Defence: Aircraft Carriers and UK Shipbuilding

Lord Astor of Hever Excerpts

Wednesday 6th November 2013 Lords Chamber

[The Parliamentary Under-Secretary of State, Ministry of Defence (Lord Astor of Hever) (Con)]

My Lords, with the leave of the House, I shall repeat a Statement made in another place by my right honourable friend the Secretary of State for Defence. The Statement is as follows.

“With permission, Mr Speaker, I would like to make a Statement on the future shipbuilding programme for the Royal Navy, and in particular the aircraft carrier project. As the House will know, the previous Government entered into a contract with the Aircraft Carrier Alliance, an industrial consortium led by BAE Systems, to build two 65,000-tonne aircraft carriers—the largest ships in the Royal Navy’s history.

In SDSR 2010, the incoming Government, faced with the challenge of dealing with a £38 billion black hole in the MoD budget, were advised that under the terms of the contract it would cost more to cancel the carriers than to build them. The Public Accounts Committee subsequently described that contract as “not fit for purpose” and identified in particular the misalignment of interests between the MoD and the contractors, manifested in a sharing arrangement for cost overruns that sees, at best, 90p of every £1 of additional cost paid by the taxpayer and only 10p paid by the contractor as the root cause of the problem.

I agree with the PAC’s analysis. In 2012 I instructed my department to begin negotiations to restructure the contract to better protect the interests of the taxpayer and to ensure the delivery of the carriers to a clear time schedule and at a realistic and deliverable cost. Following 18 months of complex negotiations with industry, I am pleased to inform the House that we have now reached heads of terms with the alliance that will address directly the concerns articulated by the PAC and others.

Under the revised agreement, the total capital cost to the Ministry of Defence of procuring the carriers will be £6.2 billion, a figure arrived at after a detailed analysis of costs already incurred and future costs and risks over the remaining seven years to the end of the project. Crucially, under the new agreement, any variation above or below that price will be shared on a 50:50 basis between government and industry until all the contractor’s profit is lost, meaning that interests are now properly aligned, driving the behaviour change needed to see this contract effectively delivered.

The increase in the cost of this project does not come as a surprise. When I announced in May last year that I had balanced the defence budget, I did so having already made prudent provision in the equipment plan for a cost increase in the carrier programme above the £5.46 billion cost reported in the major projects review 2012, in recognition of the inevitability of cost-drift in a contract that was so lopsided and poorly constructed.

I also made provision for the cost of nugatory design work on the “cats and traps” system for the carrier variant operation and for reinstating the ski-jump needed for STOVL operations. At the time of the reversion announcement, I said that these costs could be as much as £100 million. I am pleased to tell the House that they currently stand at £62 million, with the expectation that the final figure will be lower still.

Given the commercially sensitive nature of the negotiations with the Aircraft Carrier Alliance, I was not able publicly to reveal those additional provisions in our budget, since to do so would have undermined our negotiating position with industry. However, the MoD informed the National Audit Office of the provisions, and it is on that basis that it reviewed and reported on our 10-year equipment plan in January this year. I am therefore able to confirm to the House that the revised cost of the carriers remains within the additional provision made in May 2012 in the equipment plan, and that as a result of this prudent approach the defence budget remains in balance with the full cost of the carriers provided for, and that the centrally held contingency of more than £4 billion in the equipment plan that I announced remains, 18 months after it was announced, unused and intact.

In addition to renegotiating the target price and the terms of the contract, we have agreed with the Aircraft Carrier Alliance to make changes to the governance of the project to better reflect the collaborative approach to project management that the new cost-sharing arrangements will induce, and to improve the delivery of the programme. The project remains on schedule, with sea trials of HMS Queen Elizabeth in 2017 and flying trials with the F35 commencing in 2018.

Overall, this new arrangement with industry will result in savings of hundreds of millions of pounds to taxpayers, and I pay tribute to the team of MoD officials, led by the Chief of Defence Matériel, who have worked hard over a long period of time to deliver this result.

In reviewing the carrier project, we have also reviewed the wider warship-building programme, within the context of the so-called terms of business agreement, or TOBA, between the MoD and BAE Systems, signed in 2009 by the previous Government. As the House will know, we remain committed to the construction of the Type 26 global combat ship to replace our current Type 23 frigates, but the main investment approval for the Type 26 programme will not be made until the design is more mature, towards the end of next year. There is, therefore, a challenge in sustaining a skilled shipbuilding workforce in the United Kingdom between the completion of construction of the blocks for the second carrier and the beginning of construction of the Type 26 in 2016.

Under the terms of the TOBA, without a shipbuilding order to fill that gap, the MoD would be required to pay BAE Systems for shipyards and workers to stand idle, producing nothing, while their skill levels faded. Such a course would add significant risk to the effective delivery of the Type 26 programme, which assumes a skilled workforce and a working shipyard to deliver it. Therefore, to make best use of the labour force and the dockyard assets for which we would anyway be paying, I can announce today that we have signed an agreement in principle with BAE Systems to order three offshore patrol vessels for the Royal Navy, based on a more capable variant of the River Class and including a landing deck able to take a Merlin helicopter.

Subject to main gate approval in the coming months, these vessels will be constructed on the Clyde from late 2014, with the first vessel expected to come into service in 2017. The marginal cost of these ships, over and above the payments the MoD would have to make anyway to keep the yards idle, is less than £100 million, which will be funded from budget held within the equipment plan to support industrial restructuring. The order is good news for the Clyde, sustaining around 1,000 jobs as the carrier construction work reaches completion, securing the skills base there and ensuring the ability to build the Type 26 frigates in due course, while turning the MoD’s liabilities under the TOBA into valuable capability for the Royal Navy.

Turning to the final part of this Statement, the House will be aware that this morning BAE Systems has announced plans to rationalise its shipbuilding business as the surge of work associated with the carriers comes to an end. Regrettably, that will mean 835 job losses across Filton, the Clyde and Rosyth, and the closure of the company’s shipbuilding yard in Portsmouth. The loss of such a significant number of jobs is, of course, regrettable, but was always going to be inevitable as the workload associated with the carrier build comes to an end. I pay tribute to the men and women on the Clyde and in Portsmouth who have contributed so much to the construction of the Royal Navy’s warships, including, of course, the Queen Elizabeth class carriers. BAE Systems has assured me that every effort will be made to redeploy employees and that compulsory redundancies will be kept to a minimum. The company is now engaged in detailed discussions with the unions representing the workforce in Portsmouth and on the Clyde.

I know that the loss of shipbuilding capability will be a harsh blow to Portsmouth, and the Government and the city council, together with Southampton, are in discussion about a package to support the regeneration of employment opportunities in the area. As part of these discussions, I can announce that Admiral Rob Stevens, former chief executive of the British Marine Federation, will chair a new maritime forum to advise the Solent LEP on its maritime vision.

Despite the end of shipbuilding activity, Portsmouth will remain one of two home ports for the Navy’s surface fleet and will continue to undertake the vital support and maintenance work that sustains our most complex warships, including the Type 45 destroyers and, of course, the aircraft carriers. Indeed, with both carriers based in Portsmouth, the tonnage of naval vessels based in the port will be at its highest level since the early 1960s, sustaining some 11,000 jobs in total in the dockyards and related activities. To support this level of activity, I can announce today an investment of more than £100 million over the next three years in new infrastructure in Portsmouth to ensure that the carriers can be properly maintained and supported.

The chair of the Public Accounts Committee has previously described the carrier programme as,

“one of the most potent examples of what can go wrong with big projects in the public sector”.

That is the legacy that this Government inherited: a carrier contract that was “not fit for purpose” and a TOBA that would have required the MoD to pay BAE Systems to do nothing while our shipbuilding skills base faded away. These announcements today put that legacy behind us; secure the future of British warship building; set the aircraft carrier project on a new path, with clear alignment between industry and the MoD; and deliver important new capability in the form of OPVs for the Royal Navy. I commend this Statement to the House”.

My Lords, that concludes the Statement.

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[Lord Astor of Hever]

My Lords, I also pay tribute to the employees of BAE Systems and their families. I congratulate them on the excellent warships that have been built. The job losses are obviously bad news and our thoughts are, as the noble Lord said, with those affected and their families. It comes as we pass the peak of naval shipbuilding on the carriers. We have worked closely with the company to manage the impact of the losses.

Our priority is to do all we can to secure jobs for people in Portsmouth and on the Clyde. We will set out how we intend to do this once the company has set out its plans. We are in very close touch with BIS to discuss the opportunities. As the Statement said, BAE Systems has assured us that it will look first to deploy members of the staff affected to other areas of its business.

The noble Lord touched on the £38 billion black hole, and we can debate this. The Secretary of State, in the Statement in the other place, has offered to write to the shadow Secretary of State. I am very happy to write to the noble Lord, or send a copy of the same letter to the noble Lord, setting out the position on the £38 billion black hole—the difference between the available budget and the commitments that were entered into.

The noble Lord asked about BAE Systems and the trade unions. I can confirm that serious discussions are taking place at the moment. He asked if both carriers will be fully operational. That will be for the SDSR in 2015 to decide. My own personal view is that I would very much like to see both carriers operational, as the Secretary of State said in the other place, so that when one carrier goes in for refit the other is available and can use the crew from the other. However, that is not for this coalition to make a decision on. The noble Lord asked if I could give a guarantee that there will be no further rises. I cannot give that guarantee. As the Statement said, any increase will be shared on a 50:50 basis.

The noble Lord welcomed the OPVs. They will be used for fishery protection, counterpiracy and, among other things, protection of the overseas territories.

The noble Lord asked me about Scotland. I can say, first, that decisions were taken in Britain’s—the United Kingdom’s—best interests. There is no politics in this: it is absolutely in Britain’s best interests. He asked about safeguards if Scotland leaves the United Kingdom. We are not planning on that happening.

Final decisions on the build location have not yet been made on the Type 26 and it would be speculation at this point. Should Scotland decide to separate from the United Kingdom we are sure that companies there would continue to make strong bids for UK defence contracts. However, they would then be competing for business in an international market and would be eligible to bid only for contracts that were open for competition from outside the UK. They would no longer be eligible to bid for these contracts that are subject to exemptions from EU procurement rules to protect essential national security interests and are therefore placed or competed within the United Kingdom. I can also say that, with the exception of the world wars, we have not built a warship outside of the United Kingdom and we do not intend to start now.

The UK has a number of commercial yards involved in the building of military warships which have been involved in the building of these carriers. It is recognised that these yards would need additional investment to enable them to participate in the building of the Type 26.

I hope that I have covered all the noble Lord’s questions but if I have not, I will certainly write to him.

[Lord West of Spithead (Lab)]

My Lords, I am saddened but not surprised by the tone of this announcement. My main reason for that is that there is not a single mention of strategic or operational requirements. My noble friend Lord Rosser mentioned that the Statement said that the Government looked at this and asked whether it would cost more to cancel the carriers than to build them. I would absolutely hope that the reason we build something like a carrier is that we need them for our nation’s security, which we do. There is no reflection of that anywhere in the Statement, or of the sovereign requirement for a shipbuilding capability. We do not build ships for admirals to play with in the bath; there is actually a requirement for them. That is why we do it. Was there any discussion in the National Security Council, of any length—I would like to know how long, if the Minister can tell me—about the strategic requirement for a sovereign shipbuilding capability within this country? It is widely understood that the 19 escorts, which is all we have, are too few in number. Therefore, we will hopefully at some stage start to build more. Is one building stream in Scotland enough to cover that? I do not think that it is. Has this been debated and looked at? It certainly was not touched upon in this paper.

[Lord Astor of Hever]

My Lords, we must face up to the fact that the coalition Government inherited a much smaller Navy from the noble Lord’s Government. On the operational requirements, the First Sea Lord came to see me this morning and has offered to brief Peers on how he sees these carriers being used. I quite agree with the noble Lord, Lord West, that we need the carriers. They are built to be used.

[Lord Palmer of Childs Hill (LD)]

My Lords, when the cost of building two new aircraft carriers is set to rise by £800 million to £6.2 billion, Harry Truman’s adage, “The buck stops here”, is bound to be inverted. We have heard this in recent exchanges. The coalition Government blame the previous Labour Government; indeed, the contracts in my view and that of many experts, were flawed because the contractor only has to pick up 10% of the overrun. The Ministry of Defence and the Secretary of State must be complimented on negotiating for the overrun costs to be spread at 50/50 between both. However, I note in the repetition of the Secretary of State’s speech that the arrangement is to go on until the contractor’s profit is lost overall. I think we need some more meat regarding how that profit is to be calculated, because there are many ways of calculating what a profit is and not much was said about that in the Statement.

Once we get rid of the blame element we must ask, as the noble Lord, Lord West, asked, whether we need the carriers. We have exchanged views on this before. There are people who say that in an era of conflict marked by counterinsurgency, terrorism and cyberwarfare, carriers are not quite the necessity that they have been in the past. My first question to the Minister is whether the saga of carriers supports the GOCO—government-owned contractor-operated—arrangements we are suggesting should go into procurement. The Chief of the Defence Staff gave an interview on 3 November in which he said he wants the Armed Forces to be available in international crises such as striking firemen, foot and mouth, and intervention in terrorist heartlands. How do the carriers and the F-35Bs fit into that scenario?

Finally, turning to the three offshore patrol vessels, we are told that the marginal costs will be less than £100 million; what guarantees are there?

[Lord Astor of Hever]

My Lords, we do need these carriers, as I said to the noble Lord. On the question about GOCO, as the Statement said, the chair of the Public Accounts Committee has described the carrier programme as one of the most potent examples of what can go wrong with big projects in the public sector. We need to change this and we feel that a change of procurement is necessary. We will all have a chance to discuss this when the Bill comes to this House later this year. As for the operational use of the carriers, they are very flexible ships, they have full strike capability and they can also be used for humanitarian aid and the use of Special Forces. My noble friend asked what guarantee there is on the OPVs. The deal secured today is for a fixed price.

[Lord Martin of Springburn (CB)]

My Lords, I have no need to tell the Minister that closures and redundancies are soul-destroying, not only for the workers, but for their families and the communities they live in. On the specific point of redundancies, can I have an assurance that those who have been taken on as apprentices will be entitled to complete their apprenticeships with the company?

[Lord Astor of Hever]

My Lords, I cannot answer the noble Lord’s question about apprentices—it was not in my brief—but we have been assured by the company that it will do everything in its power to find alternative work for those made redundant, both on the Clyde and in Portsmouth. As the Statement said, we are investing a lot of money in Portsmouth and we hope that there will be jobs in the support bases for some of those being made redundant. This is an area that the Government, BAE Systems and the trade unions are all talking about very seriously.

[Lord Reid of Cardowan (Lab)]

My Lords, I welcome the three offshore patrol vessels. This is exactly what was envisaged when the carrier contract was first negotiated, in order to ensure the continuity of a strategic asset for this country. Thereafter, I cannot be so generous. May I correct the misapprehension that has been put about that the carrier cost doubled? The original cost was more than £4 billion when the contract was signed. There was an additional £1.8 billion because, quite correctly, the Government decided, when the recession hit us, that it should be delayed for two years. So when the coalition Government came in, the cost was actually £5.9 billion. That has now risen to £6.2 billion, part of which was due to the Government’s mistaken belief, under the last Secretary of State, that they could somehow fit “cats and traps” over the weekend by some welder doing a “homer” and getting it cheaply. Of course, it cost £60 million.

Secondly, and finally, the Statement is curiously bereft of any strategic sense of what this country needs. The contract was signed to give continuity and retention of skills so that this country would have not only jobs but a major industrial and defence strategic asset. All I have to say is, if the Government believe that they can constitute a future strategic basis purely on the basis of the intrinsic contractual cost of any given contract, I fear for the long term. If the Government continue in that way we may well end up sending our carriers—if they are built—to repair in Korea. You can win the minutes in all of these things and disastrously lose the hours. I hope that the tenor of this Statement is not one that permeates the whole of the Government’s thinking on strategic defence issues.

[Lord Astor of Hever]

My Lords, that is not the case at all. We have secured a great many jobs upon the Clyde, and the future of the British shipbuilding industry is very secure. As regards the costs, we could debate this all afternoon, but the delays added considerably to the cost of the carriers. The decision to have the “cats and traps” was not made over the weekend; we gave a great deal of consideration to it, but then made the decision to revert to the stowable version, which the previous Government had decided on.

[Lord Burnett (LD)]

My Lords, I welcome the fact that the fleet is set to grow, with not just aircraft carriers but Type 26 frigates and offshore patrol vessels, which is good news, but also with the four submarines that are the successors to Trident and which I strongly support. The naval service will need in excess of 1,000 additional trained personnel to man these vessels. Will my noble friend assure the House that the Government understand this and that steps will be taken to increase the strength of the Royal Navy to cope with these demands? Will he write to me about the consequences of this Statement for Appledore Shipbuilders in north Devon, which is in my former constituency?

--- Later in debate ---

[Lord Astor of Hever]

My Lords, I welcome my noble friend’s support for the fleet and for Vanguard’s successor. As regards manpower, the Royal Navy attaches a great deal of importance to this, in particular to get the right people with the right skills. The Navy will need an extra 2,000 people for its expanding fleet over the next five to 10 years. We are very grateful to the United States Navy and the US Marine Corps, which have been especially helpful in training our people preparing for the carriers; whether they are training pilots, deck crew, or on air direction or engineering, they have been very helpful. Finally, my noble friend asked about Appledore, on which I will write to him.

[Lord Dannatt (CB)]

My Lords, the last question was on the increase in the size of the fleet in manpower terms that would be required if both carriers come into service and the three OPVs are fully manned. I welcome that and I do not want to get into that argument at all. However, the previous Government and the present Government took major decisions which affected equipment and manpower in the Armed Forces, and priority in big handful terms has been given to equipment. Therefore where savings have had to be found they have had to be found in manpower. Most of those savings have been found within our land forces—noble Lords will recognise that I would say that, wouldn’t I?

I know that the Minister cannot give a guarantee or even half a guarantee in answering this question, but will he ensure that if there is to be an increase in the fleet in manpower terms, which I welcome, it will not be at the cost of further reductions in our land forces, given that our Army is striving very hard to meet the 20% reduction in its regular size by 2020? Will he also ensure that in future discussions with the Treasury, argument is made most fiercely for an uplift in the defence budget in order to pay for the extra people, and that it is not another opportunity cost of one service against another? We cannot do that and remain credible on the world stage.

[Lord Astor of Hever]

My Lords, the noble Lord makes a very good point; the increase in numbers goes right the way across the Royal Navy—submarines, aircraft carriers and all the other ships—but we will not reduce the size of the Army just to provide extra personnel for the Royal Navy.

[Baroness Liddell of Coatdyke (Lab)]

My Lords, political point-scoring is, I suppose, inevitable in a forum like this, but it is unedifying when hundreds of people are losing their jobs and there are families who will be in real distress this evening. Will the Minister tell us what discussions there have been with the Scottish Government about what assistance will be given to the workforce on the Clyde who will lose jobs despite the new vessels? I welcome the decision to subscribe to these new vessels on the Clyde, but the Minister should take it into account that all of us in Scotland are also heartbroken about the decision to end shipbuilding in Portsmouth. It is a historic dockyard and it is tragic that we are coming to this decision to end shipbuilding there. Does the Minister agree with me that it is absurd that this debate should be taking place at a time when we have the diversion of separating Scotland from the rest of the United Kingdom, which will finish shipbuilding on the Clyde?

[Lord Astor of Hever]

My Lords, personally, I hope that that will not happen. On the noble Baroness’s point about it being very political, I obviously deplore that, but it is inevitable. As far as redundancies are concerned, the Government, BAE Systems, and the trade unions are all, as I said, working as hard as they can to find new jobs for those personnel.

[Lord Lee of Trafford (LD)]

My Lords, when I was a Defence Minister in the 1980s, I remember being told by officials that we could build all the naval requirements in the Vickers yard at Barrow alone. In other words, we have had overcapacity, sadly, in our naval yards for years, and it still applies. I have three specific questions. First, the Statement does not indicate the cost of the three offshore patrol vessels; it is a rather shrouded figure. Will the Minister give the cost of the three OPVs? Secondly, following the point raised by the noble Lord, Lord West, and given that there is a £4 billion retention in the contingency reserve, would it not have made sense to build one more Daring class Type 45 destroyer, as we are desperately short of escort vessels? Thirdly, my noble friend the Minister touched on the humanitarian possibilities of the new carriers. Will he give an indication of the medical facilities aboard the new carriers, in particular the number of new operating theatres that will be available for potential humanitarian and evacuation relief?

[Lord Astor of Hever]

My Lords, we have provisionally agreed a firm price of £348 million with BAE Systems for the supply of three OPVs, inclusive of initial spares and support. The cost of building these vessels and their initial support is entirely contained within provision set aside to meet the Ministry of Defence’s obligation for redundancy and rationalisation costs.

My noble friend Lord Lee of Trafford asked about the humanitarian position; I can confirm that the carriers would be able to assist in evacuation. They each have an operating theatre and a huge flight deck that would take 10 Chinooks while four Chinooks could operate concurrently. I hope that that answers my noble friend’s question.

[Lord Judd (Lab)]

My Lords, in the 1960s and 1970s I had the privilege of representing in the other place part of the community of Portsmouth, including the naval base and dockyard. I remind the House that it is impossible to record adequately what this country owes Portsmouth. It has been in the front line in the defence of the realm for many, many decades. It is, after all, the home of HMS “Victory”, and that in itself says something about it.

I put it to the Minister that it is not just a matter of going through the normal routine of ministerial Statements, assuring everybody that there will be consultations and that the city council has been consulted, and so on. This nation owes a tremendous loyalty and tribute to the people of Portsmouth, and it should be a priority of all the Government and those they are associated with to make sure that a closely knit community such as this does not carry a disproportionate burden as a result of the policies that are being followed.

Referring to what my noble friend Lord West said, surely the first priority in defence is to establish what the threat is and what contribution we want to make towards international security. Having established that, what is necessary to do that? As Libya illustrated very well, every conceivable analysis of the future suggests that we are going to need flexibility and free-standing platforms from which operations can take place, and the carriers are absolutely indispensible to that future. Will the Minister please accept that he will have widespread support in this House if, having made what I believe to be the absolutely right decision to go ahead with the carriers as a priority in defence policy, that is pursued with every possible commitment?

[Lord Astor of Hever]

First, I quite agree with the noble Lord that we owe a long-term debt of loyalty to Portsmouth. Portsmouth will maintain its proud maritime heritage as the home of the Royal Navy surface fleet and the centre of BAE Systems’ ship support and maintenance business. The long-term future of Portsmouth as a naval base for the Royal Navy’s most complex warships will be in undertaking vital support work for the fleet. This will include support and maintenance for the new carriers and the Type 45 destroyers—the most advanced warships ever built for the Royal Navy. I can add that Portsmouth and Southampton are also taking part in the second wave of the City Deals programme and have been working closely with the Government to agree an ambitious deal for the area which will boost growth and jobs in the local economy. We expect to be able to conclude that deal shortly. I am grateful for the noble Lord’s support for the carriers, and I will certainly do everything possible to ensure that that work continues successfully.