MOD Considers Naval Workload Crisis

23 August 2004

In response to pleas by senior shipbuilding industry executives for a change in Ministry of Defence warship procurement plans, the Secretary of State for Defence, Mr Geoffrey Hoon, has ordered an urgent investigation.

The investigation is being led David Gould, Deputy Chief Executive of the Ministry of Defence’s (MOD’s) Defence Procurement Agency (DPA) and Rear-Admiral Ric Cheadle, the DPA’s Director of Land and Maritime programmes.  It is considering warnings that a lack of long-term coherency in the MOD's equipment programme is threatening the UK's naval industrial base, with the objective of developing a comprehensive strategy for naval shipbuilding. The work is being carried out by the MOD and DPA, with the participation of the Department of Trade and Industry (DTI) and other interested government agencies. 

RFA Lyme Bay (Swan Hunter)

A key input will be a recently completed report by the Rand Corporation, the MOD engaged Rand in late 2003 to consider whether the UK has enough naval shipbuilding capacity to undertake work in parallel on programmes such as Type 45 destroyer and the Future Aircraft Carrier (CVF) and to meet demanding in-service dates, and the impact of other programmes such as Military Afloat Reach and Sustainability (MARS) which may require new skills to meet commercial and legal standards not seen before in military vessels.  The Rand Corporation report also compares available skills and capacity with that which will be required.

Rand Corporation had predicted in a revision of its earlier 2001 report for the MOD ("The Royal Navy's New-Generation Type-45 Destroyer: Acquisition Options and Implications") that: “Demand for bluecollar workers doing direct labour declines slightly between now and 2006, after which demand increases rapidly to a peak of nearly 7,000 direct workers in 2010—almost double the level in 2005.  Clearly, the main risk for the MOD’s future programmes is maintaining and expanding the labour force in the next several years while managing a small dip in demand.”

Table 1: MOD Naval Orders - By shipyard at given dates
Shipyard(s)	August 2002	August 2004	August 2006 (Current plans)	Comments
Appledore Shipbuilders, Devon	Survey Ships	None	None	In to receivership 30 September 2003.  Now owned by DML
BAE Systems Naval Ships, Govan and Scotstoun	Auxiliary Oiler, LSD(A)s	LSD(A)s, Type 45 destroyers	Type 45 destroyers
BAE Systems Submarines Business, Barrow-in-Furness	Auxiliary Oiler, LPD(R)s, Astute submarines	Astute submarines	Astute submarines	Ceased surface ship construction May 2004
Swan Hunter, Tyneside	LSD(A)’s	LSD(A)s	None
Harland & Wolff Holdings plc, Belfast	RoRo’s	N/A	N/A	Ceased shipbuilding March 2003
Vosper Thornycroft (UK) Ltd, Woolston	Future OPV’s	N/A	N/A	Yard closed March 2004
VT Shipbuilding, Portsmouth	N/A	Type 45 destroyers	Type 45 destroyers	Yard opened September 2003

In fact the slump in shipyard workload is proving to be much longer and deeper than Rand had forecast.  Since that report was written Harland & Wolff has withdrawn from shipbuilding, Appledore Shipbuilders has gone in to receivership with the loss of up to 550 jobs, and BAE Systems has announced at its Barrow-in-Furness shipyard alone about 1300 redundancies, reducing the total workforce there to about 2,500.

 

Table 2: MOD Naval Equipment Acquisition Projects - Recently completed or soon to be completed
Ship Class	Builder(s)	Displacement, FL (tonnes)	No. Built	In Service Date (Last of Class) [1]	Project Cost
Duke Class - Type 23 frigate	BAE Systems Marine, Scotstoun [2]	4,300	16	2001	? (About £190 million each for late build units)
Sandown Class - Single Role Minehunter	Vosper Thornycroft, Woolston	450 (standard)	12	2001	? (About £40 million each for late build units)
Albion Class - Landing Platform Dock (Replacement)	BAE Systems Marine, Barrow	16,981	2	2005 [3]	£790 million
Point Class - RoRo	Harland & Wolff, Belfast	20,000	2 + 4 [4]	2003	£80 million (for 2 H&W ships only)
Wave Class - Auxiliary Oiler	BAE Systems Marine	31,500 (12,500 light)	2	2003	£211 million
Echo Class Survey Ships	Appledore Shipbuilders, Devon	3,500	2	2003	£130 million
River Class - Future OPV	Vosper Thornycroft, Woolston	1,677	3	2003	£60 million (lease arrangement)
Bay Class - Landing Ship Dock (Auxiliary)	Swan Hunter, Tyneside; BAE Naval Ships, Govan	16,160	4	2006	£320 million [5]
[1] The in-service date may be a considerable period after the ship was materially completed by the shipyard. [2] For all units completed since 1995. [3] HMS Bulwark, the second and last unit was delivered to the Royal Navy 12 July 2004. [4] Two ships were built by Harland & Wolff, another four were built by Flensburger Schiffsbau-Gesellschaft in Germany. [5] Subject to claims for cost overruns from Swan Hunter and BAE Systems which may increase final cost to £380 million.

 
The problem is caused by a prolonged gap in naval ship orders from the MOD.  At the start of the new millennium the UK shipbuilding industry had a fairly healthy workload, consisting mostly of a backlog of MOD orders plus significant export orders for Malaysia and Brunei.  But since then most of these orders have been completed (ref. Tables 2 and 3) while the failure of the UK warship industry to win any significant export orders since the 1990’s has not helped, making the industry even more dependent upon the MOD for its survival.  However the MOD itself has not placed any new orders since 2001, delays to large projects and a simultaneous failure to proceed with smaller project due to a lack of budget means that when the last of the LSD(A)’s completes in early 2006, the only MOD work (indeed almost the only work) in UK shipyards will be the SSN HMS Astute and the first Type 45 destroyers HMS Daring, HMS Dauntless (work due to start August 2004) and HMS Diamond (work due to start Spring 2005).  Industry has been dismayed by the multi-year slippage of programmes such as CVF, the Astute Second Buy and Joint Casualty Treatment Ship (JCTS), which it had hoped would now be entering the Demonstration and Manufacture (D&M) Phase, with fabrication work already started or soon to start.  The MOD also dismissed an unsolicited but aggressively priced proposal made by BAE Systems in 2002 to order two additional Wave Class Auxiliary Oilers in advance of MARS in order to fill the work gap in its shipyards.  Currently the MOD does not expect to sign any significant new contracts prior to late 2005 at best, and it will be 2007 or 2008 before shipyards will be able to cut steel on major projects such as CVF and MARS.  The result is a desperate shortage of work in UK shipyards and large scale layoff’s, in April 2004 the Chairman and owner of Swan Hunter, Mr Jaap Kroese, warned: "The reality is that everybody [1500 workers] will be made redundant and the yard will be mothballed for two years."

Table 3: MOD Naval Equipment Acquisition Projects – Future Projection
Ship Class	Builder(s)	Displacement,  Full Load (tonnes)	Number Planned	Planned Main Gate Year , actual or (planned)	Number ordered by 1 August 2004	Target In-Service Date  (First of Class) [1]	Estimated Project Budget
Daring Class Type 45 Destroyer	BAE Naval Ships, Govan and Scotstoun; VT Group, Portsmouth	7,350	8	2001	6	2007 [2]	£5,546 million (first 6 units only)
Astute Class SSN	BAE Systems Submarines, Barrow	6,500 (surface)	5 or 6 [3]	1997	1+2 [4]	2009	£3,710 million billion (first 3 units only)
Future Aircraft Carrier (CVF)	Probably BAE Naval Ships; Swan Hunter, Tyneside; VT Shipbuilding, Portsmouth; Babcock DES, Rosyth	About 60,000	2	(2005)	0	2012 [2]	Approx £3.2 billion [5]
Military Afloat Reach & Sustainability (MARS)	?	Up to 40,000	8-12	(2006) [7]	0	2010 [7]	Approx £2 billion
OPV(H) (Castle Class Replacement)	Probably VT Group or DML Appledore	1,500-2,000	1-2	(2004) or (2009)	0	2006 or 2011 [6]	£50 million (lease arrangement)
OMAR (RFA Diligence Replacement)	?	?	1	?	0	2006	?
Joint Casualty Treatment Ship (JCTS)	?	?	1	(2007)	0	2008	£30 million
Future Surface Combatant (FSC)	?	?	Up to 16	(2008) [7]	0	2015 [7]	?
[1] The in-service date may be a considerable period after the ship was materially completed by the shipyard, e.g. perhaps 18 months in the case of the first T45 destroyer. [2] One or two year slippage expected. [3] Five or six officially planned, but up to eight may eventually be ordered including replacements for the three “Final Update” Trafalgar Class. [4] Three submarines were ordered in 1997, but work on two was effectively suspended in February 2003 pending progress on the lead unit (HMS Astute) and contract renegotiation. [5] Assessment Phase £143 million, Demonstration and Manufacture Phase “most likely” £3,057 million.  There is considerable upwards pressure on these costs. [6] The MOD is considering advancing the ISD to 2006 if a proposed leasing arrangement is financially attractive.    [7] May be delayed, Initial Gate was planned for Spring/Summer 2004 but not occur.

But pervasively, by the end of the decade those UK shipyards able to build large ships will be struggling to cope with an excess of MOD work as multiple projects simultaneously reach the manufacture stage (ref. Table 3) – a "famine to feast" situation, and a driver behind VT Group’s decision to close its old and restricted capacity Woolston shipyard and open a modern new facility at Portsmouth Naval Base that is more suited to the MOD’s anticipated future requirements.  As the MOD is already warning industry that it will expect planned in-service dates for programmes such as CVF to be met despite the delay in placing orders, unless the shipbuilding industry can regenerate its workforce and construction capacity with improbable speed from 2008, problems and slippages seem to be inevitable.

Chart 1: MOD Naval Equipment Programmes from 2000 to 2018.
 Schedules are illustrative only.

The anticipated problems could be solved by reconsidering the rate at which the MOD’s required capabilities are delivered - effectively bringing forward contracts in order to fill the gap.  But while adjusting and advancing MOD orders in order to provide shipyards with a more evenly spread workload may be the sensible approach, the options available are actually very limited given the MOD’s tight budget situation with little financial flexibility, the disruptive effect of major changes on a carefully an equipment plan that looks ten years ahead, and the long lead times associated with many ideas.  For example, calls to advance the building of the planned new aircraft carriers are considered to be simply not realistic as the CVF project just won’t be ready to move on to the D&M Phase for another year.

However the MOD, DPA, DTI and shipyards are now working together, are assessing the capabilities of British yards, and are holding monthly meetings to try to tackle the identified problems.  A spokesman for the DPA said "Talks have been taking place regarding this matter.  They remain on-going, and are continuing to take place between all interested parties." 

Possible recommendations of the Gould Committee include:

• Subsidising shipyards and major suppliers to retain a core of key and experienced workers. The MOD may have already taken this approach with Rolls-Royce in to relation to nuclear submarine propulsion systems.
• Ordering a fourth Astute Class nuclear submarine in order to help sustain the supplier base. 
• Rapidly ordering one or two Castle Class OPV replacements, with a mid-2006 ISD.  VT Shipbuilding and DML Appledore are competing for the OPV(H) order.
• Finally ordering the long planned Joint Casualty Treatment Ship (JCTS), a project repeatedly delayed due to lack of funding.
• Advancing the in-service date of the MARS project.
• Expediting other capabilities such as a proposed Forward Aviation Support Ship (ASS).

Alternatively the Committee may decide, or have to decide due to funding constraints, to take no action and let events take their due course - at least in the near term.  If necessary, several options could be pursued a later date.  For example, the inward investment of skills and resources into UK shipyards from overseas could be encouraged; and the government might not be adverse to some UK shipyards being incorporated in to a pan-European company along the model of EADS in the aerospace sector. 

Another option is that government’s current industrial policy requiring RN warships and new construction RFA auxiliaries to be wholly built in the UK could be relaxed.  Indeed one respected analyst and advisor to the MOD Professor Keith Hartley of the University of York in his 2003 paper "Naval Shipbuilding in the UK and Europe: A Case for Industrial Consolidation?" said “Warship building is a classic example of European governments failing to exploit the gains from competition and free trade. … some nations such as the UK are committed to national procurement of warships … but the commitment to ‘buy British’ means that foreign firms which might be lower-cost suppliers are not able to bid for UK warship contracts.  Extending the Single Market to warships and other defence equipment procurement would offer gains to taxpayers and the Armed Forces; but the losers from such a policy would be the inefficient.”

Critics of the current ‘buy British’ policy argue that the UK still has a successful aerospace industry despite long importing aircraft and missiles, including Trident missiles for its nuclear deterrent from the USA.  They can also point out that the hull construction, assembly and outfitting of a modern warship makes up typically only about one third of the total “system cost”.  The “British built” Type 45 destroyers will have about a 50% UK content by value, with everything from steel, to weapons systems to the bridge controls being imported, and BAE Systems and Thales Naval won’t promise any better for CVF.  Bidding contractors and shipyards in France, Poland, Germany and the Netherlands which have in the past have run foul of MOD’s “buy British” requirement are now scenting real opportunities to build abroad modules or even whole ships for the MOD in the future. 

It is expected that the MOD will make an announcement later this year on its conclusions.  Those conclusions are likely to have a profound effect upon the size and capabilities of the future UK shipbuilding industry.