House of Commons - Defence

Select Committee on Defence Fourth Report

THE WARSHIP SUPPORT MODERNISATION INITIATIVE

29. There is surplus capacity in the dockyards as well as the shipyards, and it is perhaps not surprising that the way warships are supported and maintained has also been the subject of review by the MoD. On 25 March 2002, the Secretary of State announced the MoD's decision to proceed with its plans to negotiate partnering contracts for the work undertaken in each of the three naval bases, with the existing three dockyard operators.[58] Devonport Management Ltd will provide engineering and other support at Devonport naval base, Fleet Support Ltd at Portsmouth, and Babcock Naval Services (a subsidiary of Rosyth's owners) at the Clyde bases (Faslane and Coulport). There will be a 'decider'/'provider' division within the naval bases: the naval base commanders will continue to determine what work is required, and the execution of that work will be delivered by the commercial partners. Contracted activities will include engineering support, estates management and logistics support.[59] Since we took evidence on this, the three contracts were signed, between 30 May and 18 June 2002, and come into effect in September this year.

30. We were briefed on the initiative by the Warship Support Agency when we visited its headquarters at Abbey Wood earlier this year, and on our visit to Scotland. The trade unions also provided us with their perspectives.[60] There were though few details available at the time we launched our inquiry, while the MoD were still considering the merits of the scheme and the bids it had before it. The MoD's annual memorandum was provided to the Committee before the Secretary of State announced his decision to proceed with partnering, and has little to say on the warship support modernisation initiative.[61] It was not helpful, as the trade unions told us, that there were no firm proposals exposed to formal consultation. We therefore examined with our witnesses the drivers behind the changes proposed, the value for money of the proposals, and the consequences for the naval bases, dockyards and workforce.

The drivers for change

31. The history of the warship support modernisation initiative lies in the steady reduction in the size of the fleet, and in the consequences of the contractorisation of the dockyards in 1987 and their outright sale in 1997. At each of these two episodes, the MoD agreed to provide each dockyard with a programme of work allocated without competition, despite surplus capacity in the UK ship repair market.

32. A previous Defence Committee examined the dockyards in 1992-93,[62] including proposals (since introduced) to concentrate nuclear refits at Devonport. That Committee urged the MoD to reconsider the option of keeping two nuclear refit facilities, and recommended that if nuclear refitting were to be concentrated in one dockyard (Devonport) the MoD should fully protect Rosyth's allocated programme once its nuclear work was removed. Subsequently, the MoD did decide to focus its nuclear refits at Devonport. However, a National Audit Office report in 1998 on the sale of the naval dockyards[63] described difficulties and delays with building the new facilities there, and the need for the MoD to continue nuclear refits at Rosyth until 2002, by which time Devonport would finally be in a position to take on all this work. Furthermore, as a result of these delays, Rosyth would be allocated surface refits until 2008-09 (rather than 2005-06 as previously planned).[64] As we describe below, these plans have now changed again.

33. A decade ago our predecessors acknowledged that there was a question mark over whether the naval refit programme could support the number of dockyards and commercial shipyards then envisaged.[65] And since then the fleet has continued its steady contraction. The SDR in 1998 planned for a further reduction in the destroyer/frigate force from 35 to 32 ships and the non-strategic submarine fleet from 12 to 10. Many current warship procurement programmes replace existing classes of vessel rather than increase overall numbers (eg the original 12 Type-42s[66] are planned to be replaced by up to 12 Type-45 destroyers). The MoD told us that since 1987 the number of ships that pass through the maintenance and refit cycle in any one year has gone down from about 105 to about 50.[67]

34. It is not just a shrinking fleet, however, that has exacerbated the surplus repair capacity. There have also been some beneficial developments in repair practices which have increased their efficiency, such as 'reliability centred maintenance' and 'underwater engineering', and a trend towards in-service support-inclusive contracting.

35. The MoD expects 'reliability centred' maintenance to be a marked improvement over its maintenance management systems that use set intervals and overhaul procedures, irrespective of the in-service function of the equipment. The MoD considers that, throughout the life of a warship, 'reliability centred' maintenance has the potential to reduce the overall volume of the maintenance required by about 10%.[68] Underwater engineering allows a wide range of maintenance activities to be undertaken afloat that previously have only been possible with a vessel dry-docked. Its use can avoid the high cost and operational disruption caused by having to undertake an unscheduled docking in between planned dry-dock maintenance periods, which are typically programmed at intervals of about 4 to 5 years. So, with a current need to conduct repairs that would require about 20 unplanned dockings each year, the MoD told us that through using underwater engineering techniques dock charges of up to £1.5 million a year could be saved.[69] The MoD is relying on such innovations to allow two Future Carriers (rather than three as now) to maintain the required operational posture.[70]

36. The warship maintenance burden falling on the MoD is also being reduced through use of 'contractor logistics support' arrangements, whereby the vessel's manufacturer contracts also to support it in-service. In this way the manufacturer has an incentive to design ships which need less maintenance. The contractor might place such maintenance work with civil as well as naval dockyards. The contracts for the Astute submarine and off-shore patrol vessels provide for in-service support to be borne by the contractor.[71] The Type-45 prime contractor is undertaking a further examination, at MoD's behest, of options for 'contractor logistics support' of specific equipments in the destroyer (after finding that a whole-ship support package would be too difficult to arrange).[72] The results of that work could influence what in-service repair tasks will be needed, and whether they would be managed by BAE Systems or the MoD. In similar vein, the Ro-Ro contractors (rather than the MoD) will be responsible for managing the vessels' in-service maintenance under the PFI deal, and could presumably look to commercial yards (and even overseas yards) to do that work.

37. Overall, naval refit workloads have fallen from 500,000 to 250,000 man-weeks since 1987.[73] It is perhaps not surprising, therefore, that when the MoD decided to proceed with the warship support modernisation initiative, the Minister for the Armed Forces is reported as saying that "with overcapacity in the dockyards it would have been possible to have closed two of them. ... Maintaining the status quo was not an option."[74] He was also quoted as saying that through the initiative "we have given a future to all three operations". This is a proposition, however, that must be carefully tested, and one which we discuss below (paragraphs 45-49).

The intended benefits of the Warship Support Modernisation Initiative

38. Developing the warship support modernisation proposals cost the MoD £8million, plus internal MoD staff time.[75] The process had three main stages:

A scoping stage, from June 2000 to January 2001, examining the potential for savings in the dockyard warship repair programme and naval base operating costs. Scoping proposals were received from the three companies[76] and the defence trades unions. Subsequently, memoranda of understanding were signed with each company to develop their proposals to a level of maturity against which contracts could be let.

A second stage, in which output specifications describing the services provided by the naval bases were developed, together with a 'benchmark' to measure value for money and to support the negotiations. Initial proposals were received from the companies and the trades unions in April/May 2001 for comparison with the benchmark.

A third stage, in which the companies and trades unions submitted their final proposals.[77]

The Minister for the Armed Forces expected the three new contracts to be in place in April 2002, with a transition to the new arrangements in July.[78] In the event, contracts were signed between 30 May and 18 June, to come into effect in September.

39. The trades unions' proposals to the MoD were rejected. These envisaged retaining the naval base workforces within the MoD, but with a partnership established between the naval bases, dockyards and ship contractors to support each class of vessel. It appears that the MoD accepted this idea in principle (and had already been establishing project teams to manage ship 'classes' in-service), but it considered that the complexity of devising contractual arrangements for such partnerships suggested that an evolutionary approach was needed in moving towards this ultimate goal. The MoD also assessed the unions' proposals to have offered less value for money than those of the companies (paragraph 42).

40. The MoD told us that the trades unions were involved from the outset, and in all three stages of the initiative.[79] They submitted scoping proposals in the first stage, and were invited to develop these further. In seeking proposals for the second stage, only a summary of the benchmark financial savings offered by the naval bases was released to the relevant companies, but the full details were released to the trades unions.[80] Mr Coles, whose Warship Support Agency was managing this initiative, told us that "I believe there has been a huge amount of consultation over this whole period of time about the process with the trades unions".[81] The MoD told us that the unions' proposal was considered as a full option in its own right and treated in the same way as the companies' proposals, with no particular constraints on adopting them if they proved to be the best value for money.[82]

41. Despite such reassurances, there has been some disquiet at the dockyards and naval bases about whether the trade unions' proposals were given a full and fair consideration, and whether the MoD had put as much effort into developing the potential of the unions' proposals as they did the companies'. The situation was not helped by the uncertainty surrounding a review by the National Audit Office which had not been published or shown to the trades unions. The MoD told us that the non-executive director of the Warship Support Agency had commissioned the National Audit Office to carry out an assurance audit of the process in a consultancy role, and as such, the MoD asserted, it constituted internal advice to the MOD and was not for publication.[83] We sought without success to obtain a copy of the report from the MoD, but the Department did provide us with a short summary report that had been agreed for the purpose with the NAO.[84]

42. The MoD expect savings from the warship support modernisation initiative of £327 million over 5 years, and £48 million a year thereafter.[85] Without proceeding with the initiative, the 'benchmark' in-house management arrangements put forward by the naval base commanders would generate some saving themselves.[86] But the companies' proposals "offered additional value for money over the first five years significantly in excess of the benchmark and the trades unions' proposals."[87] Mr Coles listed some of the benefits of the initiative that would contribute to those savings. These included rationalising organisations at each site from two to just one, the firms' ability to attract third-party work, competition for refits reducing their cost to the MoD, rationalising engineering maintenance and management structures, and the wider sharing of overheads for the estates and utilities.[88]

43. We explored in more detail two areas underlying the anticipated increased efficiency—increased refit competition, and the synergies of managing closely-located naval bases and dockyards.

Implications for competition and the future of the naval bases and dockyards

44. When, a year ago, the Secretary of State wrote to the Committee Chairman,[89] he stated that "a key objective of our strategy is to maximise competition in the warship repair market, thereby encouraging the existing companies to improve productivity". Mr Coles told us that refit competition will indeed increase under the prospective contracts, to 93% by 2005-06.[90] But this does not address the already planned underlying tapering-off of the allocated refit programmes. We therefore obtained from the MoD details of the position on surface ship refit competition[91] with the MoD proceeding with the warship support modernisation initiative, and on the basis that it would not do so (see Tables below). We established that, overall, introducing the warship support modernisation initiative will by 2005-06 increase the estimated percentage of refit work exposed to competition by a half — 93% rather than 61% .[92]

Extent of warship refit competition

	2002-03	2003-04	2004-05	2005-06
Assuming the WSMI proceeded:	53%	51%	69%	93%
Assuming the WSMI did not proceed:	52%	44%	41%	61%

A tapering-off of allocated warship maintenance programmes

	Prior to the Initiative	Under the WSMI
Devonport	Allocated upkeep programme to end in 2001-02. All docking periods allocated.	Last allocated upkeep in 2002-03. Docking periods to be competed after 2002-03.
Rosyth	Major warship/escort upkeep programme allocated to end in 2004-05. Minor warship repair periods allocated until 2007-08.	Allocated work to end in 2004-05. Allocated work to end in 2004-05.
Portsmouth	Docking periods allocated. No Repair period work allocated.	Allocated work to end in 2004-05. No repair period work allocated.

45. We explored whether the efficiencies, from competition or otherwise, would be more likely to affect the dockyards or the naval bases, and to what extent the MoD will be able or willing to influence where the results of any rationalisations might fall.

46. As regards the dockyards, we explored how competition might affect the longer term viability of some of the current yards, including whether the trend towards contracting warship procurement in a way that subsumes in-service support and maintenance could take refit work away even from all of the three naval dockyards. The MoD told us that in practice it would not want to agree to proposals that would jeopardise stable base-porting for ships' crews.[93] As CDP put it—

However, we noted that the newly-contracted firms would be managing the estates of both the dockyards and their nearby naval bases with no apparent MoD veto on their possible estate rationalisation plans. The Warship Support Agency's chief executive told us that "we want output; how they deliver it is less of a concern to us".[95] Mr Coles asserted that the MoD's refit workload could be handled by "one or five" dockyards, and that it would want to keep "at least two" of the current three for warship refit competition purposes.[96]

47. What of the naval bases? The MoD told us that the savings in the first 5 years are roughly evenly divided between the dockyard programme and the naval bases, but that the longer term recurring savings are entirely attributed to the naval bases.[97] The initiative is likely to lead to 1,000 posts being lost over a five year period, which translates into 750 staff because some posts are vacant.[98] The largest element of the naval base savings is concerned with the proposed partnering on the Clyde,[99] where savings from the synergies of the separated sites (Faslane and Rosyth) appear mainly to be confined to introducing "managerial skills that are needed to be brought to the base at Faslane".[100] If Faslane is in for a period of painful adjustment, the position regarding the naval bases more generally seems more certain. We were assured indeed that the MoD needs three naval bases.[101]

48. The underlying trend of reducing warships maintenance workloads has been long and deeply entrenched. Surplus capacity has remained, despite contractorising and then selling the dockyards, and the major job losses that have formed their backdrop. However, in seeking to tackle that problem — one shared with warship building, as we have seen — the MoD brought two years of still greater uncertainty as it developed its warship support modernisation proposals. It must not be surprised if further anxieties have developed over that time. With the contracts in place, the MoD must now clear the air over its plans for the future of the naval bases in the longer term, and how it expects work (and jobs) to be divided between the dockyards and the naval bases. A start would be a wide-ranging review by the National Audit Office to clarify and report to the House on the way the initiative was developed and managed by the MoD, the value for money of the new arrangements and on whether the approach now followed is an appropriate response to the challenge of managing surplus warship repair capacity.

49. The Secretary of State said in January 2001 that the improvements in competition and productivity from the initiative "should maintain the commercial viability of the companies against a reducing volume of warship repair. Withdrawal from the market by any of the existing players would be detrimental to competition and could jeopardise MoD achieving value for money in the longer term."[102] Looking to the future, however, there remains much uncertainty for the naval bases and dockyards, and their workforces. And the MoD will still be the party most able to influence how events are played out; a role which it must exercise with the same responsibility as it had before it contractorised the management of the naval bases. The MoD will remain in the driving seat, particularly in terms of the future of the naval bases. It considers that its recent decisions on the base-porting of future warships—Portsmouth for the Future Carriers and Type-45s, Devonport for amphibious assault vessels and the helicopter carrier, and Clyde for the Astute submarines—will provide a continuing need for all three bases.[103] The output-focussed contracts with the new commercial managers will prompt efficiency initiatives, however, that might place the longer term viability of some dockyards in greater doubt. Despite the caveats of the Minister and his officials, we noted that they were prepared to accept that ultimately market forces would sort out over-capacity in the dockyards.[104] Market forces should not however be the only determinant. The MoD will need to ensure that it monitors the contractors' performance and its effect on the service provided to the Fleet, and that it is able to safeguard essential facilities at the bases and Rosyth Dockyard. We believe that all major planned refit and maintenance work must be undertaken in the UK.