HCDC INQUIRY – GENERAL ELECTRIC AT RUGBY / FLEET SOLID SUPPORT SHIPS PROCUREMENT [EXTRACTS] – 21 May 2019
Witnesses: Stuart Andrew MP, Sir Simon Bollom KBE CB, Air Marshal Richard Knighton CB and Rear Admiral Paul Marshall CBE.
Q137 Chairman (Dr Julian Lewis): Welcome to the new panel of witnesses, including the Minister. The running order will involve a couple of brief questions about the A400M and the Wedgetail procurement. We will then have a few more questions about General Electric and Rugby, and will then proceed to the fleet solid support ships issue. Please briefly introduce yourselves.
Air Marshal Knighton: Air Marshal Richard Knighton. I am Deputy Chief of Defence Staff, military capability.
Stuart Andrew: Stuart Andrew, Minister for Defence Procurement.
Sir Simon Bollom: Simon Bollom, Chief Executive, Defence Equipment and Support.
Rear Admiral Marshall: Rear Admiral Paul Marshall, senior responsible owner for Type 31, Type 26 and fleet solid support.
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Q178 Dr Lewis: We must move on to General Electric in Rugby. Minister, you referred, quite rightly, in your earlier remarks in this other context that we have quite a lot of correspondence going back and forth between the Committee and yourself. We appreciate the promptitude with which you reply to our inquiries. But you will know that when it comes to GE and the proposed move to Nancy, that correspondence, as I recall it, seemed to be rather accepting of the fact that it was going to happen. Luckily, and by happy coincidence, it was announced just yesterday – 24 hours ahead of this hearing – that we have a deal and a good outcome, and the Royal Naval part of the business has been secured, largely because of the acceleration of Type 26 motor orders. I have a couple of initial questions, and then John in particular will explore how we got to this state where even though we appeared to have a legally binding agreement to ensure that this important capability was secure in the UK, we very nearly lost it. When did you first hear about GE’s plans to move the work to Nancy? Were you consulted – forewarned, in other words – about that before the announcement was made that they were planning to close down and move?
Stuart Andrew: Both Simon and I will need to answer this question, because he has been dealing with this prior to my appointment. But pretty soon after my appointment this issue was raised with me, not least by the local Member of Parliament, Mark Pawsey. I have to say, as I said in the House yesterday, he has been extremely persistent in making sure that we are doing all that we can for this. As soon as that issue was raised with me, I arranged for a telephone call with GE to discuss what the options were. I understood there had been previous discussions, but the plan seemed to be, from their point of view, that they would continue with the decision to move to Nancy.
Q179 Dr Lewis: Right. Just to pin down this bit – I have a couple more questions to follow – and I appreciate that this was before your time, Minister, but can anybody be clear: was the MoD properly consulted before GE announced that they were planning to close down this plant and move the work to France?
Sir Simon Bollom: I have been running this issue since December 2017, which was the point at which GE notified us of the intent to go into consultation about moving the RMR capability to Nancy.
Q180 Dr Lewis: Was that notification made to you before it was made public?
Sir Simon Bollom: I think it was in parallel.
Q181 Dr Lewis: So really they came to you and said:
“Well, we are planning to do this. And, by the way, we just put it out on the wire.”
Sir Simon Bollom: They advised us that they were going to go into a consultation.
Q182 Dr Lewis: It doesn’t sound as if there were any serious, in-depth discussions about the implications of all this before the consultation process was announced and got under way.
Sir Simon Bollom: I became aware of it in December 2017, and they launched the consultation process early in 2018.
Q183 Dr Lewis: Were there intensive discussions before it went public?
Sir Simon Bollom: There has been some very intensive conversation with GE on not just the rotating machines but the test facility and the engineering capability.
Q184 Dr Lewis: I know there has been ever since. I am asking – this is a fairly straightforward point. If you are not sure, and I appreciate that you would not want to mislead the Committee –
Sir Simon Bollom: I will need to go and check the timings.
Q185 Dr Lewis: Will you check it and let us know? All we want to know is how seriously this company was taking its obligations to the Ministry of Defence and this country before it came out into the open with this proposal, which seemed to fly in the face of all the assurances that the Ministry of Defence and the Government had been given by the company when it acquired the plant in the first place.
Sir Simon Bollom: I understand the point and I will confirm the timings.
Q186 Dr Lewis: That is fair enough. So why did it take so long to reach agreement with GE about bringing forward the batch 2 Type 26 programme to help maintain the Rugby site? In the correspondence we were having, there was not much sign of any progress being made. Was it that you would always have been willing to bring forward the batch in order to save it, or was it that they were asking you to do this and you were reluctant to do it? Who blinked first?
Stuart Andrew: I will let Sir Simon go into greater detail, but I think I am right in saying that right from the outset the offer was to bring forward the Type 26 motor work.
Q187 Dr Lewis: So it was always the position of the MoD that, if it would help, you would accelerate.
Sir Simon Bollom: Let me put it another way, Chair. We were notified of an intent to go into a negotiation over a move to Nancy. That is when we intervened. To us there seemed to be a real economic benefit in terms of retaining the capability at Rugby. It kept engineering, test and rotating machines together. Clearly, it is a very important part of support to our current warships and indeed our future aspirations: Type 26, potentially Type 31, and FSS. So we entered into a negotiation that essentially was one about the programme assurance that GE was seeking in terms of keeping that viable. You will be aware of the pressures the company is experiencing not just in this country or in Europe, but across the US in a heavy rationalisation programme. We sought to find a deal that was value for money for us and provided us with the right level of capability for the Royal Navy, but equally provided them with a viable business. That process takes time. As part of the deal, we brought forward an undertaking to commit to the batch 2 motors, subject to our internal approval scheme.
Q188 Dr Lewis: When they were making the offer to take all this to Nancy, were they proposing, as far as you knew, to build one of these special tanks that is such an intimate part of the process? We have a much larger one here than they have in Nancy.
Sir Simon Bollom: That is the test facility.
Q189 Dr Lewis: That’s right. Were they undertaking to build a new larger one there, or were we going to have to get a different sort of motor?
Sir Simon Bollom: No, they would effectively build to pattern the motors that were then being built at the Rugby facility. So the test facility is more of a development, an investigative capability. It is not just for our ships. It encompasses submarines as well. So that is very much a part of UK freedom of action, but in terms of the manufacture of the motors, it is essentially built to a pattern.
Q190 Dr Lewis: So it would have been exactly the same motor.
Sir Simon Bollom: It would have been the same motor, but –
Q191 Dr Lewis: We would not have had to redesign the ships.
Sir Simon Bollom: No, we would have had to go through acceptance testing again, which was one of the arguments that we put forward. We argued very strongly that we had a capability that we understood at Rugby. We did not want to go through extensive qualification on a new manufacturing capability.
Q192 Dr Lewis: But we would have lost the ability to build motors of this sort in the UK.
Sir Simon Bollom: There are other competitors, but certainly at this scale and to that fidelity we would probably have lost that.
Q193 Dr Lewis: Okay. Finally from me, what discussions did you have with your Australian and Canadian opposite numbers, Minister, about the proposal, because it would have affected them as well?
Stuart Andrew: Most of the discussions that I have had were with the company itself. As I said at the beginning, we had the initial telephone call and then I asked them to come in to meet with me, and then officials had more detailed discussions at which we brought up the potential opportunities that would exist with both the Australia and the Canada campaigns.
Q194 Dr Lewis: Were you ever worried about the discovery by the trade unions of Chinese espionage fears in relation to the Nancy site?
Stuart Andrew: No, I wasn’t personally.
Sir Simon Bollom: I had heard that there was a concern. That was not really a key determinant in the decision, which was a business and economic one.
Dr Lewis: Hmm. What does that remind me of? Mentioning nothing about Huawei at all …
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Q218 Martin Docherty-Hughes: It is like Goundhog Day. Minister and members of the panel, do the examples of France and Italy show that there is a choice over the classification of fleet solid support ships as warships? I would note that they have both already built and exported the FREMM frigates, which are the principal rivals to what will be the Type 31e. Both have diversified shipbuilding bases, which can literally turn their hand to anything, whether it be what we used to do on the Clyde – being a son of Clydebank, I know that we built ocean-going liners and warships at the exact same time, even though we have absolutely nothing left now – yet BAE Systems in Clyde has been told that it can’t build a Type 26 and a Type 31 at the same time. With the confusion around the fleet solid support, we also have an industry that says it wants to do something. Why doesn’t the MoD support it and the taxpayer, in the same way they have done in France and Italy?
Air Marshal Knighton: I am not quite sure who has told BAE Systems. You said that BAE Systems had been told that –
Q219 Martin Docherty-Hughes: I was led to believe that it had been told that it can’t bid for both the Type 26 and the Type 31 at the same time.
Sir Simon Bollom: That is not true.
Air Marshal Knighton: That is not true.
Q220 Martin Docherty-Hughes: So you are making it quite clear that they can do it at the same time?
Sir Simon Bollom: Absolutely, and they are.
Air Marshal Knighton: BAE Systems is one of the consortia.
Martin Docherty-Hughes: That gives some clarity on that, at least. Thank you.
Air Marshal Knighton: On your question about FSS and whether there is a choice, there clearly is a choice. The UK has made a choice that we should run an international competition for its build, on the basis that we recognise that international competition drives higher productivity and better innovation.
Q221 Dr Lewis: Can I just clarify this? You are saying – there is an argument to be made for this – that you classify fleet solid support ships as not being warships not because you have to but because you are taking up the option that you have of classifying them as not being warships; you are not being forced to do that. Is that right?
Air Marshal Knighton: Ms Smeeth made the point that you can make an argument for classifying them as warships. The Government clearly said that they are not classifying them as warships for the purposes of the national shipbuilding strategy, and therefore it is open to international competition.
Q222 Dr Lewis: Yes, I know what you decided. I am saying that you are not saying that you have been forced to make that choice but that it was a free choice that you chose to make? Is that right?
Air Marshal Knighton: Yes.
Q223 Dr Lewis: You are not saying that you might have liked to have classified them as warships but could not; you are saying that you could have classified them as warships but decided, for good reasons – competition and all the rest of it – not to classify them as warships. Is that right?
Air Marshal Knighton: The policy is clear: we decided that we would not classify these as warships. That is clearly a choice.
Q224 Dr Lewis: Why are you resisting? The policy is clear: you have decided not to classify them as warships. I am asking whether you made that decision solely because you had to, because there are rules that mean that you cannot classify them as warships, or whether you had the option of classifying them as warships and chose not to. Which of the two is it?
Air Marshal Knighton: The admiral explained the rules around the UN convention on the law of the sea. If you interpret that with regard to the use of Royal Fleet Auxiliary ships, you can come to the conclusion that they are not warships. Like all these things, there is a degree of judgment.
Q225 Dr Lewis: I am sorry; this is too much detail. It is a very simple point: are you making this classification because you have chosen to do so or have you no choice in the matter?
Air Marshal Knighton: The Government have chosen to do so.
Q226 Dr Lewis: I know the Government have chosen to do so, but have they chosen to do so because they have to choose this option, or could they have chosen the other option? It is very simple. Was it a voluntary choice or was it something on which you really had no choice? I don’t understand what is so incomprehensible about this question.
Stuart Andrew: My understanding is that the judgment that has been made is that the exemption from the procurement regulations of article 346 could not be made because we could not argue that it was a warship, for the reasons we have explained.
Q227 Dr Lewis: So you are saying that you had to choose this –
Stuart Andrew: That was our legal interpretation of the procurement regulations.
Dr Lewis: So you think that you had no choice. That is all I wanted to get at.
Q228 Martin Docherty-Hughes: Let us take this a wee bit further. If the Minister in the Department does not think there was a choice, why does the Department say in a formal response to an e-petition that
“it is conceivable that other nations have applied exemptions where the UK has chosen not to, but which are still reasonable in their own National Security context and wholly compliant with EU law”?
Stuart Andrew: The reason we made this decision –
Martin Docherty-Hughes: Choice.
Stuart Andrew: This is the interpretation, because of the national security –
Q229 Martin Docherty-Hughes: Why is no one else in the European Union interpreting it?
Stuart Andrew: I cannot answer for other European countries on the decisions they make. All I can say is that we had to look at this very carefully. To ensure that we adhered to the national security exemption, we had to make a decision on this. For frigates and aircraft carriers and so on, we can argue that their design features – the complex weapons, the sensor fit and so on – are important for operational advantage. I cannot say why other countries have made that decision about their fleet solid support ships.
Q230 Mr Francois: So you are hiding behind article 346?
Stuart Andrew: It is part of the regulations that we have to adhere to.
Mr Francois: This is ludicrous.
Stuart Andrew: We are in the EU.
Dr Lewis: We are at the moment.
Mr Francois: If you are using 346, that is utterly ludicrous. The French didn’t; all the other European countries didn’t; so how is it that they interpret it differently from you?
Stuart Andrew: I think we have just explained –
Q231 Mr Francois: You haven’t, actually.
Stuart Andrew: I tried to explain that how our fleet solid support ships are crewed is an element of this. The sensors and weapons that they have on them are defensive; they are not attack weapons. This is the sort of decision that we make –
Q232 Mr Francois: Minister, article 346 refers to “warlike stores”. There has been European case law about whether or not a parachute constitutes “warlike stores”, for instance, or a medical kit, if it is likely to be deployed on a battlefield. Are you telling me that a Royal Fleet Auxiliary that goes to sea to support the Royal Navy at war is not a warlike store?
Stuart Andrew: As I have just tried to explain –
Mr Francois: I know the article.
Stuart Andrew: As I have tried to explain, that is the interpretation that we have made. This is not just about the definition of the warship. There are multiple factors that we are working towards to try and make the whole of the industry even more competitive.
Q233 Mr Francois: I have never heard you try to hide behind article 346. You can make other arguments, but to try and rest your argument on article 346 is dangerous.
Stuart Andrew: It is not just 346. We have just heard from the Rear Admiral about –
Mr Francois: I will wait, but then it’s my go.
Air Marshal Knighton: I was just going to say, Mr Francois, that countries such as Germany have competed their support shipping in Europe. Other countries, such as Norway and Australia, have also competed their support shipping. I have highlighted the ones that have.
Mr Francois: I’ve got that. Presumably the French can read too, right?
Q234 Dr Lewis: The point we are trying to get at is simply that some countries have chosen to class it as a warship; some have chosen not to class it as a warship. We have chosen not to class it as a warship but we are trying to pretend that we had to not class it as a warship – but that seems to stretch our credulity.
Rear Admiral Marshall: I think you have very clearly pointed out the importance of achieving a drumbeat of orders; and the current competition is being run under article 346.
Mr Francois: Cheer up, Sir Simon; it’s nearly over.
Rear Admiral Marshall: Therefore we need to continue that competition under article 346 in order to place the orders.
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Q293 Dr Lewis: We are almost done. How do you protect yourselves against the possibility that, in a bidding situation of this sort, a foreign bidder – possibly state-subsidised – might deliberately underbid what the British consortium might be able to offer with a clear conscience, and then, after it is too late and the foreign bidder has got the contract, it turns out to be more expensive and is delayed? Do you have the contracts drawn up in such a way that they have to bear the loss, or do we have to?
Sir Simon Bollom: The first part is that we will do an extensive piece of due diligence on the winning bidder, as we did with the Tide-class tankers. We have a process that looks for abnormally low bids. We will of course have a very detailed breakdown of the cost estimates that the supplier provides, and of course we have benchmarks. We will be pretty confident that we could identify a low bidder. The intention, just as we did with Tide, would be to go for a firm fixed price on this. It is then up to the bidder to make sure that they deliver – there is no more money available.
Q294 Dr Lewis: Yes. I am not an expert on the subject, but I believe there were problems with that tanker delivery. Is that right?
Sir Simon Bollom: There were some negotiations at the end. The contractor found that it was a tough target that was set, but that is what you get with a firm fixed price – there is an associated risk.
Q295 Dr Lewis: So we didn’t lose out?
Sir Simon Bollom: We absolutely didn’t. We came inside the budget.
Q296 Dr Lewis: That is very clear and the sort of answer I was looking for. Thank you. Finally, do you think that chapter 5 of the national shipbuilding strategy, on industrial policy and prosperity, is dead? Or can we take some comfort from another quote from the new Secretary of State’s speech at RUSI, when she said the aim is:
“to create a virtuous circle where we recognise that it’s long order books and a steady drumbeat in our yards that strengthens our supply chain and brings down the overall cost of procurement. What’s needed is a closer partnership with industry that gives them confidence to invest and build and us the confidence that we can and must buy British.”
Is she on track? Is the chapter of the national shipbuilding strategy that suggests the same sort of thing on track? Or are these just virtuous words, rather than a virtuous circle?
Sir Simon Bollom: I will defer to my Minister.
Stuart Andrew: The Secretary of State was clearly saying that we understand and recognise the point about a regular drumbeat, but we have to ensure – I keep going back to this point – that we get value for money for the taxpayer and that we get the maximum capability available with the budget that we have. In order to ensure that those yards are able to produce such equipment, we need them to be competitive. The Secretary of State was very clear in challenging the industry to do that, and that is why we are working very closely with them. We are looking at a whole range of aspects around the prosperity agenda, following Philip Dunne’s review – things like setting up the new joint economic data hub, which is looking at what is the true value of defence to the wider UK economy and how we are making more of the industry more competitive. We are working closely with people like ADS, Defence Economics, the Office for National Statistics and –
Q297 Dr Lewis: Is that data hub in the MoD itself?
Stuart Andrew: It is down at Farnborough, isn’t it?
Air Marshal Knighton: It is in Farnborough. It is an adjunct to the DSC.
Stuart Andrew: As part of that, in the autumn we are having the Defence Economics Conference, which will again be hosted by King’s College London. It will look at the value of the defence sector, so that we can really try to understand the true value to the UK economy of the defence sector.
Q298 Dr Lewis: You will no doubt know about the King’s College report of a few years ago that Lord Sterling commissioned, entitled A Benefit, Not a Burden, which stressed the amount of revenue that comes back to the Treasury and to the economy when British defence expenditure is invested in expenditure by British defence industries. Finally, how far has Sir John Parker got with his review of the national shipbuilding strategy, and when is he likely to report?
Stuart Andrew: My understanding is that his report will be published jointly with our response, and that will be later this year.
Q299 Dr Lewis: Okay, so we now know it will not be next year, but there is a lot of this year left to go. Can you narrow it down a bit more?
Air Marshal Knighton: Sir John has not yet passed his report to the Secretary of State. We expect that to happen soon, but it is Sir John’s report and I am afraid we do not know precisely when he is going to pass it on.
Q300 Dr Lewis: But you think it is at a draft stage, perhaps.
Air Marshal Knighton: It is imminent.
Q301 Dr Lewis: In that case, I would have thought it would be a matter of weeks rather than months, with any luck. We will look out for it.
Stuart Andrew: We are in Sir John’s hands.
Dr Lewis: Well, give him a nudge. Thank you all very much. It has been a marathon session and we have covered a lot of ground. We are very grateful to you all.