there is procurement for our own armed forces is, first of all, what capability is needed, is required. That is the prime factor. What is it that our armed forces need in order to do the task that the government sets them? That is where we start. We are always looking for ways to improve that. There have been huge improvements in the last few years with the introduction of smart acquisition, which I am sure the Committee knows about. As far as shipbuilding is concerned, we still believe that competition as a general principle is the right way to continue because it normally leads to value for money and innovation. We are pragmatic and, I hope, flexible. As you will know, Mr Duncan, our revised strategy for a very big order indeed, the Type 45 Destroyer, replaces competition for the later batches of that class with a strategy which allows competition for further programmes. In other words, we have said that two companies, BAE SYSTEMS and Vosper Thorneycroft, will build those ships in order to keep both of those important companies in the market for future competition. The revised aircraft carrier assessment strategy maximises competition at the most appropriate level; first of all, prime contractor and then at subcontract level. What we need to do is buy ships when the armed forces require them, not, I am afraid, when the shipyards require them. Luckily, in the years that are ahead - and here I bring really good news but you know it already - we are at the moment in time when there is a large number of warships to be built - I think 30 in the next 20 years, the largest for a very long period of time. We know already that Clydeside will build a substantial proportion of those ships. The news I bring is good news. That is our attitude towards procurement in shipbuilding. We prefer competition, we want to see competition; we think that does drive down cost, and we are talking about what the taxpayer has to pay at the end of the day. Sometimes competition is not always the right answer.

Mr Weir

  142. Could you perhaps tell us how you assess the BAE SYSTEMS three-year strategy? We have had a lot of discussion as to how this will work and the possibility of perhaps work being transferred from the Clyde at some point.
  (Lord Bach) I am not going to be very helpful about this. We do take the view that this is a matter for BAE SYSTEMS. They are the ones who tender for projects, for programmes. How they work out their strategy is very much a matter for them. It may be that Mr Wilson has something to say about this.
  (Mr Wilson) I think that there will be some initial scepticism about it, simply because it was not the way things had been done in the past. The more it was examined, and the Task Force looked at it very closely, then the greater the possibility of the approach. In fact, if you put it in a wider context, there was nothing particularly unusual about it. Yesterday I was on Tyneside. There are absolutely massive structures in Tyneside which are being assembled in different parts of the world with bits being floated in from South Korea to link up with what is being done in Tyneside and then floated off to Nigeria. The globalization of maritime industries is now well established. Therefore, in that context, it is a relatively modest undertaking to have three yards co-operating in the building of one vessel, and certainly of course it is excellent for the Clyde that two of these yards are in close proximity to one another.

  143. I accept what the Minister is saying. Some worry was expressed that in the three-yard strategy, if it contracted to any extent, one of these yards might become vulnerable because work could be transferred from there to the other two yards within the system. Do you feel that is a real possibility, given the amount of ships being built? Do you see, at least for the foreseeable future, a three-year strategy being viable?
  (Mr Wilson) I am absolutely certain that the strategy gives the best possible prospect of the long-term security of the two yards on the Clyde and, with reasonable success in the export field to complement domestic demand, the three yards will be secure for the foreseeable future. In this business ten years is a remarkably long timescale, given past experience. In fact, we are inquiring into this industry at the time when there are positive prospects such as had not existed within recent years.

Mr Lyons

  144. We heard earlier some evidence about German shipyards referring to a co-ordinator in marine shipbuilding. What is the Government's view in terms of UK shipbuilding and what are the advantages and disadvantages in that type of co-ordinator?
  (Mr Wilson) The idea of an individual champion of the shipbuilding industry is apparently successful in Germany and also in the Netherlands where there has been a great development of the shipbuilding industry. In principle, it was certainly something that I was attracted to. We have a Shipbuilding Forum, which was a fair effort to get everybody round the table in what traditionally is a fairly fractious industry. We now have the Shipbuilding and Marine Industries Forum. As I said earlier, there has been an effort to move the leadership of the Forum over to the industry itself and the Chairman now comes from within the industry. Within the forum there is a strategic group, a small core group, again industry-led, and which, on the surface, would seem to be designed to do some of the tasks that a co-ordinator would do. At the last meeting of the Shipbuilding Forum that I chaired there was a lively discussion about whether the industry actually wanted this additional figure or whether it would be premature, at precisely the moment when we were restructuring the forum, to add what could be seen as another layer or a competing entity with the forum and the core group of the forum. Therefore, it is now in the hands of the forum itself really to decide whether they want this additional figure or whether the structure we have got now fulfils the same role.

Mr Robertson

  145. During taking evidence, Scottish Enterprise considered some of the proposed investment to be indeterminate and vacant in some cases. The trade unions also felt that high levels of investment were needed to bring our shipbuilding into line with the German yards. Has sufficient investment been made in the Clyde shipyards to ensure they are innovative, efficient and productive?
  (Mr Wilson) If I may strike a slightly historic note here, and I go back to 1997 when I became Scottish Industry Minister, one of the first things I did was to go to Govan shipyard which was suffering one of its occasional periods of difficulty. I learnt very quickly that Scottish Enterprise and government in general had turned its back on shipbuilding and had classified it as a sort of write-off, sunset industry. Kvaerner at that time were bitter about the fact that they had had so little help from Scottish Enterprise or from government more widely. So there has undoubtedly been a period when government in its widest form did nothing to support investment in shipbuilding. The remarkable thing is that these yards continued to invest on their own account and that they turned out ships of the quality which came from both Yarrows and Govan shipbuilders. There is a background to the question you ask. I think with the new era of BAE SYSTEMS, which clearly has made a very substantial commitment to their strategy, all their vested interest is in investing in a way that is going to see through that strategy. I am convinced, and the Task Force was convinced, that the money was going in from BAE SYSTEMS as promised. I understand there is a £9.6 million investment being made in the current year and there is a £75 million investment programme overall. I have no reason to doubt the integrity of that commitment by BAE SYSTEMS because I think it is an essential part of their strategy. On the other hand, what is enough? No figure is the limit, particularly in an industry which has moved dramatically from being relatively low tech to being extremely high tech, and then the more investment the better.

  146. I agree with what you have said, Mr Wilson, but in agreeing with you, I would say that it is the government's place to help yards out. Obviously we thank the government for the orders. That has sustained shipbuilding within the Clyde for many years to come and that is good news, but we have got to the stage where there is a shortfall. While we have secured something like 1200 jobs on the Clyde, that still leaves another 800 jobs that have to be sustained as well on other types of work. Can you help us by using government investment in the yards to allow them to put in for orders that are not always to do with MoD work?
  (Mr Wilson) Certainly during my time in this we have on numerous occasions worked closely with the companies to ensure that they have the best possible chance of obtaining other work. Sometimes that has been successful and sometimes not. Ultimately, the bids have to be commercially attractive to the customer. Government cannot deliver these orders. What we can do is to make sure that the playing field is genuinely level and that the companies have every opportunity to bid on a fair and even basis.

  147. The company obviously has a strategy. Does the Government have a strategy for shipbuilding?
  (Mr Wilson) As we have discussed earlier, the strategy for shipbuilding is being revamped this very day at the Shipbuilding Forum, working through the Shipbuilding Forum with industry, the government and all the other interested parties in the same room. The answer is: yes, we do have a strategy for shipbuilding and we do have clear targets through the Shipbuilding Forum of what we want to achieve. The ambitions, given the low point to which we had descended over the past 20 or so years, might seem relatively modest but, for instance, we aim to increase the number of merchant ship completions to 35 per year by the end of 2004. That will be a value of £300 million against £150 million at present. Even to quote that sort of number, given our tradition, is an indication of how far things have gone before we got round to reversing them.

Mr Lazarowicz

  148. This takes us on from the earlier questions and initially this one is for Mr Wilson. How competitive do you assess the UK shipbuilding industry as being and what more could be done to improve the competitiveness and develop the revival of the industry?
  (Mr Wilson) The evidence suggests that in the global shipbuilding industry, the British shipbuilding industry is not competing terribly successfully. That is why we have seen the decline in the number of yards. There are still some things which it does extremely well and we have to build on these strengths, but we certainly must have the kind of competitiveness agenda which is being promoted through the Shipbuilding Forum. We have to have a big emphasis on skills training because there is a real problem with the ageing workforce and it has to be seen as an industry with a long-term future for young people to enter. We have to have greater co-operative working within the industry so that while on one level they may be competing against each other, there are also synergies among the companies where added value can be obtained. As I say, we are starting from a low level. It would be absurd to sit here and say that the British shipbuilding industry is highly competitive when we compare the output with other countries in Europe, but there have been tremendous advances in those yards which have survived through thick and thin. Certainly from the platform on which we are now, the surviving shipyards can have a very bright future.

  149. How far do you consider that the shipbuilding industry has bought into the vision of improving competitiveness? I ask that because in our earlier evidence session this morning we were told by the representatives from BAE SYSTEMS that they consider the Shipbuilding Forum, I think their phrase was, "a useful forum for exchange of views". When it was put to them by one of my colleagues that the forum was a talking shop, they did not seem to demur too strongly. Do you feel industry is fully supportive of the Government's efforts in this way and, if not, what can be done to change their perspective?
  (Mr Wilson) I think the Shipbuilding Forum could be a more useful instrument than it has been up till now. That is the thinking behind revamping it. I can draw a very direct analogy with Pilot, which is the oil and gas industry forum that brings together government and industry. In terms of effectiveness, Pilot is pretty far ahead, but the reason for that is the strength of commitment which the companies have made to their involvement in Pilot. Probably in the oil and gas industry it was at least as counter-cultural for the industry to become involved as closely as that with government around the same table but, having done so, and taken the decision to do so, they have contributed at an extremely high level and an enormous amount of work is done between meetings to carry forward an agreed agenda. Remarkable progress has also been made in breaking down confidentiality barriers between companies within reasonable limits. If some of these best practices from Pilot could be translated into the Shipbuilding Forum, then it would be more effective. It is now under industry leadership and really the pace at which the Shipbuilding Forum develops is in the hands of the industry itself.

  150. Do you think more could be done to co-ordinate the activities of government departments in this area?
  (Mr Wilson) An effort is made to do that. The Marine Unit in the DTI is in constant touch with the Ministry of Defence, the Department of Transport and other relevant government departments. I would always be cautious about saying that you could not do more on this because I think joining up government is something to which great lip service is paid but it does not always happen in practice. I think we have to be vigilant always that the right hand knows what the left hand is doing. Certainly within the Shipbuilding Forum other relevant departments are represented and their involvement is encouraged.
  (Mrs McGuire) Thank you very much for your kind comments at the beginning. The area that Mr Lazarowicz has mentioned about a joined-up approach is one in which the Scotland Office is particularly interested. Certainly, since the establishment of the Task Force, we have established very good links with DESO in particular to look at ways in which the Scotland Office can highlight the very good skills and opportunities that are available specifically on the Clyde, but obviously in a wider context in Scottish shipbuilding. On the other hand, we have also provided, I think, a bit of a bridge with the main contractors, with BAE SYSTEMS, with them briefing us on opportunities. Obviously some of those areas are a bit confidential but I do not think you would have to be in prophesy to identify exactly where the main markets are. Certainly, the Secretary of State has taken every opportunity to highlight the skills that we have and the opportunities that government is affording.

Mr Carmichael

  151. Following on from that, Scottish Enterprise has told us in the oral evidence session that the future sustainability of industry in the Clyde is dependent on at least one export order per year. You have touched briefly on the relationship of DESO and BAE SYSTEMS. Is there anything else that the Scotland Office is doing to promote or help win export orders for Clydeside?
  (Mrs McGuire) As I have already indicated, the Scotland Office is constantly appraising the opportunities that are available and obviously some of these trails are very long. We cannot turn round shipbuilding orders, with the greatest will in the world, overnight. It takes a fairly extensive period to build that up. What we now have are the links and the information to highlight the opportunities that are available on the Clyde in particular, since that is obviously the focus of the discussion, but ultimately of course the export market is very competitive. It is about the right time, the right price and the right ship. What we can do is facilitate the opportunities. We cannot specifically insist that any government or company actually places an order.

  152. Is it the role of the Scotland Office to get preferential treatment for Clydeside?
  (Mrs McGuire) No. I think we have to be very careful in what we do. This is one of the areas obviously that —

  153. I mean within government?
  (Mrs McGuire) We are there to argue Scotland's case in government. I appreciate that Mr Carmichael and I might disagree as to how we do that, but I certainly would hope that he would recognise that the Scotland Office will not let Scotland's case go by default inside government. Ultimately, of course, the Procurement Agency is the MoD.
  (Lord Bach) Could I say something in relation to the export questions? I think Mr Lazarowicz and Mr Carmichael have both been asking about that. First of all, the Scotland Office certainly put forward Scotland's case in this field very effectively in government, and the MoD unashamedly uses Scotland Office Ministers to try and obtain defence exports from the Clyde when they go abroad. Ministers throughout government - the DTI, FCO, all of us - work very hard to get defence exports, not just of course for the Clyde but for all British companies in this field. If I may say so, Mrs Adams, just for a moment, I was very impressed by the way in which the Task Force made the point about how crucial defence exports are in the debate that your Committee has started. I am quoting from 2.3.4: "Defence exports of £5 billion per annum make an important contribution to the UK economy and account for 40 per cent of defence industry output. In addition, substantial cost savings to the MoD are achieved through reduced fixed overhead charges from export defence orders. The UK Government is highly supportive of defence exports, subject of course to strategic and ethical policy guidelines". In our view, one of the ways in which the Clyde will become successful and continue to be successful is if it manages to export defence equipment. It is not unknown for people to be a little bit shy about the value of defence exports, but we do not think that the Clyde from the MoD's point of view can survive on MoD orders alone, and that is why defence exports should be supported by anyone who wants to see the Clyde a success. Not any defence exports but legitimate and controlled defence exports. That was a point I wanted to get across, if I might. Can I make one other point on this. There is a problem in relation to defence exports here, not just for the Clyde but for Navy exports generally. Royal Navy vessels are often pretty sophisticated, for the use of our own Armed Forces and sometimes, frankly, too sophisticated for what other countries need or require. We think export prospects would be improved by some greater flexibility of design and hence in cost. We hope UK shipbuilders, BAE SYSTEMS and others too, would consider producing export versions of Royal Navy designs. We think that is something your Committee might want to consider in drawing up its conclusions.

  154. This is very interesting and I am afraid it is going to be veering off in a direction that I certainly had not anticipated. When we had evidence earlier this morning from BAE SYSTEMS, one of the points Mr Phillipson made was that in America, for example, the risk and the R&D commitment is entirely taken on by the government whereas we insist that that is a cost that is borne by the industry. He says that that is a way in which our shipbuilding industry is put at a competitive disadvantage. Would you care to comment on that?
  (Lord Bach) I am afraid that in the defence field, let's be absolutely frank about this, the United States and the United Kingdom are miles and miles apart, both in terms, of course, of the absolute amount they spend on defence and also the proportion of GDP. The Americans start from where they start from and we start from where we do. We have a proud record and we certainly spend more on defence GDP-wise than all our European allies. It is true that the American administration does put more into R&D than the British MoD, but we do put money into R&D and because of decisions made by the Chancellor recently for small and medium enterprises we will be putting in more. I think that is right, Mr Wilson?
  (Mr Wilson) Yes.
  (Lord Bach) So we do what we can. To suggest that government can supply all the research and development costs for large military companies just will not happen, I am afraid. We think our system of procurement works pretty well here. We give as much as assistance as we can, both the MoD and DTI, to industry in this field.
  (Mr Wilson) It goes back it a question Mr Lazarowicz asked about competitiveness. It has been drawn to my attention that we at present have a £3 million programme of grants with the Shipbuilding and Ship Repair Association to improve competitiveness and also we have a wide programme of grants in R&D. I would very much support what Lord Bach says, that there is a relatively small number of big contractors in this field and the idea that government should pay all R&D costs, while doubtless very attractive to that small number of companies, is not one that instantly appeals to anyone else.

Mr Robertson

  155. Going back to the Scotland Office, Mrs McGuire, the question I asked BAE in previous evidence was what contact they have had with the Scotland Office because in the Task Force Report in paragraph 2.9.8 it says "every appropriate opportunity should be taken to include ministers from the Scotland Office in promoting the Clydeside's case in new orders". They said they have had no contact with the Scotland Office. Can you tell me—and I do not think you will know why—how you are going about retrieving that situation?
  (Mrs McGuire) First of all, I am certainly advised that BAE SYSTEMS fully briefs the Department on commercial opportunities. I am interested that a BAE SYSTEMS' representative here has said something in conflict with that. Obviously given what you have said I will take that back to find out whether or not there is a misconception on my part or a misperception on their part and we will certainly clarify it.[14] Certainly our aim is to provide good channels of communication between ourselves and BAE SYSTEMS and vice versa, but obviously I have to consider what they have said this morning and will certainly look at rectifying it if that is the case.

  156. Can I take it from that that you feel there is a place for the Scotland Office in looking for orders for the Clyde and anywhere else in Scotland for that matter?
  (Mrs McGuire) I think there is a strong case for the Scotland Office highlighting the skills and achievements and the future of the Clyde wherever we possibly can. Certainly the Secretary of State misses no opportunity to do that and no doubt will continue to do so.

Mr Weir

  157. Can I follow up the question to Lord Bach about defence exports. We discussed this with BAE earlier. There are two points that came out of that about its long-term viability, one being obviously that the UK wants to make sure that all warships which are available to the United Kingdom follow a similar route. Secondly, according to BAE much of the export market is basic exported technology to build the first ship and thereafter the foreign yard would take it on. I wonder on that basis how you see the long-term viability particularly of Naval defence exports?
  (Lord Bach) Both points that were made by BAE SYSTEMS have some validity, the first point perhaps rather less because there are only a limited number of countries that are fortunate enough to have the resources to be able to build warships. We are one of them and we know who the others are, but other countries are entitled to have their own means of deterrent and defence if need be and it is to those countries we would hope to sell. Of course, there has been a pretty good record over many years of Britain selling warships, big and small, to foreign countries and they have been put to sensible use by those foreign countries. I do not think anyone is particularly talking about exporting chiefly to those countries that already manufacture warships although that can happen.

  158. If you have already got a shipbuilding industry through the transfer of technology, in effect, can they then start to build warships?
  (Lord Bach) This is the second point you make and it is true that a lot of countries to whom we would like to export ships would themselves, of course, like to start up perhaps in a small way procuring their own warships in the future. We have to accept that. That is a fact. Not all of them want to do that, some of them want to purchase if they can afford to do so, others want to purchase, as you say, first and then have the technology transferred about which our companies are very open compared to some of our competitors overseas, and then do the remainder-in-country. That is not to say that there would not be advantages for Clydeside at the same time as those other countries were doing their second or third of class in-country because Clydeside's skills, ability and designs would always be needed. I am not claiming for a moment that exports are easy in the Navy field, but it is important not to give up on Navy exports too quickly. There are places in the world that want the skills that the Clyde and other British shipyards can bring to this field. The United Kingdom is unrivalled in this field historically. We still have a great deal to offer. I know there are problems for companies on this but I ask the question: how will Clydeside exist in shipbuilding terms in 15 or 20 years' time if you rely solely on MoD orders? It will be extraordinarily difficult and I am sure one of the things your Committee is doing is to look at how its long-term survival can be guaranteed. One of those ways it seems to the Government is by getting more export orders perhaps of smaller ships, not always of big ships perhaps of smaller ships.

Mr Lyons

  159. Just in relation to that, Lord Bach, the question of new orders, how do we in mechanical terms go out and do that, try and find out who is thinking of placing an order for either defence or commercial shipbuilding?
  (Lord Bach) As far as the defence side of it is concerned, DESO, who I think you have heard about already in discussions today, are part of the MoD but have a well deserved high reputation in assisting British industry in selling abroad. One of the ways they do that is to have information as to what countries are interested in what at a particularly early stage and then they help the companies run campaigns in order to try and persuade those countries in a highly, highly competitive market—it is absurdly competitive sometimes—to choose Britain as the source of their export. DESO is always available to British companies - BAE SYSTEMS I think know this better than anybody—in order to assist. Also we get assistance from the DTI and the FCO, we all work together closely in order to try and maximise these exports but they happen, they do happen, and if DESO was not to exist I think it would be much, much harder for there to be so many British exports in the defence field, including the Navy.

14   See Ev 68. Back

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