WEDNESDAY 19 JUNE 2002

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Members present:

Mrs Irene Adams, in the Chair
Mr Peter Duncan
Eric Joyce
Mr Mark Lazarowicz
Mr John Lyons
Ann McKechin
John Robertson
Mr Mohammad Sarwar
Mr Michael Weir

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Memorandum submitted by BAE Systems

Examination of Witnesses

MR BRIAN PHILLIPSON, Group Managing Director, Sea Systems, and MR SIMON KIRBY, Managing Director Type 45 (formerly Managing Director BAE Systems Marine), examined.

 

Chairman

  1. 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 and 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?
  2. (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.

  3. 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?
  4. (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/war shipbuilding 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-last 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 as 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 war ships 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 for use so the announcement was made at the same time.

    Mr Lyons

  5. 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?
  6. (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 set 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.

     

    John Robertson

  7. Moving on to your Three Yard Strategy, during our evidence taking from the Task Force and also from the trade unions, 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", and the Union said less polite things. Could you comment on that?
  8. (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 to 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 we 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 have history as it is shown, but there are several examples within the world of shipyards that have gone down this type of strategy.

  9. 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?
  10. (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 we have taken the ALSL order and the Type 45 order; we are on track for that strategy, but if it was 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 maintain that strategy.

    Ann McKechin

  11. 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?
  12. (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 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

  13. 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?
  14. (Mr Phillipson) One of the challenges of business of this kind is that to continue to deliver the complexity of products that are required for the budgets and timescales 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 for 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 are 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, and in principle there is support for example to export discussions and DESO 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 with total 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 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 decision 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 do have a fundamental partnership between the customer community and the supply community in this industry, and we have to recognise that.

    John Robertson

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

  17. What are they?
  18. (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 short term decision making to take 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 his 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, and 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 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.

  19. Do I gather from that that you do not think the policy is consistent?
  20. (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 you 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 on 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

  21. 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?
  22. (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 demands from a 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 justice that 75 million pounds worth of investment against the business we have identified in our strategy.

  23. 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?
  24. (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 pounds 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 pounds. 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 investments; we plan to invest 9 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 come out 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.

    John Robertson

  25. 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?
  26. (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 central 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 war shipbuilder; the skills for war ships 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.

  27. 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?
  28. (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.

  29. 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?
  30. (Mr Kirby) That 75 million pounds 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 -

  31. 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?
  32. (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.

  33. 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?
  34. (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.

  35. 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?
  36. (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.

    Chairman

  37. So the amount you had invested was included in that 75 million?
  38. (Mr Phillipson) The amount we had planned to invest was included, yes.

    John Robertson

  39. In the Task Force it says, "Of the estimated 75 million investment shown for the Clyde, the following items have been specified.", and it goes on to list them. In fairness that would things that are going to be invested in, not that have already been invested in. You are now telling me then, if half of that had already been invested before the Task Force had met, you are now counting them as another good bit of work you have done, but it is not.
  40. (Mr Kirby) I can submit to the Committee a piece of paper that outlines the 75 million. As I say, pages 43/44 of the document outlines the investment plan by year. This year we have committed to spend I think it is 9.6 million to be precise, and we will spend 9.6 million this year in our Clyde yards.

    (Mr Phillipson) Please understand that this was an investment strategy to support a business strategy. The business strategy was formulated as we went through the year 2000. What we did with the Task Force was to test that strategy and also look at, for example, how we could mitigate the redundancies that resulted from the downsizing. This was not about a deal; this was about delivery of a business strategy that made sense for the shipyards, its work force and our shareholders.

    Chairman: Now we must move on to the maritime industry co-ordinator.

    Mr Lyons

  41. Mr Phillipson, the last time we took evidence we heard about German shipbuilding and the use of a co-ordinator. Do you have a view on that, and are there any advantages or disadvantages in having that position in Britain shipbuilding?
  42. (Mr Phillipson) To be honest, I do not have a clear view, and the reason is it depends on the powers or responsibilities of that individual. I have seen a little bit of the work of these individuals in Germany. I worked in Germany for three years in the aerospace industry, and they also have an aerospace co-ordinator. It can be very helpful but it very much depends on his role and responsibility, and what we can look to that individual for.

  43. But, in terms of German shipbuilding, something comparable in terms of power and responsibilities may have a chance of success in the way the Germans have?
  44. (Mr Phillipson) It might. I suspect it is a different situation in the UK. If you look at the way the German industry is structured, if you look at, for example, investment opportunities they have had in East Germany because of unification and you look at some of the history of co-operation between their yards and you compare that with the history in the UK of quite severe downsizing in recent years, fierce competition between the yards, we are in a different situation, so the precise German solution I suspect might not be ideal for our situation. I think we could have a situation where there was a stronger representation in Government for the interests of this industry but how we do that and what we do I do not have a clear view about. I doubt whether the precise German model would automatically be the best thing for the UK

    Mr Lazarowicz

  45. Broadening the subject beyond BAE itself, can you tell me how competitive you consider the UK shipbuilding industry to be and what more could be done to improve competitiveness? In particular, I know there is a shipbuilding forum which was set up a few years ago. What is your assessment of that forum in helping improve the competitiveness of the industry?
  46. (Mr Phillipson) I will defer to Simon on the shipbuilding forum because I have not personally attended it but, on the competitive issue generally, firstly it is very difficult to measure competitiveness. We operate in the UK war ship market primarily and one of the distinctive features about that market is our defence forces hate coming second. As a result they have fairly demanding requirements; they like warships that win. Those standards are not the same as the standards that other people operate to. If you compare what is required to design and build a UK war ship with others, you have not got like-for-like comparison. Again, it might be interesting to ask the Minister later this morning whether he feels he gets good value for money on the warships he buys. My advice is they do very well. The MoD believes the value for money they get from Britain industry is excellent and if you compare us with the United States, for example, you do have similarly demanding design standards, and I think we are extremely competitive. Occasionally we get the opportunity for a straight head-for-head comparison for value for money competitiveness. When we do, all the evidence is that we are very competitive, but you have to recognise some differences. For example, because we are a war shipyard we carry a level of overhead that some commercial yards would not. If you look at the man hours it takes us sometimes to do a job, the man hours can be very competitive with a commercial yard, but because they are having to carry the overheads of the warship business, if we load the man hours completely with those overheads, we are not competitive. That is why for infill work sometimes we have to not recover all of our overheads to remain competitive, but on a like-for-like comparison there are bits and pieces of evidence that say we are very competitive, but it is difficult to get like-for-like because the UK does demand some quite high standards in its warships - higher than many other nations.

  47. But where we can get like-for-like, can we get improvements in our competitive position?
  48. (Mr Phillipson) Yes, and typically they come about through investment. We have an example at the moment which is not Scottish but I will quote it to you nevertheless, on the astute nuclear submarine programme, we have invested in a fair degree of automation around manufacturing the rings of the hull, and we can demonstrate that we have a huge improvement in quality and a 30 per cent reduction in cost in manufacturing the structure of that submarine compared to its predecessors, and it is largely down to some particular pieces of investment we were able to make both in the design of that product and in its manufacture. If you look inside the Type 45 today there are many examples where we are able to design and invest in manufacturing to take cost out of that product. What we have not done in the last few years is invested in some of the R&D that would have made that easier, or the skills development or the facilities development, and one regret I have is that when you come along with a big programme like Type 45 it is a wee bit late to do the R&D. We have had examples where, faced with tight budgets, we have taken the challenge of that budget but, frankly, we did not get the R&D done before we took the challenge and sometimes when you then introduce novel techniques to take cost out they backfire on you a bit, and we have examples where we have introduced very new technology, and it has not gone right and it has cost us a lot to sort the mess out. But in general you have to keep improving competitiveness, you have to keep investing in both design for manufacture and the manufacturing skills and facilities, but finding the money to make those investments is difficult; the UK is not a big investor in R&D in these areas; in fact, on the contrary, in the warship field we traditionally have had many of these skills in the MoD, and until programmes like Astute and Type 45 the design authority for warships was always in the UK MoD; they did their own internal R&D and they basically instructed the industry how to build. That has changed in the last few years, but in two ways: firstly, they pushed the responsibility out to industry but, secondly, they have stopped investing in it and they are having to downsize their own technical skills but there is not an easy means for us to up-skill our facilities and there is not the money available to transfer the R&D and the know-how and the facilities, and we have had some difficulty because of that. Going forward, we have to invest continually improving our design skills, our manufacturing skills, our manufacturing facilities because this is a treadmill. You cannot stand still: it is about continuous improvement.

    (Mr Kirby) On the Shipbuilding Forum, it has been running I guess for about three years now. In terms of the views, it is a useful exchange of views within the shipbuilding community and interested parties and I think that is what it is: a useful exchange of views. Whether it could be made more effective I am not sure. It relates partly back to the point of view that you have a shipbuilding co-ordinator and the role of that, to give that some real teeth to achieve. But I think the Forum itself is a useful exchange of views. It gives people the opportunity to understand what is going on nationally and internationally, but that is about it.

  49. Do you not think it might be a good idea to lift it up from being a platform for the exchange of views to something more, particularly given the discussion we had earlier?
  50. (Mr Kirby) Exactly what form that would take I am not sure but I would say certainly we would welcome an opportunity to discuss how it could be used more effectively, yes.

    Mr Carmichael

  51. Is "useful forum for an exchange of views" a polite way of calling it a "talking shop"?
  52. (Mr Kirby) You can make your own judgment on that but I think it could be made a more useful forum. It has the right people - or it could have the right people there supported by industry. Certainly we would commit to that and we would be quite happy to engage on discussion on how that could be done. It does bring in the shipbuilding co-ordinator debate and what the role of that person would be, because clearly they would be the focal point of that forum.

    Mr Carmichael: To use another polite euphemism, I hear what you are saying!

    Mr Joyce

  53. Mr Phillipson, what you said earlier about Britain armed forces not wanting to come second is entirely understandable. There are areas of procurement strategy, not necessarily naval, where the Government and the armed services themselves have accepted an element of compromise, where they have chosen to buy off-the-shelf or abroad and have compromised on the design spec that they can lay down to the industry. Is there any scope within shipbuilding or not?
  54. (Mr Phillipson) Yes, and I am a big enthusiastic fan of smart acquisition when it works well. You may be aware before taking this post I ran the Type 45 programme for its first two years. On that programme, unusually, MoD started off with some clarity about the budget that was available, and they had some very key requirements that could not be compromised but beyond that they were up for compromise, and they were willing to engage with us wholeheartedly, and really effectively, in discussing what the trade-offs were as we went through the design to be able to satisfy the needs of all the user community - and that is complex because there are people writing requirements, people operating the ships, people operating support ships, all having an impact, and corralling that group to participate in those trade-off discussions is not easy. But it worked well on 45 and continues to do so, and we have been able to make some pretty massive trade-off decisions, many of which had benefits downstream for the next 20/30/50 years. We have clear through-life benefits because we have adopted a different approach. I do believe at the moment, and my experience at the moment is on the naval side of MoD, there is a real enthusiasm for practical decision making about what is needed and what is not because it is archaic. There are areas where commercial standards are ahead of military, and we need to drop the military and move to the commercial, but with some care and sometimes there is a danger of not doing enough work really to understand the implications of the change, and that comes back to R&D. It would have been really nice if, over the years, we had spent more money on R&D to say, "Can we apply these commercial standards in the military market?". Regrettably we have not done that yet; I think it is something we need to pay more attention to in the future and, by the way, we also need to do it with a community who can use the R&D. It is no good paying a five man consultancy team to do a report: you really have to take the designers, you have to design the warships and have them understand how you can migrate standards. But it is going on; it is the way forward; there are a lot of examples on it that are there now on Type 45 but it still has to be fit for the purpose, and the purpose is still "do not come second".

    Mr Weir

  55. Throughout the evidence hearing most witnesses have stressed our need to increase exports, and Scottish Enterprise said that sustainability on the Clyde was dependent on at least one new export order a year. Can I ask you to what extent the longer term future of shipbuilding on the Clyde is dependent on winning at least one new export order a year? What size of export order would you require, since there is obviously a wide spectrum, and is it a realistic target to ask for one a year?
  56. (Mr Phillipson) You ask the question in a good week, and any of you free on Saturday morning are welcome to come and join us watching the launch of our third OPV for Brunei from the berth in Scotstoun, and it is only a couple of weeks now since we were awarded the Queen's Award for Export Success from export shipbuilding. We can export ships; I think the Malaysian Navy which has two excellent frigiates are delighted with their product and very interested in procuring more, and the Bruneian ships are tremendous. We do need a reasonable level of export business as part of the business plan that we have put forward with the Task Force. You can equate it approximately to about a ship a year but it very much depends on the size of the ship. At the moment we are putting through the Bruneian ships; we have three on the river at the moment - or will have on Saturday. They are about the size of ship that probably fits the bill. If we get one or two larger ships they keep us going more years, so it is a very rough measure, and it is about a ship a year. So if we get an order for two or three ships that is fine; that will keep us going a year or two, but we do need a level of work. We did show the Task Force the workload forecast for the business and you can identify in that the work we know about, the probable work, and the possible work, and in that possible slice there is a fair amount of export. Again, the good news is I can see customers who do give us the work we need for the next few years, and we are in very active discussions, and I do know we have had strong personal support from the MoD at Secretary of State level in recent weeks, so I am optimistic that we should be able to bring some of these orders in but it is a tough market out there. We did present some evidence to the Task Force about how many orders there are out there, and if you look back over the last few years there are not that many. We are in the up market end: we do not sell floating bath tubs with a pea shooter on the end but serious warships, and much of the market is closed to us because people want to design and build their own products. The open market to us can, however, still potentially deliver the level of business we need, and we are very actively pursuing that.

  57. You say much of the market is closed. Given that we are discussing the fact that the UK wants, quite rightly, to keep its warship manufacturing within the UK and you are finding that other countries are doing exactly the same, you mentioned Brunei ships, do you have any other orders on the books for export at the moment?
  58. (Mr Phillipson) We do not have any other export orders on the books at the moment. Regarding people wanting their own capability, a number of things go on. The Task Force report, for example, talked about technology transfer. Now, that is important in some markets. There are markets that are completely closed. The United States are not going to buy offshore - "Buy American". France and Germany are similar sorts of markets. There are markets that are closed because of defence policy matters - Taiwan - but that still leaves a fair part of the world that does buy offshore. Some of the nations that are growing their industrial capability want to use purchases as a way of technology transfer and grow their own capabilities. We have not done a huge amount of that in the shipbuilding arena but are prepared to. We have done a lot in the aircraft area where we have taken products and put them into licensed manufacture in other countries and grown their capabilities; we have the skills to do it and regrettably it is part of the business we are in, so we will bid work of that kind. If people want it, what we will typically try to do is say, "We will build the first one or couple and then teach you how to build the rest", and that is part of the business we have to be in. So we will do that where necessary but we do try quite hard to make sure we get a decent slice of it first before we start transferring it across.

  59. So is there a diminishing market? The logic of what you are saying is that there has been a diminishing market for a number of years but that you are transferring technology effectively to other areas for ships.
  60. (Mr Phillipson) Yes, and that comes back to the point about competitiveness. The demands of the market move on year by year; we have to keep running ahead of the other guys. So as we see more demand from the product what we have to do is invest in where the demand is going and be prepared to release to some of these other nations yesterday's capability in technology. Frankly, for some of them, that is all they can cope with. If you have not built warships, do not try to start on a nuclear submarine or an aircraft carrier because you will not do it. You have to start with something simpler. But it is the nature of these sorts of businesses that, because nations want their own capability, to survive you have to keep ahead of them and be in a position where you can offer something special that they cannot easily reproduce locally.

    Mr Weir: Are you also trying to get non military work in the export market?

    Chairman

  61. Can I appeal for a little brevity in your answers, Mr Phillipson, please, given that time is moving on and we still have a lot of questions to get through?
  62. (Mr Phillipson) Yes. As was explained in the Task Force Report, the strategy is to use commercial work to infill gaps. It is not a market where we believe our skill-set and our facilities can be competitive on the world scale as a profit making business, and I think the history of British shipbuilders over the last few years, and even European shipbuilders, largely confirms that.

    Mr Sarwar

  63. To safeguard the long-term future of the shipbuilding on the River Clyde, it is the unanimous view that BAE Systems has to bring in commercial and export orders. The Government can give you full sport - and I am sure the Government is, along with trade unions, the Scottish Executive and everybody, but unfortunately there is a fear among the politicians and trade union members that when it comes to tendering at competitive prices, BAE Systems so far has not been able to. Is there a realistic chance that in future you will be able to offer competitive prices during tendering for export and commercial orders?
  64. (Mr Phillipson) Specifically, I can quote you the example of the anchor handler we launched and delivered on budget earlier this year, competitively priced, and very successfully. It was a classic piece of commercial infill and it was a good programme. We will continue to bid for and win programmes of that kind but the strategy we outlined to the Task Force, the strategy which the Task Force confirmed after detailed review as being robust and sound, was that commercial work is infill. We are basically a defence contractor building complex warships; there is a market for our export product; we need to win some of that export market; and that is what we have built our strategy around.

    Mr Carmichael

  65. Can I try and pull together some of the threads about commercial shipbuilding that you have already referred to? There is on record Government encouragement for outfits such as yourself to go into commercial shipbuilding. To paraphrase what you are saying this morning, you seem to be saying, "That is not what we do and it is difficult for us to do it". Firstly, you indicated that you have tendered and you have sometimes not been successful in respect of contracts that you feel really you could not have bid for any more cheaply. Could you give me some indication of the percentages we are dealing with here of bids successful against bids made, in very round figures and, to go on from that, what active and material encouragement are you getting from the Government to support the development of commercial shipbuilding on the Clyde? Finally, on subsidies abroad, you were talking about inexplicable failures to win contracts. Are you saying that is because you think that there is some force behind the bid that is successful that is helping them make that bid and, if you have these suspicions, do you ever follow them up?
  66. (Mr Phillipson) In terms of statistics, I do not have any. It may be we can generate some but I do not have any. On the question of support for commercial work from the Government: I am not sure particularly that I am aware of any. Simon, are you?

    (Mr Kirby) I think we have had occasional instances where we have been put in touch with particular opportunitise and that is about as far as it goes and we have explored some of those opportunities that I have been aware of. Whether there has been any other I would not know but that is about the extent of it.

  67. So it is mostly just up to yourselves?
  68. (Mr Phillipson) In terms of making sense of a piece of business, yes. To give you a different example, one of the areas where some European yards have been extremely successful is the cruise liner industry. In France, Italy, Finland, there are yards churning out very large numbers of cruise liners. The United States had a problem with this because most of the cruise liners seemed to be operating either to Alaska or around the Caribbean, and if you go to Miami you will see half the European product there and the United States' Government and its shipyards thought it was a bit of a problem, so they passed the Jones Act which says that if you want to operate in and out of American ports you have to build your ships in America. We could try that in the UK but we have not got that big a cruise industry anyway and, frankly, the consequences in the United States have not been great. I know of one yard which took an order for two cruise liners, a military yard, which took the order knowing that they were going to lose a fortune on them and they were priced way above European levels. That particular order has now become a casualty of September 11th and various other things, but it is absolutely clear in the United States that, despite very aggressive government intervention, their experience so far of having cruise liners bid for and made by their defence yards has not been good. It has delivered nothing by way of output yet. There is evidence of other programmes in the United States where they force commercial ships into defence yards, and that has been disastrous. I honestly do not believe there is any good evidence that you can take a competent warship builder, with their overhead and cost structure, and apply that to the aggressive commercial market there is out there now because you are competing with eastern European nations, Far Eastern nations, nations which have had masses of subsidies, have a much lower cost base and are not required to deliver profits. It is a jungle out there. The subsidy issue is very difficult. We do not, as a matter of policy, make it our main business in life to find out how other companies finance themselves. That is not our bread and butter. I can tell you that it is not as simple as direct subsidy is. A lot of things go into how you make a price and what are allowable costs. The UK Ministry of Defence has an overhead structure, which they agree with contractors periodically, that says what you are allowed to charge to a programme and what you are not allowed to charge to a programme. I have done a lot of business in the United States. I can tell you that doing business in the United States is much more attractive than doing business in the UK because the two departments of defence have very different approaches to risk and what is an allowable cost. That is not a subsidy; it is just a different charging structure. The UK MoD wishes industry to be the holder of risk. The United States Government will not allow industry to hold development risk. They say development risk has to be held by the government and development is cost plus. Most of our business is first of class development. We are carrying huge risks, often with slim profit margins. In the United States you would not be allowed to carry the risk. You must get all costs plus a margin. That is not a subsidy. This is a difficult area. I believe we can make sense of the business plan we have with export business and UK business and occasional commercial input. What is important for us is that we make sense of our business.

  69. The business for outfits such as yours going into commercial shipbuilding is really a bit of a red herring, is it not?
  70. (Mr Philipson) I honestly believe it is. You can look at some of the yards that have tried that in the UK. For example we have Govan in our portfolio, a yard with a commercial background. We have seen Cammell Laird recently trying to break back in and then it failed. This is not an area where I think the UK can easily get back into being a big supplier. We get the odd bits and pieces, yes, mainly on a limited profitability in-fill basis.

    Mr Joyce

  71. Following through that assumption that you are essentially a warship builder and that you build essentially for a home market, which is the Ministry of Defence, a large critical mass, the Ministry of Defence clearly wants conversely to purchase products produced at home. What would the effect be on Scottish yards in terms of winning work if the Scotland were not part of the UK?
  72. (Mr Philipson) I am really not sure I am qualified to comment on this.

    Chairman: I do not think you are qualified, Mr Philipson, to answer that.

    Mr Peter Duncan

  73. I turn to the evidence about the Task Force report, which is an excellent document in terms of providing a route map through this whole issue. One of the recommendations was that we need to explore the further opportunities for collaborative ways of working through the industry. After the report, have there been any changes and how is that working in practice? What gains could be made and what beneficial consequences could there be for Clydeside in particular?
  74. (Mr Philipson) I am enthusiastic about getting better relationships around UK industry. I think that we have to look at how we survive and thrive nationally. This is not a big enough market for us to be at one another's throats, and, in particular, there are some things on the horizon which demand all we have in the UK, and I look at the aircraft carrier in particular. Building two carriers in this country is going to demand the best of what we have got, wherever it is. I have been very pleased on Type 45 that we have been able to establish a really good relationship between the prime contractors, the shipyards and Vosper Thorneycoft as a major subcontractor that is working. That will continue to work for a long time to come. We have put those players together and I personally have watched them over the last 18 months ago. These are guys getting on with the job. It is working well. We have a close relationship with Swan Hunter and ALSL. They are the lead yard and we support them. We are working very closely and very well with them. I think there are more things of that kind we need to do. The carrier does provide a good opportunity for us to make it happen. Again, I come back to some comments I made earlier this morning about ongoing discussions with MoD on how we approach the carrier programme, not at prime level but at shipyard level. As an industry, we do need to sort out with MoD and the primaries how we can work together, how we need to work together, to deliver the design and build those ships in the timescales that everybody wants. So I am enthusiastic. We are beginning to make some progress. However, I would also say that we still have a long way to go, specifically in terms of the Clyde. We see the Clyde as being our centre of excellence for design engineering and surface ships and also to build a first of place. The facilities and the workforce on the Clyde, let us be quite honest, are the best in the UK and the biggest in the UK by a huge margin. If we are going to see more collaboration in the UK, I can only see the skill base we have in the Clyde as being good because I see that as being the centre of gravity, the nucleus, around which we can build those relationships.

    John Robertson

  75. In the Task Force report it talks about the Government's role and co-operation with various Ministers. Have you had contacts with the Scotland Office in regard to ongoing business?
  76. (Mr Philipson) I might ask Simon to answer on a more traditional basis rather than for my recent months.

    (Mr Kirby) If you look back over the last 12 months, we have had dialogue with the Scotland Office and the Scottish Executive really around the whole issue of shipbuilding in the UK, where we see the Clyde fitting in. As Mr Philipson has just described, from a surface ship point of view, that primarily is round Clydeside.

  77. Have you had any contact since the Task Force report?
  78. (Mr Kirby) I am not aware of any since the Task Force report.

    Chairman: We will now look at skills and training.

    Mr Joyce

  79. Could you quickly take me through how you ensure that the skills mix and skills base within your organisation is kept fit for purpose and how you might add value for people to move on to other competences?
  80. (Mr Kirby) Firstly, within the Task Force we did carry out a comprehensive skills review of the workforce on the Clyde. I think you also need to take into account the fact that we have inherited many different things, including a skills mix and the people we have in the two yards. As part of that review, shortfalls in skills requirements over the next ten years and surpluses in certain skills were shown. The task that we have now taken upon ourselves really is to look for where we can make up the shortfalls, where we can retrain and redeploy people. Indeed, we have undertaken a quite significant training programme that is currently running, for example, to retrain people with steel worker skills to become qualified electricians and people with steel worker skills to become qualified draughtspeople. That programme is costing, with some support from the Scottish Executive, round about three-quarters of a million pounds. That addresses some of the issues. We also look to see how we can bring young people into the business and indeed one thing we were very clear on last year was that even though we had a huge problem of downsizing the business, we did commit to taking young people into the business. Indeed, this year we are taking more apprentices in than we did last year, for example. We are taking graduates into the business. We cannot make the mistake that happened in the early Nineties when shipbuilding simply stopped recruiting young people, stopped apprentice training. For the lifeblood of the business, we do need to inject young people in and we are endeavouring to do that. It is something you cannot change overnight. You obviously have a demographic profile for a workforce and a skills requirement. It takes time to work those things through. The Task Force was a very useful opportunity to bring in additional views on how we should do that. Certainly that was probably one of the key areas in the report that did influence the way we are now doing that retraining of people on the Clyde.

  81. Have you increased trainers or people who conduct training analyses and so forth? Do you contract that out or is that paid for by the public purse?
  82. (Mr Kirby) With the exception of some help on the Task Force, those specifics I mentioned earlier, all training is primarily funded in-house. There are grants and support as you would expect but primarily it is internally funded. We use all of those, our in-house people, local colleges and external contracted out agencies.

  83. The Task Force report refers to external qualifications. It would be quite useful to know how much upskilling is going on. Has there been any increase in the last short while in terms of the size of the workforce which has some kind of validated external qualification?
  84. (Mr Kirby) I do not have the statistics as to whether here has been an increase but certainly it is something we need to encourage. Especially on the Clyde, attracting good young people into shipbuilding is not easy to do, as we all understand because of the historic factors. We do encourage giving that sort of opportunity as a mechanism and making it attractive to people. We have people doing sponsored degrees, for example, and sponsored HFEs within Glasgow universities.

    Mr Lyons

  85. Mr Kirby, I was interested in your comments about retraining, in particular of apprentices. One of your trade union colleagues in evidence to us said that the number of apprentices BAE Systems are proposing for this year is shocking and that there has been a reduction in the last few years. Is that accurate?
  86. (Mr Kirby) I think you will find that comment was made around some early date. We are recruiting more apprentices this year than we have in recent years. I think you will find off-line that we can take you through the statistics.

    John Robertson

  87. To follow on from that, the statistics I have show that you have agreed to take on 50 and then 30 and now it is down to 20. Can I emphasise that not everybody is a university graduate. There are a lot of good people, particularly round about the area of the yards, who leave school and are looking for jobs and modern apprenticeships are very important. We need this commitment, not just from yourself but from the Government and others. Can we get this number back up to 50 and get these modern apprentices into the business as they will be the future of your company?
  88. (Mr Kirby) I think the number, for the record, is 35. It is really an issue of having to bring people into the business; we also have to look at retraining the skills mix we have in the business. It is all part of the same solution, getting the right skills for the next ten years. Certainly we fully support the view that we need to take young people into the business, not just graduates but skilled people who will be our lifeblood in the future.

    (Mr Philipson) We have consistently in recent years taken 30 to 40 apprentices and we are doing that again this year. This is at craft level. To underline your point, we fully appreciate that the vast majority of our workforce are not university graduates, and long may it continue because I do not see too many university graduates doing some of the jobs we need done.

    Chairman: You will be glad to know that we have now reached the last question. Could you give us a quick assessment of the future of employment in shipbuilding on the Clyde as you see it?

    (Mr Philipson) Basically the outlook has not changed from what we explained to the Task Force. At the moment, we are close to our final decisions about the ending of the redundancy programme that we started some time ago. In the next few weeks, we will finally remove the uncertainty for the people who are waiting for final decisions. We are very near the final decision on closing that particular programme, which had a total of 1,000 on it. Beyond that, the outlook is very much as we described to the Task Force. It very much depends on the success we have or do not have in winning other business, in particular some export programmes and the aircraft carrier, which are key to our longer term future. There is nothing different from that. Work load forecasts were presented in the Task Force report. That continues to be a reasonably accurate view of the long-term future.

    Chairman: Gentlemen, can I thank you very much for coming this morning and for your full and frank answers. These will be very useful to the Committee when we come to making our report.

    Memoranda submitted by the Ministry of Defence, the Department of Trade and Industry and The Scotland Office

    Examination of Witnesses

    LORD BACH, Minister for Defence Procurement, MR ANDY McCLELLAND, Support Director E and H Group, Defence Procurement Agency, Ministry of Defence, MR BRIAN WILSON MP, Minister of State for Industry, Energy and the Environment, MR NORMAN BRICE, Assistant Director, Marine Unit (Shipbuilding), DTI, MRS ANNE McGUIRE MP, Parliamentary Under-Secretary of State, and MR IAN HOOPER, Head of Economy and Industry Division, examined.

    Chairman

  89. Can I welcome you to the Scottish Affairs Select Committee and our inquiry into employment in shipbuilding on the Clyde. Before embarking on our questions, may I welcome in particular Mrs McGuire, who is new to her particular remit at the moment. We are very grateful to her for coming along this morning. She knows we will not go easy on her and she would not expect it. We know she does not need us to go easy on her anyway. We welcome Lord Bach, who I understand has come back overnight from the States. Mr Wilson is always welcome here at this Committee. Can we go straight into what we have been doing. Later today the Shipbuilding and Marine Industries Forum is due to consider an Implementation Plan produced jointly by the three marine trade associations. To what extent does the Implementation Plan respond to the first recommendation from the Clyde Shipyards Task Force that "UK Government shipbuilding policy should be restated"?
  90. (Mr Wilson) Thank you, Mrs Adams, for your welcome and for involving us in this inquiry. As you rightly say, the Shipbuilding Forum is meeting this afternoon and it is taking forward really an updated agenda for the shipbuilding industry in the UK. The Shipbuilding Forum has been in operation for some time now. I have been a member of it in various roles and latterly the Chairman of it. The Shipbuilding Forum has now been reshaped to strengthen the industry's role and to give industry a leadership role within it. Its clear objective is to create the circumstances, with Government supporting industry, which will lead to a significant increase in the UK share of the global market and also promote a positive image of the shipbuilding sectors. I think everything the Shipbuilding Forum will be doing this afternoon is very much in line with the recommendations of the Clyde Task Force.

  91. In their memoranda, the DTI and MoD reaffirmed that "all fighting vessels are built in the UK". Does it remain Government policy that domestic warships are constructed in the UK?
  92. (Lord Bach) Mrs Adams, if I may take this, I think I know from what event this particular question arises with the Committee. May I say straight away that, yes, it is Government policy that all warships will be built in the United Kingdom. What does that actually mean I think is what the Committee wants to know. It covers, in our opinion, fabrication and assembly of new warship hulls. I must make it clear that it does not mean every last nut and bolt, or for that matter every weapon system carried on board. What is significant and what began this policy in the 1980s is that we retain the ability for the United Kingdom to manufacture warships right up to the largest and the most capable of vessels. That is the policy and it remains the policy.

    John Robertson

  93. Lord Bach, you are talking about the fabrication and assembly. We have mentioned areas like the bow, the work for which has gone to a Dutch yard. Does this mean that in future anything of that sort of size and magnitude will be built in Britain?
  94. (Lord Bach) Can I try and answer that and come directly to the issue that I know concerned the Committee at its last meeting? I have already written to you, Mrs Adams, of course. I am sure the Committee have seen a copy of my letter. The background is that the fabrication of the two ALSL bow sections - a very small part, I should say, of the bow sections - was put out to competition by the prime contractor, Swan Hunter. Competition included three UK companies. Swan Hunter chose the Dutch company, Centraalstaal, because they made the most cost-effective bid to suit the required timescale and thus that company will undertake the steel fabrication of small units. I said it was small; it is 5 per cent by weight of the total steel fabrication. However, and I want to emphasise this, Mrs Adams, final assembly, systems, outfitting and fabrication into a complete bow section will take place along with the construction of the rest of the hull at Swan Hunter's shipyard on Tyneside. Subcontracting sections such as this has not been uncommon practice when the shipbuilders themselves do not have the necessary in-house skills or equipment to carry out such complex work, as was the position here. However, in view of what has occurred here, and as soon as it came to my attention, we have had placed in the ALSL contract, which of course as you know concerns Govan Shipyard very much, a clause which requires Swan Hunter to obtain MoD's prior approval before subcontracting any fabrication or assembly of structural steel work. To answer your question, Mr Robertson, and I am sorry it has taken some time to get round to it, future shipbuilding contracts will incorporate a similar clause and will make it clear that approval to place any such subcontracts outside the UK will only be granted in exceptional circumstances. I just want to say a very brief work about these exceptional circumstances. It would be palpably absurd if there was, for example, the most enormous price difference or difference as to where the particular item could be got ready if, because of this, it was not ever possible to use a non-UK firm. But I will need some persuading that the circumstances are truly exceptional before we breach this particular rule; in other words, that warships are built in the United Kingdom.

  95. I have two matters to raise with you. The first one is this. I attended a meeting with the Secretary of State, along with my colleagues from the other constituencies on the Clyde. We had the trade union representatives with us. At that meeting Geoff Hoon said to us that the ships would be built in Britain. We seem to be playing about with words here, Lord Bach, as to what is being built. It has also been brought to my attention that block 5 of this ship is now up for tender and I know that BAE Systems has tendered for it. I want to know about this block 5, which is two large parts - and I can give you a copy of this - and obviously bigger than the bow part that we were talking about that went to Holland. Are these sections going to be built within yards in Britain or is this another case of more and more parts of our ships being built abroad? I am quite concerned about this. I only got the information this morning, otherwise I would have let you know about it earlier. Out of the 15 sections of this ship, we now have three that are being put out to tender by a company about which I know my colleagues will be asking you in future questions.
  96. (Lord Bach) I am afraid it is news to me and to my officials. What part of the ship is block 5?

  97. Now you are asking! It is the middle bit, to use a technical term. I will let you see this.
  98. (Lord Bach) I may be none the wiser when I see it.

    Chairman

  99. While that is being shown to you, Lord Bach, could I clarify one point? Was the transfer of work due to shortages of skills at home or because the Dutch bid was more cost-effective?
  100. (Lord Bach) I am afraid that in this particular instance the Dutch bid was much more cost-effective. It was much cheaper. That is not to say that necessarily meant that the contractor should have made the decision that it did. It was for that reason that we stepped in and are now going to have put in the contract the clause that I referred to, and it will be in future contracts as well, which is what Mr Robertson wanted to know.

    John Robertson

  101. I am concerned that you will have a say obviously in these two sections of the ship that are going to be put out to tender. My problem of course is: why the devil should we give contracts to a company that cannot do the work? Should we not then pass the contract on to the person who was the runner-up in the bid?
  102. (Lord Bach) It is fair to say that prime contractors are not necessarily expected to do everything involved with the ship, not even with the construction of the ship. I emphasised that this was a very small part of the bow that needed a particular method used in order to get it as it was. So there is nothing, I think, unusual in subcontracting that. What was unusual, as has been found out, was the fact that, even though this, in my view, was fabrication or construction, it went to a non-UK company. As far as block 5 is concerned, I am absolutely ignorant as to the answer to your question. What I promise to do, if I may, Mrs Adams, is to go back to the department, find out what the position is and let you know, as Chairman, straight away, but I would be surprised if this is part of the construction or fabrication of this vessel if we were going to have a repeat of what happened before.

    Mr Sarwar

  103. We all know that the shipbuilding industry in the UK is on the decline because of the level of investment and we are not able to compete with Europe and other places. I must thank Brian Wilson and Lord Bach for their support of Govan Shipyard and the shipbuilding industry on the River Clyde. We really appreciate that. One thing which is a matter of concern to all of us is that we were repeatedly assured by Geoff Hoon that all the warships will be constructed in the UK but the door has been opened and we are told that in exceptional circumstances some work will be passed on to other parts of the world. This is something that worries me. According to a letter to the Chairman from you, Swan Hunter emphasises that the majority of the subcontract work will be placed in the UK. What do you mean by "majority of the work" in percentage terms and what message do we take from this?
  104. (Lord Bach) Thank you very much for the kind words you said about Mr Wilson and myself. I want to make it quite clear that the policy relates to the construction of the hull of the ship. It always has and continues to do so. I do not want there to be any doubt about that, please, in the Committee. That stands. It has never been policy, as I understand it, that every part of the ship - all the bits that are added on to it - necessarily will all come from UK suppliers. The position is that MoD will look carefully to see where the prime contractor is putting out his subcontracts. Clearly, if too many are being put out or the wrong ones are being put out, MoD will be asking the supplier why that is so, but what we are concerned about is competition in order to get value for money so that the British taxpayer pays as little as he possibly can for what is needed by our navy. So we would be very foolish if we were to say that every part of every warship has to come from the United Kingdom, and that is not our policy. As far as construction and fabrication of the hull is concerned, that has to come, as far as I am concerned, from the United Kingdom.

    Mr Carmichael

  105. If I understand what you are saying, Lord Bach, you are telling us that this situation has arisen because a clause was not in the contract that ought to have been in the contract and will in the future be in the contract. It is not your fault and you are here talking to us today. In fact, I was in practice as a solicitor before I came into the House. If I had ever put a client in a position where something as fundamental as that was missing from a contract, I could only speculate what would happen to me. It might well involve the clearing of my desk. What are you doing?
  106. (Lord Bach) Mr Carmichael, I was a barrister before I came here. I do not know which of us is in the worse position. I think your comment is really very exaggerated here, if I may say so. We are feeling our way to some extent with the large number of warship builds that there are going to be in the United Kingdom over the next number of years. We know what the policy is in terms of the building of these ships. They must be British, they must be UK as far as the construction is concerned. Companies know that as well, whether they are companies on the Clyde or companies elsewhere in the United Kingdom. On this occasion, and we regret that it has happened and I want to be absolutely frank with the Committee about that, we are not hiding or covering up here; we regret that it has happened. Our letter and what I have answered makes that quite clear. We believe that this should not have happened, whether there was a particular clause in the contract or not. It did not need the clause in the contract for this not to have happened, but it has happened. Now, in order that there should be clarity in the future, we have inserted this clause into this contract and will do so in all other shipbuilding contracts. I really do not think it is an issue in the event where you would have had to clear your desk.

    Chairman: You did make it clear in your letter and we are grateful for the fact that you responded so quickly .

    Mr Weir

  107. I appreciate what Lord Bach is saying. Maybe I am naive about how a contract is tendered for. I would have thought that in working out the tender price, the company must have taken into account where they were getting the various sections of the ship built. Would they not have known from the outset that they were going to tender some of it to Holland? What detail would you department have got on how the ship was being built at the tender process stage?
  108. (Lord Bach) I think you are a solicitor too, Mr Weir. Am I right?

  109. Yes.
  110. (Lord Bach) As I understand it, the department or the DPA knew that a contract was to be put out for this work, but did not know that there was going to be any chance of a non-UK company tendering for it, and then learnt of course that a non-UK company had not only tendered for it but had won it as well. As far as this piece of work was concerned, it was always the intention, as I understand it, of the prime contractor to put it out for contract, and we would have known about that at the time the contract was signed.

  111. You would not have not known it was going to go to a non-UK yard at that time?
  112. (Lord Bach) No, we did not.

    John Robertson

  113. Could I go back to the question I thought I was asking specifically about the Swan Hunter bit for the ALSL. As we now know, the fact is that they bid for ships for which they could not do the work. They might be able to do some of the work but not all of it. Firstly, could you comment on that? Secondly, could you take that away and make sure it does not happen again? Could you make sure that when companies actually put tenders in for MoD work, they can do the work and they can do it in Britain? Then we will know up-front if they are going to subcontract and were they are going to subcontract to.
  114. (Lord Bach) I will certainly take that away with me, but I have to say that on this contract when it was decided, Swan Hunter I think won it fairly clearly. I have to emphasise again that what we are talking about here is a very small part indeed of -

  115. There were reservations at the time that Swan Hunter could not fulfil their part of the bid. I know that from the unions who made representations. I was there at the time when Geoff Hoon was told that this company could not do the work. Geoff Hoon turned round and said that the company had informed him they could do the work. Subsequently, we find out that the unions were right.
  116. (Lord Bach) Companies can do the work, mainly by doing it themselves, but they are also entitled to subcontract in order to get the work done. That is what Swan Hunter did. I want to say that, as far as Swan Hunter are concerned, we are, on balance, pleased with what they have done with this particular contract.

    Chairman: We understand that some of the Ministers have other engagements at 1 o'clock. We aim to finish at 12.45. We are now going to look at procurement.

    Mr Duncan

  117. 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?
  118. (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.

  119. 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?
  120. (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, places competition for the later batches of that class on a strategy which allows competition for a further programme. 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. 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 number 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

  121. 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.
  122. (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.

  123. 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?
  124. (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 waiting for the historic reality of inquiring into this industry at the time when there are positive prospects such as had not existed within recent years.

    Mr Lyons

  125. 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?
  126. (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 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.

    John Robertson

  127. 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?
  128. (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. Kavaerner 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.

  129. 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 do to with MoD work?
  130. (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.

  131. The company obviously has a strategy. Does the Government have a strategy for shipbuilding?
  132. (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.

    Chairman: Can we move on and look at competitiveness and exports?

    Mr Lazarowicz

  133. This takes us on in the 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?
  134. (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 though 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 though thick and thin. Certainly from the platform on which we are now, the surviving shipyards can have a very bright future.

  135. How far do you consider that the shipbuilding industry has been brought 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 perceptive?
  136. (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.

  137. Do you think more could be done to co-ordinate the activities of government departments in this area?
  138. (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

  139. 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?
  140. (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.

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

  143. I mean within government?
  144. (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.

  145. 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?
  146. (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.

    John Robertson

  147. 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.
  148. (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. 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.

  149. 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?
  150. (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

  151. 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?
  152. (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.

  153. If you have already got a shipbuilding industry through the transfer of technology, in effect, can they then start to build warships?
  154. (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

  155. 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?
  156. (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.

  157. On a slight change of direction, you are thinking in terms of smaller shipbuilding rather than commercial and MoD work?
  158. (Lord Bach) Well, what I was referring to in terms of export, I have not mentioned commercial yet, that is really a matter for Mr Wilson not me, as far as the MoD ships, navy ships are concerned, Mrs Adams, we are not going to be selling many aircraft carriers but it is quite possible some smaller ships - offshore patrol vessels, that sort of ship, landing craft, small landing craft - might well be wanted by other countries and it may be that is where we should be looking.

    Chairman

  159. Mr Wilson?
  160. (Mr Wilson) I think it would be appropriate to mention the role of our embassies around the world.

    (Lord Bach) Absolutely.

    (Mr Wilson) We have an unrivalled network of embassies in virtually every country of the world. In many of these we have military attachés and in virtually all of them we have commercial departments who are looking for export opportunities. There are a lot of ears to the ground around the world. I do not think it is inconceivable that there would be any export opportunity in this field that the UK Government in the widest sense was not aware of and was not actively assessing. The same would go to some extent for commercial shipping. There is the network of Trade Partners UK. The section of it which deals with oil and gas also deals with shipbuilding. It would constantly be on the look-out for opportunities. There is a big crossover there. I was in Azerbaijan the week before last and while I was there on oil and gas business I picked up on an opportunity for shipbuilding which might well come to a British yard and that will be taken forward both by the DTI but also by Trade Partners UK. In addition to that we are about to give a grant, I think we have given it, to the Shipbuilding and Ship Repair Association to strengthen their marketing effort because we have also got to have salesmen and saleswomen from the industry go out there and identify these opportunities. The other thing, the caveat, as Lord Bach says, is there are many of these orders where they would not think of coming to Britain because they are looking for the cheapest solution rather than the best solution.

    Chairman: Super response indeed, Minister. Can we look still further at commercial shipbuilding.

    Mr Weir

  161. We have heard a lot about the possibility of commercial shipbuilding on the Clyde. Do you think it is possible for Clyde shipyards to compete for commercial shipbuilding orders? Do you think BAE are interested in doing so?
  162. (Mr Wilson) I must add - I have been waiting to do this - a name to this discussion. When we talk about Clyde shipbuilding, we are not only talking about Yarrow's and about Govan, let us not forget Fergusons, which does not have to diversify into commercial shipbuilding because it has never been in anything else. It is a remarkable success story and I think it should be recognised in the Committee's discussions. I think as far as Govan and Yarrow is concerned, it is very much for the judgment of BAE Systems. Clearly they have made their commitment, their business is in the defence sector, but within my recent experience they have pursued, also, a non defence order. Sometimes it will suit them to take that kind of work, sometimes it might even suit them to take it at a loss in order to maintain the skills base in between MoD orders. That would certainly have been the outcome if they had been successful with the BP order a few months ago. Who knows: if you went back five years in this business, a lot of things have changed, and if you look forward five years, who knows what kind of work we will be looking for to supplement the MoD diet on the Clyde. Certainly the techniques exist and the facilities exist to do commercial shipbuilding. I think we should remember there are a number of small shipbuilders in the UK who in spite of everything are very successful. Just to supplement what has been said about export orders, certainly as a Scot and at various times as Scottish Minister, when we are out there in the world we are marketing the UK. I would never be forgiven by the guy who runs Appledore in Devon who comes from poor Glasgow and certainly I would not be forgiven by him if I was too sectarian about this.

    Mr Carmichael

  163. The payment of subsidies, be they hidden or otherwise, we have touched on this already with Lord Bach, is this in the Government's view a fact or fiction in overseas shipbuilding industries? Are you in a position to give us concrete examples of malpractice that you have come across?
  164. (Mr Wilson) I think hidden foreign subsidies are one of the holy myths of this saga, that there always has to be someone else to blame. If I can just relate that to the oil and gas industry, again. It has always been darkly rumoured that Norway does things for its industry that we do not do for ours and nobody has ever been quite able to specify what they allegedly do. In recent weeks when it became apparent that the order for the Clair Jacket was going to go to Norway rather than to a UK yard, I commissioned some work to try to finally get to the bottom of this, for the reason that I am genuinely curious, I have been hearing it for so long that I would like to know whether it is true or false. The preliminary result of that, and I will publish the findings of this, is that it is false. The advantages to Norwegian yards do not come from backhanders from Government, they come from continuity of work and, very importantly, continuity of investment. The reason oil and gas have been more successful is that 30 years ago they very sensibly went down a policy of having a small number of yards which could then have a continuous order book. You get all the advantages from that of a planned and strategic approach. I would be very wary of an assumption - an unproven assumption - that anyone who beats us is doing it for reasons which are other than transparent. I do not say it never happens but I do not think it is the norm. On the other hand, there is the issue of Korea which is a different kettle of fish altogether. Certainly it is my view and the UK Government's view that action against Korea should have been started in the World Trade Organisation some time ago because we think there are unfair practices there.

    Mr Weir

  165. Do you think then that the United Kingdom yards are able to compete in world markets anywhere? You do not feel there are any hidden subsidies in Korea?
  166. (Mr Wilson) We think there are hidden subsidies in Korea and therefore we think that the EU should have initiated action against Korea some time ago and it has got mixed up with other issues. There is always this problem of whether you delay resolving the problem by starting a formal action or whether you proceed, and in this case if the EU had proceeded earlier they would be much further down the road now in tackling unfair competition from Korea.

  167. Is the United Kingdom Government pushing the EU to start the process?
  168. (Mr Wilson) The UK Government has been pushing the EU within the Council of Ministers for some time to do this.

  169. Is there any prospect of it happening soon?
  170. (Mr Wilson) Something happened last Friday.

  171. Korea won!
  172. (Mr Wilson) My advisers say not very much so ---

    Eric Joyce

  173. In the previous evidence session we heard in the United States that if you want to operate in US waters, including places like the Caribbean to which they refer, you had to build your civvy ship in America. That seems to be quite a restrictive practice. Is that legitimate on the one hand and is there anything we can possibly do about that?
  174. (Mr Wilson) It is called the Jones Act and it is a fairly classic piece of American protectionism. Whether there is anything we can do about it or not - It is grandfathered under the OECD and there is nothing we can do effectively.

    John Robertson

  175. Is there any case for introducing subsidies for shipbuilding within the European Union?
  176. (Mr Wilson) No, we are very much against their reintroduction.

  177. I did not ask if you were against it. I said is there a case to do it and can you do it?
  178. (Mr Wilson) It is theoretically possible but politically impossible because there would be a number of Member States in the same position as ourselves who have gone through the agonies of getting rid of subsidies who certainly are not going to want to reintroduce them. There is a proposal which is linked to the Korean issue. This is the interplay of issues. The opposition within the Council of Ministers to taking action against Korea for subsidising their industry is that some Member States want to counter Korean subsidies by introducing subsidies of our own. It is another way of tackling the same problem but we think it is the wrong way of tackling the same problem because it gets back into an auction of subsidies and a) we do not want that and b) there is absolutely no reason to think we will win under that option. We could end up re-introducing subsidies only in order for ourselves to be more effectively competed against.

  179. Part of the evidence mentioned in the previous session was the fact that Germany had used EU subsidies to upgrade their yards and that we should have done the same thing.
  180. (Mr Wilson) That was in the very special circumstances of the reunification of Germany and I think at that time there was such massive political advantage from that happening that there was a mood that there also had to be liberality in determining what the Germans could do with the economy of the former GDR.

  181. Do these rules not still exist within the EU? The one I am thinking of is if a yard diversifies into other industries then they were allowed EU subsidies to do that.
  182. (Mr Wilson) There may be circumstances in which they would apply but certainly the general movement is away from subsidies. I would be very surprised - although I will check and come back to you - if that were still an option. I think it was in relation to the particular issue of German unification.

    Chairman

  183. We will have a look at collaborative working. Has the Task Force Report led to revised practices within the UK shipbuilding industry being discussed and, if so, which might have beneficial consequences for Clydeside?
  184. (Mr Wilson) I think the existence of the Forum points in the direction of collaborative working and certainly it is very much in the spirit of the Forum to encourage companies to work together. There is no doubt that where companies work together and each ends up with a part of the contract, then everybody benefits, compared to a situation in which they compete bitterly and someone else comes through the middle and wins the whole of the contract. We are very much in favour of collaborative working. Indeed, it was one of the major conclusions of a DTI study of the Netherlands because a lot of the success of the Netherlands' industry has been due to that same approach. Yes, there are individual companies but there is also a collective entity which is the Netherlands' industry which is prepared to work together. It is rather like the pilot metaphor I was using where companies can find ways of working together while maintaining their commercial rivalry.

    Chairman: Thank you very much. Can we move on to skills and training. Eric?

    Eric Joyce

  185. I think this is probably a Scotland Office question although it strikes me that some of this stuff would be devolved. About 20 per cent, as I understand it, of the employees in the shipyards are over 56 so they are going to fade out in due course and the company will need, as BAE Systems gave evidence earlier, to attract new people in by up-skilling them. From my modest knowledge of the private sector, they tend to want, understandably, to cut the training to the bone so that people are fit for purpose for doing a very specific thing within their company. Are we confident that at the moment the workforce is being given additional training one way or another, through the company, perhaps through assistance from government agencies, to ensure that they are both flexible within the company and within the market and, indeed, within the wider economy?
  186. (Mrs McGuire) You are maybe aware that the Task Force has undertaken a skills audit and that work is on-going at the moment. I understand that the DTI is creating a database of the skills that are available. Obviously the unions are very, very keen on us investing to upgrade the skills. You have identified a clear issue there that as the workforce gets older we have to reinvigorate and refresh and perhaps establish new skills for those who are younger. We have certainly been working with the Task Force to encourage that skills audit. You are right, some of that work has been undertaken by the Scottish Executive and links into ourselves or the Task Force.

    (Mr Wilson) If I can confirm that. One of the major areas of concern for the Task Force was that this is an ageing workforce and that if new people are going to be attracted into it there has to be both an upgrading of skills and also a long-term future in the industry. It is correct that the DTI, working with the Department of Education and Skills, has just signed a contract to compile a database of workers in the shipbuilding and related industries, which again includes oil and gas, and that will give details of the age, address, CVof workers and that will be generally available within the industry. Also they are working with the MoD and it will be possible to link skill shortages which the MoD is encountering with the database, and hopefully that approach will lead to men being matched with jobs.

    (Lord Bach) Could I just say a word, with your permission Chairman, the Rand Corporation, a non-profit, American corporation that looks into defence matters - they are the ones that had a big say in our type-45 procurement strategy - are involved in work to assess the shipbuilding strategies of the two competing aircraft carrier prime contractors. They have visited the prime contractors, been to the shipyards which could be involved (and that obviously involves the Clyde) in aircraft carrier construction. They are analysing their data. They are going to report their findings both to the MoD and to DTI later this summer. That will help us decide who wins that particular contract. Much more important than that in the sense of this question, it will assist in establishing the skills that will be required to support the large aircraft carrier programme and other programmes that Mr Wilson and Mrs McGuire have been talking about .

    (Mrs McGuire) The timing of all this is vital because the skills assessment is currently on-going and we have to make sure we do not lose the opportunity when the next tranche of work comes on-stream.

    Chairman

  187. You will be glad to know that we have come to the last question and I would ask you all to get your crystal balls out. Lord Bach touched on it earlier about the future of the Clyde. Can you give us what your assessment of the future of employment in shipbuilding on the Clyde might be?
  188. (Mr Wilson) I think everything we have said and I am sure everything you have heard from BAE Systems points to the fact that there is now a more stable platform for security and growth than there has been in many years, and therefore I would take an optimistic view. I think maybe the most significant thing about the Task Force was the way the stewards who were on the Task Force came round to that view as well, albeit with some doubts from Yarrows because they are so dependent on export orders. They realise that although they had shed jobs (and at the end of the day it was fewer jobs than had been feared) that once that hump was got over, there was then ten years of work there. There are not many industries and certainly it is a novelty fo shipbuilding in my experience to be able to say there is ten years of work there. Therefore I have every reason to be optimistic. I want that optimism to include Fergusons because I think it is tremendously important that we maintain a merchant shipbuilding capacity on the Clyde hopefully and also for growth in the future.

    (Lord Bach) I agree with everything Mr Wilson has said. From an MoD perspective we have placed a considerable amount of work with Marine Clyde Shipyards recently. I repeat what I am sure you have heard many times before, no shipyard can depend on MoD work alone and we expect the company which runs these yards to be rigorous in its search for other customers. From an MoD perspective, of course, I must say this: there are several good warship builders around the UK and obviously the MoD must treat all parts of the industry on a fair and equitable basis. I know that is what the Committee would expect me to say. It does look good in the future, as Mr Wilson says. I think the Committee should look ahead of the next ten years, with respect. That is the time when a feast is sometimes followed by famine. It would be very sad if that happened in this case.

  189. Unusual as it is, we will let the woman have the last word!

(Mrs McGuire) I obviously do not disagree with any of the sentiments that have been expressed before, but I think the Clyde is in a good position. Historically, 12 out of the 16 type-23s are Clyde-built and two out the five serving type-22s are Clyde-built but, in saying that, we cannot afford to rest on our laurels. There is a good solid baseload of work there from the MoD but the export market is still vital and certainly that is a role that The Scottish Office will look forward to playing in encouraging the exports and also in highlighting the opportunities abroad for very good, skilled Scottish shipyards.

Chairman: Thank you very much indeed, Mrs McGuire. Ladies and gentlemen, can I thank you very much for coming along this morning and for giving us very full and frank answers and for co-operating with us in this inquiry. We are very grateful to you and we are sure that your evidence will be very useful to us when we come to compiling our report. Thank you very much.