INTRODUCTION

  Answers to the Committee's specific questions on the Modular Charge System, including the rationale behind the decision to proceed with the procurement of the charge systems developed by the Somchem of South Africa, are attached. In addition, the Committee might find it helpful to have a summary of some of the key issues behind the Modular Charge System decision and the wider issue of security of supply.

MODULAR CHARGE SYSTEM

  The selection of the charge system sub-contractor was undertaken by the prime contractors, Marconi Marine Land and Naval Systems, with absolute fairness. The outcome of the trials programme showed conclusively that the Somchem charge system was technically superior to those offered by the other contenders. The price tendered by Somchem also offered a significant cost saving over the other bidders' tenders.

  The Department recognised, however, that a decision to place the sub-contract with Somchem might create industrial difficulties for Royal Ordnance. Against this background, and following representations from Royal Ordnance, the Ministry of Defence agreed that that Royal Ordnance and Somchem should discuss the possibility of an arrangement which would provide Royal Ordnance with work and also enable Somchem to satisfy its industrial Participation obligations. The outcome of these negotiations revealed that the involvement of Royal Ordnance in the manufacture of propellant for the Modular Charge System would lead to a cost increase of around *** in the Somchem bid. Moreover, Royal Ordnance also stated that it would require guaranteed additional work from the Ministry of Defence for Challenger 2 training ammunition to make Bishopton viable in the short term. The identifiable additional costs to the Ministry of Defence of Royal Ordnance's proposals would have been around *** in the short term to medium term. Further regular contracts would also be required to ensure the factory's long term viability. ***

  While the factory would have stayed open under Royal Ordnance's proposals, the company announced that it would still need to reduce the workforce from around 300 to around 150. Following consultation with other government Departments, the Ministry of Defence did not consider that the package offered value for money, nor that it would have contributed to the long term health of the industry in the face of declining world wide demand for ammunition and the current rationalisation of European defence industries.

SECURITY OF SUPPLY

  Security of supply is not a new criterion. It has always been a factor in collaborative equipment projects, where work-share arrangements often mean that some components are manufactured only in certain countries. In an era when the majority of likely military operations will be conducted in coalition with out allies, and when many of the equipments used in such operations are the product of collaborative development and production programmes, only a very small number of technologies and associated manufacturing capabilities are of strategic national importance. Mutual interdependence between countries is already a fact over a whole range of military capabilities.

  Security of supply in the ammunition area was examined in detail in the context of decisions made in late 1998 on the Multi Year Buy and Extended Range Ordnance/Modular Charge System competitions. Royal Ordnance already obtains all its single base propellants, which are used in small-arms ammunition, mortar and smaller artillery munitions, from overseas sources. Several other ammunition components, such as fuses, are also procured by Royal Ordnance from overseas suppliers for some types of ammunition. Single and multi base propellants, and other ammunition components, are manufactured to the required standard in many locations around the world and are not, and have not for some time been, strategic UK manufacturing capabilities. As part of the Modular Charge System decision, the Department examined closely the proposals offered by Somchem, to ensure that the United Kingdom could obtain future supplies of Modular Charge System without difficulty. ***

  The Government remains committed to a strong, capable and competitive United Kingdom industrial base as part of the necessary underpinning of a sound defence posture and defence capability. We have consistently stated that the restructuring of European defence industry would not affect the supply of defence materiel necessary to discharge our military commitments. Although the closure of Royal Ordnance Bishopton will end the United Kingdom's capability to manufacture ammunition propellant, this does not mean that the Ministry of Defence will be unable to buy ammunition from Royal Ordnance, who can still source individual components from other manufacturers. British industry will retain the ability to manufacture certain propellant materials, to develop and manufacture ammunition, and to participate in collaborative ammunition programmes. Although we very much regret the loss of jobs which will result from the closure of Royal Ordnance Bishopton, we agree with British Aerospace that rationalisation of Royal Ordnance is required in order to safeguard the future of the company, and of the majority of the jobs associated with its operations. We remain convinced that the decisions taken on the Modular Charge System contract award are the right ones for the Armed Forces and the British taxpayer.

Q1. Details of each contract currently outstanding with Royal Ordnance, including those recently announced (MoD Press Notice 322/98); including details of the items concerned, start dates and contract duration, the location at which production is (or will be) undertaken, and the MoD's estimate of RO jobs maintained by these contracts.

  A1.1 Tables showing current MoD prime contracts and associated sub-contracts with Royal Ordnance are attached at Annexes A and B, respectively. Although comprehensive for prime contracts placed by MoD, the information on sub-contracts placed by industry is included only where available.

  A1.2 The table at Annex A includes details of the large calibre ammunition multi-year buy contract placed with Royal Ordnance on 16 December 1998 and referred to in Ministry of Defence Press Notice 322/98 of 15 December 1998. The contract for the Extended Range Ordnance-Modular Charge System programme, also announced in the Press Notice, is expected to be placed in March 1999. We expect that the sub-contract for the extended range barrel will last for some four years and will secure around 50 jobs at Royal Ordnance Nottingham.

  A1.3 Annex B includes details of MoD programmes where Royal Ordnance is a sub-contractor, including the ASRAAM, Sea Wolf and Starstreak missile programmes. Royal Ordnance is also involved with the Department's nuclear programme at AWE Aldermaston, contracts for which are placed directly by the Management and Operating Contractor Hunting-BRAE.

Q2. Details of which countries currently have the capacity to produce propellant that would satisfy UK MoD specifications and safety standards.

  A2.1 Countries currently having the capacity to produce multi-base propellants that would satisfy Ministry of Defence specifications and safety standards are known to include, France, Germany, Italy, Norway, Spain, Sweden, Australia, South Africa and the USA. For single-base propellants, there is no longer a manufacturing facility in the UK; Royal Ordnance' requirements are met by its subsidiary, Muiden Chemie, in The Netherlands. Single-base propellants can also be obtained from a similar range of countries as those listed above for multi-base propellant.

Q3. The MoD's assessment of the jobs at Bishopton which would likely to have been sustained had the MCS contract been placed with RO.

  A3.1 The Ministry of Defence has no direct knowledge of the number of jobs that might have been secured. British Aerospace did, however, indicate that the factory would not have been sustainable even if the company had been successful in securing directed sub-contract work on the Modular Charge System. The company stressed that, in addition to the MCS work, it would need further MoD ammunition contracts simply to sustain Bishopton scaled down from around 300 to around 300 to around 150 employees.

Q4. The differences in cost to the MoD of letting the MCS contract with (a) RO, (b) Somchem, (c) other potential contractors invited to tender, and (d) the hybrid Somchem/RO "workshare" bid.

  A4.1 *** However, the costs quoted in response to the Ministry of Defence Invitation to Tender for final development, integration and the first and second tranche buys of the Modular Charge System are:

Royal Ordnance: ***

Team MACS: ***

Somchem: ***

  Including Royal Ordnance as a directed sub-contractor to Somchem would have increased the cost of the Modular Charge System by *** to ***. This additional cost was calculated following negotiations between the two companies and is based on Somchem's analysis of the premium required, including the need for capital investment at Royal Ordnance Bishopton. ***

  A4.2 However, as mentioned at paragraph A3.1, British Aerospace indicated that Bishopton would not have been sustainable with only the MCS work. The MoD would, therefore, also have had regularly to direct further ammunition orders to Royal Ordnance in order that the RO could have retained an economically viable Bishopton in order to conduct the MCS and other work. The additional associated cost of foregoing competition on the forthcoming 120 mm CHARM 3 ammunition requirement alone was judged to be ***.

  A4.3 The cost to MoD of Royal Ordnance's proposal to scale down operations at Bishopton was assessed to be ***. This sum will be required to gain Ordnance Board qualification for future ammunition using propellant sourced from different sites. The cost of re-qualifying all currently programmed future ammunition buys in the event that Bishopton closes was assessed as *** a difference of ***.

  A4.4 In total, therefore, the additional cost of directing the MCS sub-contract work and CHARM 3 training ammunition to Bishopton was assessed as around *** against a *** cost for not directing the work; a net additional cost of around ***. All costs are inclusive of VAT and are commercially confidential.

Q5. Whether (a) the identification of potential sub-contractors for the AS90 enhancement package, and (b) the sub-contracts finally awarded (to RO for new barrels, and to Somchem for the MCS) were those proposed by the prime contractor Marconi Marine Land and Naval Systems; and details of the MoD's role in selecting the invitation to tender list and the successful sub-contractors.

  A5.1 The choice of Royal ordnance as sub-contractor for the Extended Range Ordnance barrel was mandated by the Ministry of Defence on the basis that the company owned the design rights for the 52 calibre barrel. As prime contractor for the Extended Range Ordnance-Modular Charge System programme, Marconi Marine Land and Naval Systems was required to recommend a suitable sub-contractor for the Modular Charge System using a competitiveness selection process. As part of this process, Marconi Marine first recommended a short list of five potential contractors and then, following the company's preliminary evaluation of the five charge systems, recommended that the three products developed by Royal Ordnance, Team MACS and Somchem should undergo live firing and technical trials. This approach was endorsed by the Ministry of Defence at each stage. *** Following completion of the trials programme, Marconi Marine recommended the Somchem charge system, which showed significant technical, cost and programme benefits, as the preferred supplier to the Ministry of Defence. This recommendations was internally validated and endorsed by the Department and a contract is planned to be placed with Marconi Marine shortly.

Q6. Details of the unsuccessful Somchem/RO `workshare' option; including which party(ies) proposed it, the type and value of workshare involved, and the RO jobs that might have been secured by it. Also, details of any linkage between the award of the MCS contract to Somchem and workshare or other terms of any UK export contracts.

  A6.1 During its negotiations with Somchem's parent company, Denel, regarding Industrial Participation and security of supply issues, the Ministry of Defence encouraged Somchem to investigated the possibility of a workshare arrangement with United Kingdom defence industry, including Royal Ordnance, to satisfy the Industrial Participation offer that formed an integral part of the company's bid. The Ministry of Defence specified that any such arrangement should include propellant manufacture and should not result in an increase to the price already quoted for the work by Somchem, but did not participate in discussions between the companies. In July 1998, Somchem reported that the companies had arrived at a proposal where Royal Ordnance could share in the manufacture of the propellant and undertake the loading, assembly and packaging for all charge modules. However, Somchem advised that the proposal would add an additional *** to its existing quote, together with some £1 million to its existing quote, together with some £1 million for capital investment at Royal Ordnance Bishopton. The additional cost to the Ministry of Defence of directed sub-contracting to Royal Ordnance would have been some.

  A6.2 Additionally, Royal Ordnance advised that it would also need guarantees of other ammunition buys from the Ministry of Defence, and access to DERA facilities and manpower to carry out commercial research at MoD's expense, to ensure the future viability of the Bishopton facility. The company said that this package would allow a work force of approximately 150 to be retained at the site for the duration of the Modular Charge System contract. This would have increased the total additional cost of the proposal even further, with no guarantee that Bishopton would be secure in the longer term without additional support from the Ministry of Defence.

  A6.3 The Somchem charge was a clear winner on technical and financial merit. Defence equipment sales prospects in South Africa were not a relevant consideration. Following the announcement by the South Africa were not a relevant consideration. Following the announcement by the South African government on 18 November that United Kingdom defence companies had been selected as "preferred suppliers", the Ministry of Defence is exploring the possibility of abating part of the Industrial Participation obligations to be incurred by Somchem against similar commitments entered into by the successful United Kingdom companies.

Q7. What assessment was made by the MoD of the implications for ammunition war-stock holdings and for the availability of supplies in time of crisis, flowing from the award of the MCS contract outside the UK.

  A7.1 MoD reviewed its strategy on ammunition procurement as part of the considerations on the Modular Charge System and Multi Year Buy programmes. This work confirmed that the manufacture of ammunition propellant in the United Kingdom was not an essential capability. In reaching this conclusion, four discrete factors were taken into account: stockpile requirements, regeneration requirements, urgent re-supply and maintaining UK ammunition standards.

  A7.2 From an operational perspective, what is required is sufficient ammunition stocks to sustain all likely operations. This is a key factor and is being taken into account in the current review of our stockholdings. The War Reserve stockpile is the Department's investment against the risk of a short-warning conflict. The size of the War Reserve is calculated against Strategic Defence Review planning assumptions and is sufficient for operational scenarios involving a Division warfighting for 30 days. The warning period for any larger conflict is assessed to be sufficient to procure more charges, along with all other additional requirements for such an eventuality.

  A7.3 Although stocks should be sufficient, we also investigated the ways in which a need for urgent supply of ammunition would be met. It is not prudent to assume that ammunition could be manufactured in the short time available once troops have deployed and any such urgent requirements could, therefore, only be met by obtaining ammunition, as opposed to obtaining components and attempting to manufacture the ammunition. The Department has also mitigated the risk of actual usage exceeding planning figures, by investing in greater inter-operability of munitions. Under the Joint Ballistics Memorandum of Understanding signed by Germany, Italy, United States, United Kingdom and France, all modular charge systems, existing charge systems and projectiles are compatible with each other nation's guns. This allows strategic and operational exchange of 155mm ammunition, as was demonstrated in Operation GRANBY in 1991.

  A7.4 As far as regeneration of the stockpiling is concerned, assumptions on warning times imply that stocks could be built up again through normal procurement action. Ammunition stocks would only be one part of the necessary resupply of equipment and regeneration of stocks.

  A7.5 All military equipment, including ammunition must meet UK or NATO quality standards. Given the interoperability of ammunition, and the wide range of possible approved sources, this is not assessed to be a limitation in ammunition supply. Royal Ordnance already obtains all its single-base propellant from overseas.

Q8. The arrangements, if any, made with Somchem and/or the government of South Africa to guarantee supplies, including supply arrangements in times of crisis.

  A8.1 ***