Written evidence submitted by Professor Keith Hartley (Emeritus Professor of Economics at University of York) (DIS0021)

Defence in Scotland: Military Shipbuilding.

A Gap in the Terms of Reference

 

Keith Hartley

Emeritus Professor of Economics

University of York

York, YO10 5DD

England             

28th April, 2022

 

Introduction: scope of this evidence

  1. This written evidence identifies a major gap in the Terms of Reference. The Terms focus on the role of the UK Government in the future of Scotland’s warship building industry and neglect the role and impact of a possible Independent Scotland.
  2. All the key questions raised for the Inquiry refer to the role and impacts of the UK National Government. These questions include the future of the military shipbuilding industry in Scotland; the numbers and types of Royal Navy ships likely to be built in Scotland; the procurement approach; Scotland’s benefits from exports; and what more could the UK Government do to maintain and foster warship building in Scotland. These are relevant questions but they need to be considered against a possible scenario of an Independent Scotland. Independence would change dramatically the answers to the key questions.

Limitations of the Evidence

  1. Independence for Scotland raises a complex set of economic questions about its future naval defence policy.  Information is needed on the naval defence budget and naval defence policy of an Independent Scotland. What types and numbers of warships will be purchased with Independence and what is the likely economic impacts on the size and skill base of the workforce? Various assumptions are possible, each providing different answers to the key questions. The task of an economic analyst is to identify and assess critically the various assumptions used in any scenario and to identify gaps in information and knowledge. A starting point is the facts about the Scottish warship industry.

 

The Scottish warship building industry

 

  1. Estimated employment in the Industry is some 7,000 jobs in Scotland. There are two major warship shipbuilders, namely, BAE Systems with yards at Govan and Scotstoun and Babcock with a yard at Rosyth. Currently, BAE Systems is building 8 Type 26 frigates and Babcock is constructing 5 Type 31 frigates and a further 5 Type 32 frigates. Also, 5 Offshore Patrol Vessels were built by BAE giving a total of 23 warships for the Royal Navy built in Scottish yards between 2014 and 2035. 
  2. Each warship has an associated supply chain. These are complex and data are not always available on the true extent of supply chains.  On the Type 26 frigate, it has been estimated that the programme will sustain some 4,000 jobs in total across the UK. Suppliers on this programme include Denham Industrial Services (Glasgow); Malin Group (Glasgow); CBL (Hartlepool); Kaefer (Nottingham) and SCA (Dorset) which shows the geographical diversity of supply chains (and these are first tier suppliers only not including second and third tier firms). Others include Rolls-Royce/MTU supplying the propulsion system and Ultra Electronics providing the sonars. There is an international dimension with variants of the Type 26 selected by Australia and Canada. BAE Systems received a contract estimated at some £3.7 billion for the first three Type 26 ships.
  3. The Type 31 frigate (known as the Arrowhead 140 design) is estimated to sustain 1,700 skilled jobs in Scotland and a further 1,700 jobs in the supply chain across the UK. Average production cost is estimated at £250mn and the overall programme cost at £2 billion with £1.25bn awarded to Babcock. The Type 31 team comprises Babcock, Thales, OMT and BMT and other suppliers include Rolls-Royce/MTU which provides the diesel engines. The Type 31 will also be built by Poland and Indonesia.    

 

Future Warship Building in an Independent Scotland?

 

  1. Independence raises many complex questions about the economic and other aspects of defence policy and future warship building in Scotland. Much remains unknown and uncertain. Specifically, we lack information on the Naval defence budget in an Independent Scotland enabling an assessment of the scale of procurement and its likely impact on Scotland’s warship building work force and its skill base. The approach will be illustrated by taking what appears to be a simple example and showing its complexity.
  2. Consider a possible future scenario under Independence with the Government of the Rest of the UK (RUK) deciding to reallocate its warship building to yards in the RUK (i.e. Independence will lead to a re-allocation of Royal Navy warship building from Scotland to RUK). This is a likely response by RUK to Independence: RUK has always preferred to build its warships in domestic yards for reasons of national security and domestic employment objectives and such preferences are likely to continue with an Independent Scotland.  
  3. A re-allocation of work from Scotland to RUK will not be costless and will take time (adjustments are not instantaneous). Contract changes will be required and such changes involve costs. There are at least two different time periods for contract changes and information is needed on the likely costs of such contract changes. First, in the short run (immediately), contracts can be broken which usually requires compensation payments. Or, secondly, the buyer (UK Ministry of Defence) might wait until the current contracts have been completed and then re-allocate future contracts to yards in the RUK (in the long run, all contacts can be changed). Creating warship yards in RUK is feasible since there is physical and human capital capacity in the form of existing yards (e.g. Barrow; Cammell Laird; Devonport). If needed, design and other key staffs can be recruited from the Scottish yards, with appropriate staff compensation payments for re-location.
  4. The Scottish yards are privately-owned and with Independence, the owners of the yards might decide to move to RUK with its larger warship market: the Royal Navy will offer more attractive and more challenging markets than the Independent Scottish navy. The Government of an Independent Scotland might respond by nationalising its warship yards. This will be a further financial cost for Scotland and problems have arisen with its track record of performance under state ownership. Its nationalisation of Ferguson Marine and the building of two ferries has been associated with substantial cost overruns and delays (cost overruns of 2.5 times and delays of 5 years); and a 2022 Scottish Government contract for two new ferries was awarded to a Turkish yard[1]. The example of this scenario illustrates the complexity of what appears to be a simple choice.

Conclusion        

  1.   An Independent Scotland means over time a significantly smaller Scottish warship building industry. An Independent Scottish navy will not have the buying power of the Royal Navy: it will probably require a few patrol vessels which will not be as technically demanding as the requirement for advanced naval frigates by the Royal Navy. Also, over time, the owners of the Scottish warship yards are likely to re-locate to RUK with impacts on employment and the skills base.
  2. Of course, the Government of an Independent Scotland might claim that it can create new jobs to offset job losses in warship building. This a possibility but a properly argued case needs to be presented, otherwise we enter the realm of ‘magic wand’ economics.

April 2022

 

 

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[1] This example shows that the Scottish Government might prefer to select a foreign yard rather than a domestic yard when awarding contracts.