Examination of Witnesses (Questions 1
THURSDAY 25 APRIL 2002
Chairman: Sir Robert and Mr Coles, welcome
to our annual joust. We are playing at home today as opposed to
travelling at exorbitant cost to Bristol. I am surprised you have
any visitors in Bristol with the price of the tickets. You know
we have three sessions dealing with our major procurement projects
inquiry and this is the first of the three. The Minister will
be coming at the third session. We will finish at 12.30. If you
wish anything to be said in private, because I know there are
a number of sensitive issues, not necessarily in terms of national
security but things that are commercially confidential, please
indicate you would prefer to answer those questions in private
and we can set aside the last 10 or 15 minutes for a private session.
Mr Jones: Just to declare my interest
in terms of the register of members' interest, I am a member of
the GMB trade union and they did sponsor my election campaign
Syd Rapson: I have an interest to declare
being a member of the ACEU Amicus union which potentially might
have an interest in the yards affected by the warship reorganisation
programme. I represent Portsmouth North so I have a direct emotional
interest but no financial interest. I should explain that this
is a depleted Committee. Some Honourable Members are on proper
business elsewhere but two in particular have chosen to stay on
the Council of Europe in the European Union. I was a member of
that body and my policy determines that you cannot be on both
the Council of Europe and the Defence Committee. Defence is an
important Committee and I had to make a choice. Unfortunately,
we have had four sessions of this Committee this week. This is
our fifth. For Members to choose to be on other parliamentary
duties at will when there are substitutes for them, I think it
is a sad reflection.
1. Thank you. We have a maritime flavour to
our session today. Later on we will be discussing the warship
support modernisation initiative with implications for the support
of ships once in service. First of all, I would like to examine
possible changes that may arise on the warship procurement side.
The study on warship procurement that you commissioned from RAND
appears to have major ramifications, not just for the Type 45
destroyer but for many of the MoD's warship programmes into the
future. When will the report be published? I hope we have an advance
copy because we send advance copies of our reports to the Ministry
of Defence. It will be kept confidential until the time of publication.
Secondly, Sir Robert, what do you think are the major messages
or lessons at this stage for the way that the MoD goes about warship
procurement emerging from that RAND study? Linked to that, what
makes shipbuilding so different from other defence industries
that it requires its own strategy? RAND; difference between shipbuilding
and lessons emerging at this stage in time from the RAND study.
(Sir Robert Walmsley) I know that you appreciate crisp
answers. I am afraid the scope of the questions you have asked
me is going to make that rather difficult.
2. If there is anybody behind you that could
add anything, please feel free.
(Sir Robert Walmsley) I am sure they could add plenty.
They are here to support me and particularly to correct anything
I say that is factually wrong because there is quite a lot of
information to try to recall. The first question was when did
we institute the RAND study.
3. No, but we would like to ask that also.
(Sir Robert Walmsley) Last spring. We did it because
we could see that the Type 45 procurement strategy was not delivering
results. I think it is reasonable for me to outline what was going
wrong. We placed the prime contract with BAE SYSTEMS for three
ships and associated contracts for the major equipment for six
ships in December 2000. That had a design office established at
Scotstoun in the Yarrow shipyard on the Clyde. That prime contract
office had staff from both Vospers and BAE SYSTEMS in it and they
were working harmoniously together. The purpose of having both
shipyards present there was to ensure, as the design developed,
that neither shipyard was excluded as a result of being asked
to lift too great blocks or whatever. The design was to be well
adapted to the construction techniques of both shipyards. At December
2000, the design maturity was such that there could be no very
specific shipbuilding subcontract placed by the prime contract
office on either Vospers or BAE Marine. Since we placed the prime
contract in December 2000, it is not surprising that the design
maturity was not tremendous. What we were looking for is what
is called a risk sharing agreement between the prime contractor,
BAE SYSTEMS, at corporate level, and each of the two shipyards,
BAE SYSTEMS Marine and Vospers. That would require them to take
a risk at the shipyard that work had to be added to the specification
as presented to them early in the year 2001. We were unable to
persuade the prime contract office and the shipbuilders to share
that risk. That meant the strategy was going nowhere in the spring
and we had to decide whether our ideas for competition were right
or whether we were, as I think I have been accused of doing in
the past, flogging a dead horse.
4. Or flogging it to France.
(Sir Robert Walmsley) That thought had not occurred
to me but I understand why you make the point. Sometimes when
you have been pursuing an idea for a long time, which was essentially
to build ship one and three on the Clyde with bits from Vospers
who would also build ship two, and then to have a winner takes
all competition for subsequent ships, you do get stuck. I have
been very impressed by the RAND Corporation, which is a non-profit
making California based think tankperhaps not a very good
advertisement in your eyesand the work they have done for
the United States Department of Defense during the year 2000 on
whether or not it makes sense to introduce competition into the
Joint Strike Fighter programme, clearly a matter of huge interest
to the US DoD and indeed to us. I understood something of how
this work was conducted because RAND had included me amongst the
people they had extensive discussions with. I was impressed with
the people, with their business models that they used to assess
whether competition was a good idea or not and when RAND Europe
was established in spring 2001 I picked up the telephone and asked
if they could send the same people to give us some advice on the
Type 45. That is where this all came from. Were we stuck on a
competitive procurement strategy? Was it a good idea? There was
one group of people, who are very good value because they are
non-profit making, with experience of assessing head to head competitions
and whether they deliver value.
5. The specialists from RAND in Santa Monica
and Washington then supplemented the RAND Europe staff because
the expertise was in the United States, I presume?
(Sir Robert Walmsley) That is exactly right. RAND
Europe were the contracting vehicle. It is much more attractive
for me to do business with a European company. We wanted the American
expertise to be US based, computer business models which showed
what competition essentially does for you.
6. When will this report be published?
(Sir Robert Walmsley) The report was prepared on the
basis of interviews with five UK shipyards, BAE SYSTEMS Marine,
Vospers, Appledore, Harland & Wolff and Swan Hunter. Each
of them agreed to give commercially confidential information.
We have just this week had the replies back from the shipyards
as to what information they would require excised from the report
or sanitised in some way before it is published. It is now in
our hands, the timetable. I am chancing my arm because we have
not had time to look at the volume of all these comments. It will
be published long before the parliamentary recess and placed in
the House of Commons library. It is fewer than 100 pages long.
I think it is a good read and it has a lot of commercially confidential
information that we have to comb through and get rid of.
7. I do not know when it will be published or
what our timetable is but as it is going to be such an important
report I hope we can have some opportunity of meeting you, formally
or informally, to discuss the report and which parts of it you
are going to accept. What will be the transition from these recommendations
to policy being devised and decisions being made?
(Sir Robert Walmsley) Some of the decisions which
this report was intended to help us frame have already been taken,
most obviously the Type 45. Because I knew this was a critical
point, I wrote down the conclusion of this amazing body of work
which has caused some wry smiles amongst those who have been outside
it, but I found very reassuring. This is RAND speaking: "We
estimate there is roughly an even chance that competitive production
of a Type 45 at two shipyards would yield about the same overall
cost as sole source production at one shipyard. There is no definitive
answer as to whether competitive or sole source production would
likely lead to lower costs."
8. How much did that brilliant piece of analysis
cost you? You could have worked that out yourself and saved money.
I have not read the report but that seems to be classic Civil
Service language saying the decision is over to you.
(Sir Robert Walmsley) If you compare that with the
robustness of their conclusions about the Joint Strike Fighter
where they were absolutely against the introduction of competition,
I found this slightly reassuring because we have persuaded ministers
that a competitive strategy was good, partly to not put all your
eggs in one basket and partly we thought it would probably lead
us to lower costs. Here were RAND validating that initial strategy,
not saying it was obviously right, but certainly not saying it
was wrong. We were still stuck with the same problem as we had
before. The RAND report went on: "Allowing each shipbuilder
to build the same section of blocks of all 12 ships not only keeps
both companies involved in building warships but also takes maximum
advantage of the lower production man hours due to learning."
RAND did the studies and that was the key to unlocking the Type
45 build strategy which I think you know moved from being a head
to head competition between Vospers and BAE SYSTEMS for ships
following ship three, which would potentially lead us into a situation
where the loser went out of the warship building business into
allocating the same blocks from each of up to 12 ships to specific
shipyards. The strategy we now have soundly based on this RAND
quantitative, data based study is that Vospers will build virtually
all the ship forward of the bridge, both masts, the funnel and
the upper works. Barrow will build the engine rooms and, after
ship one, will do the assembly and Clyde will do the stern and
the ops room.
9. It seems like a T&G commission.
(Sir Robert Walmsley) That is the reason why it is
so important to have numbers underpinning our conclusion that
this was an economical way of approaching the Type 45 programme.
It still took quite a bit of negotiating with the shipyards but
I felt comfortable that we were not flogging a dead horse of head
to head competition and that we had a strategy which looked a
good way of keeping two companies in the warship building business.
10. What about the other shipyards? Did the
strategy give any encouragement that there will be more than two
(Sir Robert Walmsley) Probably not. I do get contacted
by other shipyards from time to time but I draw a distinction
between a destroyerthe complexity density of a destroyer
I would say is higher than of any other ship, other than a nuclear
powered submarine. That means that warship building skills are
absolutely critical to these. I think they are called surface
combatants now. The situation we have therefore is that we have
to retain shipyards with these special warship building skills,
outfitting, weapons SYSTEMS, lots of computers etc; whereas the
other three shipyards consulted, Swan Hunter now engaged on building
the ALSLs, the logistic ships, Appledore building survey ships
under subcontract to Vospers and Harland & Wolff building
two roro ferries, instinctively they are completely different
types of ships. Survey ships do have complicated echo sounders
but apart from that no weapons. The other ships are effectively
11. What makes shipbuilding so different from
the other defence industries so that it needs its own strategy?
(Sir Robert Walmsley) A number of features. The first
one is not an analytic one. The word "emotion" has already
been used this morning. There is no question that people feel
a loyalty to shipbuilding that is not felt with car factories
or aeroplane factories. Do not ask me why. Perhaps ships being
called "she" is an indication of how people feel about
them. Second, there is no reciprocity in the shipbuilding industry.
I have not yet seen a foreign country with a shipbuilding industry
being prepared to seek tenders from the United Kingdom to build
warships. I do not find it very easy to contemplate giving them
the opportunity to build our warships if there is no possibility
of reciprocity on shipbuilding. I accept that that answer is somewhat
conditioned by my first answer. The third point, which is a more
analytical point, is that the design content of a ship build is
low, relative to the unit production cost roughly speaking equal,
whereas the unit production cost of an aircraft is far less than
the design cost. We have been forced with aircraft programmes
and missile programmes where there are very large, development
contracts to go into international collaboration, to share the
non-recurring costs. There is no real incentive to share the non-recurring
costs of a ship design because the design costs are so much less.
I am trying to create the impression that in many of our other
defence industries, we have been dealing in international business
and that forges international, industrial relationships which
tends to encourage this international type of procurement. A final
point is security. Integrating a warship's weapon equipment does
require absolute disclosure of performance of all the subSYSTEMS.
A lot of trade offs have to be done. Should we have a bigger gun
or a more effective missile system because we cannot have both
because there is not the space in the forecastle of the ship.
Those types of discussions are simpler and therefore more efficiently
conducted with national contracting authorities. None of those
is a clear cut, black or white answer but they are factors which
have influenced it.
12. Sir Robert, I do not envy your task because
the situation the warship industry finds itself in now is as a
direct result of the decisions taken in the eighties in terms
of procurement, in terms of ending up with one main contractor.
When I was involved with Swan Hunter we felt the effects of that
in terms of Swan Hunter being taken out of the warship building
industry and it is interesting now that they should get back into
it. I accept what you say about BAE SYSTEMS being our prime contractors
contracting for warships and the nature of the industry these
days. I remember the days where a shipyard was awarded a contract
and it got everything from building it all the way through to
putting light bulbs in. Those days have gone now. You are possibly
talking about coordination between a number of defence contractors
actually building a large warship these days. You are trying to
get competition CVF which I know the Chairman has a down on but
BAE SYSTEMS are not a British owned company any more. What you
are trying to do in terms of subcontracting work around the countryis
that not a way of keeping the capacity going especially because
the nature of some of the contracts you have now is you can build
a module here and hook them together as a way of keeping that
competition going in terms of keeping the yards like Swan Hunter
and Vospers working. I think we should take this into consideration
as well, the jobs implications not just for Swan Hunter but for
all these shipyards in terms of sharing the work around so you
can have one prime contract but a lot of work could be done in
different yards around the country.
(Sir Robert Walmsley) There is a lot in that. It is
hard to give a quick answer. First of all, sharing work around
as a simple concept is not a good idea unless you can demonstrate
the benefit of doing so. It nearly always leads to fixed overheads
being attributed to thinner streams of work which adds to the
aggregate, overall cost. The RAND study took account of those
effects. It was very clear that manufacturing the same blocks
in a shipyard for a whole class of ships did give this learning
curve improvement. Sharing it around has to be done in a very
determined way with a clear strategy behind it.
13. It is quite common in the oil industry,
is it not?
(Sir Robert Walmsley) I have spent some time on the
oil rig construction industry. It remains a bit of a mystery to
me and I sometimes think a bit of a mystery to some of the people
engaged. They take their decisions for their own reasons and they
are hugely influenced by the timetable for starting production
which is when they start to get their money back, so they will
do things in order to shorten time to production starting. I do
want to get across the idea that none of this is intended to dilute
my own commitment to competition. Competition stimulates innovation
as well as grinding out costs. There is something there about
looking for better ways of doing things. What is difficult for
me to do is to rationalise an idea that we are prepared to forego
competition todaythat is to say, keep the work spread outin
order to generate the possibility of competition at some stage
in the future. That is denying yourself something you want in
order to retain a possibility of having it in the longer term.
I admit that sitting behind this strategy that we are adopting
for the Type 45 lies the concept of a different type of competition
which is a competition for ideas which says, "If he is producing
constructed warships for far fewer man hours per tonne than you,
why should we go on giving our business to you?" That provides
an incentive even with distributed work for both shipyards to
continually improve their performance.
14. Is not the ultimate aim that you end up
taking capacity out of the industry like Swan Hunter and you have
invested huge amounts of money in Swan Hunter and they are in
a position where they can tender for work. They cannot do what
Swans used to do in terms of design teams, but I know there is
a tightrope in terms of competition to make sure you have capacity
but if you over egg the competition too much is not the danger
that you end up where you are now? You will only have one or two
yards who can provide it.
(Sir Robert Walmsley) It is not likely to be cost
efficient to distribute the work in a carefree fashion. We do
not need more capacity than the capacity that we are currently
going to use for the Type 45. There is no particular advantage,
it seems to me, for the Ministry of Defence artificially maintaining
capacity which just generates costs. I still come back to not
putting all our eggs in one basket being a good thing. I can see
the point of having two people involved in warship building but
I do not see any advantage in retaining more than two. These both
are commercially strong companies. We would not have shared the
work out between two companies who were not commercially capable
of sustaining the warship work. I am a great admirer of Mr Kroese
at Swan Hunter but he has not invested significant sums of money.
He is so successful because he invests extremely small sums of
money to deliver huge productivity improvements. I have been very
impressed by the fact that he has used shipyard workers to build
the new dock for the building of the ALSL. Digging a hole for
himself is how he sometimes puts it and using his own money. When
you are using your own money, you do not invest huge sums of it.
You hire in etc. I am very impressed with what is happening at
Swan Hunter, but that is not creating a warship building capability
in the round in terms of design offices.
15. Coming from Portsmouth, we have a different
view of the process and we are very grateful for the RAND study
and the outcome. We were championing Vospers and they have a fair
slice. We are very pleased. I am coming from an attitude of gratefulness.
The RAND study has gone into some depth about taking up competition
in a certain way which is fairly unique. It appears to be for
the present. Is there in future going to be a reimposition of
competition if you can see that would make things better, or are
we going to be using the RAND proposals as a backdrop for everything
we do in the future? Is it completely black and white?
(Sir Robert Walmsley) I would not rule out reverting
to competition for some ship production. If we wanted cargo ships
for the Navy, I imagine that you could see Swan Hunter, Appledore
or Harland & Wolff being able to bid to do that. We would
think very carefully before we decided not to use competition.
It does stimulate innovation and drive costs out. People find
new ways of doing things. For warships, as a result of the Type
45 strategy, I cannot remember a time when there has been a longer
running contract placed with either Vospers or other marine yards.
They have certainty on which to plan because we should remember
that we have the biggest Navy in Europe but we are by no means
the biggest exporter of warships, surface or submarine, in Europe.
This is a challenge for the shipbuilding industry. We should be
doing better in terms of securing warship export business. The
Type 45 gives a platform and both companies can look for a certain
future from the Ministry of Defence over a long period. Of course
there will be some uncertainty about it but the Type 45 should
be enough to help launch some export programmes. I very strongly
believe that we should be able to do better in that respect than
we do currently.
16. There is 60-odd per cent over capacity in
shipyards, as I understand it from a recent study. That is an
enormous over-capacity. I know we are guessing but competition
involvement in the future might be able to cope with that. There
seems to be an enormous over-capacity which cannot be resolved
other than by reducing the employees by a vast amount in this
structure. You think the competition might be able to still keep
people employed with that over-capacity?
(Sir Robert Walmsley) The difficulty I have with that
is that competition does not keep the loser employed. If you allow
competition to kill off one of two effective companies, then you
have no competition for ever. The Type 45 strategy retains an
element of competition, a needle if you like, between two yards,
each of whom are trying to perform better than the other, without
putting them into a head to head, winner takes all, loser disappears
situation. I think it is quite constructive. The same problems
are arising in the United States and they have not solved them.
The same problems are arising in other countries. We are all trying
to face up to this issue. It does mean that the capacity is more
distributed than it probably would be if you wanted to go to one
set of overheads, pushing everything through one yard, but I do
not feel comfortable with having all my eggs in one management
17. Your memorandum acknowledges that the unsolicited
BAE proposal for them to build all 12 Type 45s would have been
cheaper than the strategy that you finally adopted. We are very
interested to know why you came to the decision you did and why
you rejected their original proposal.
(Sir Robert Walmsley) Two reasons, one of which is
a straightforward, commercial one. The unsolicited proposaland
it genuinely was unsolicited; it was a very unwelcome complication
in our lives at the timeattached certain conditions about
other programmes in order to generate the cost savings. This was
an absolute compendium of how, if virtually all warship building
activities for ever and a day went into BAE SYSTEMS Marine, everything
would be great for us in the long term. Attaching those conditions
to it really was signing up to quite a major shift in our policy
which was to distribute warship building for competition reasons
and also, for the strategic benefit of , just having two groups
of people engaged in the same activity. The first thing was there
were conditions attached to it which looked very unattractive
to us in the long term. The second point is that if you look at
Barrow, which was going to carry a far greater component of the
Type 45 programme than it is currently going to do under this
strategy which puts quite a lot of work on the Clyde, there was
going to be enormous congestion in the shipyard between pieces
of Type 45 destroyer going to Devonshire Dock Hall and pieces
of nuclear powered submarine and quite a small clearance between
them. There is nobody that I know who is a bigger expert on congestion
in Devonshire Dock Hall than Mr Coles. It did not look to me or
anybody who knew anything about defence programmes that either
Astute or Type 45 would not have to have much of a hiccup for
the whole place to come to a grinding gridlock.
(Mr Coles) In relation to the Trident programme, because
the pieces came in at the end, any disruption to production brought
the whole thing to a standing start because you could not move
things around. We used to plan in those days 18 months ahead where
pieces would be to ensure that production would flow. If you bring
on top of that a larger vessel, the chances of having a hiccup
and not being able to fix it can mean the whole thing comes to
a grinding halt.
18. If it is all clogged up, should you have
moved there in the first place?
(Mr Coles) You need to have your throughput planned
meticulously and thoroughly and have some give in the system;
otherwise, you are blocked up for ever, or for a long time.
19. Why have you only extended the first batch
to six vessels? Would not prices be lower for a larger batch of,
say, the whole 12 vessels?
(Sir Robert Walmsley) They certainly would but the
flexibility of the defence programme would therefore have been
seriously reduced. We have the conditions for pricing the ships
beyond ship six very carefully linked to the productivity that
we have secured in this first order. We have some of the benefits
that you have hinted at but the consequence of ordering 12 sets
of the missile system equipment, 12 radars right now, when we
have not seen one working yet is a big thing to do. By going for
six ships, we have given economies of scale and by locking in
the productivity on the second six that will work well.