Tough Decisions on Ship Building Ahoy

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There is a decision looming, possibly towards the end of the year that will see the future military surface shipbuilding landscape in the UK defined.

As the Type 45 build phase draws to a close the endpoint of CVF within view the only major build programme on the horizon is the Type 26. The end of the design phase for Type 26 is around 2013/2014 which is as we know is well within the timeframe for any referendum on Scottish independence.

The UK has a public-private hybrid, although ostensibly BAE Systems is a PLC, in the shipbuilding sector it only has one customer, the MoD, and that customer also defines the wider industrial policy as well. The Maritime Change Programme is informing the shipbuilding and support environment, making sure that skills, capabilities and capacities match predicted and stable orders. Driving this programme is the 2009 15 Year terms of business agreement (TOBA) which defined a run rate of about £230 million revenue from the MoD per year. The MoD is committed to this 15-year programme, it would be on the hook for a large stack of costs if it pulls out.

The TOBA has at its core a need to reduce costs, BAE is under the cosh with both carrot and stick.

The SDSR demanded cost savings across the board and surface shipbuilding does not get a free pass.

There are two yards in Scotland and one in England

Govan, Scotsoun and Portsmouth each offer a range of advantages and disadvantages so there is no obvious contender. If Portsmouth goes it will also have implications for Birkenhead and the Tyne where Cammell Laird and A&P are based.

Whilst there is nothing unusual with block building very large ships like CVF where parallel fabrication can be used to speed construction it surely must introduce some measure of inefficiency and additional cost on smaller vessels.

The recent MARS contract was placed overseas partly because it was cheaper but mainly because of a lack of capacity, the UK shipbuilding industry is at full tilt with CVF but this isn’t going to last forever and a reduction in capacity is inevitable.

Maintaining the three yards at a reduced and realistic capacity is not viable, three yards with a build rate of one Type 26 a year does not make for a cheap build or viable industry.

Closure of one or more would seem inevitable, unpleasant for all concerned of course.

BAE has retained the services of Lek Consultanting to provide an impartial analysis but whilst this may provide a perfectly sensible outcome it may not take into account the political aspects.

It may come down to a simple choice between North or South and if the North decides to leave the Union then where does that leave our desire to retain onshore the ability to design, build and integrate complex surface warships?

BAE Systems must take this into account; it cannot be swept under the carpet and I would expect that no decision will be made until the referendum issue becomes clear.

A sting in the tale courtesy of the TOBA is that if any yards are closed, Mr and Mrs taxpayer, courtesy of the MoD’s budget, will be invited to foot the bill.

A cynic might think the recent announcements were BAE’s way of reminding the MoD to get a move on with Type 26 but I think long term it is clear that the current capacity will need to be trimmed back.

Perhaps there are options, selling a yard to Babcock, bringing forward other projects or having a long term strategy for example.

Sad times.

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