Written evidence submitted by Ministry of Defence (DIS0031)

Ministry of Defence Written Evidence for the Scottish Affairs Committee’s Inquiry into Defence in Scotland: military shipbuilding

What impacts are the Government’s Shipbuilding Strategy and National Shipbuilding Office having on the shipbuilding industry in Scotland?

Scotland is renowned for its rich shipbuilding heritage, spanning hundreds of years. Scotland has given the world some of its best-known maritime names and remains the location of a significant proportion of the UK's shipbuilding capacity. As such, Scotland sees benefits from the Government’s shipbuilding spend and the refreshed National Shipbuilding Strategy (NSbS) that was published on 10 March 2022. In 2019/20, the MOD spent £3.8 billion on shipbuilding and repair, directly supporting 27,100 jobs across the UK. From this, 7,500 jobs were based across Scotland.

There have been some significant achievements since the 2017 NSbS was published that have benefited Scotland. These include:

• the successful placing of the Type 31 frigate contract at Rosyth Royal Dockyard Limited (of Babcock International Group);
• the export of the Arrowhead 140 design (the export version of the Type 31) to Indonesia and Poland;
• the completion and delivery of five Offshore Patrol Vessel Batch 2 vessels from BAE Systems on the Clyde;
• the placing of the Type 26 frigate batch 1 contract; and,
• the export of the Type 26 design to Canada and Australia.

The benefits of the approach taken with Type 31 continue to be realised with the unveiling of the impressive Venturer building assembly hall in Rosyth and apprentice intakes. With the appointment of the Defence Secretary as the Government’s Shipbuilding Tsar, responsible for all aspects of UK shipbuilding, our ambitions for the shipbuilding sector have grown further still and there has been a renewed drive across Government to reinvigorate the sector. The refreshed NSbS was needed to expand the 2017 strategy to encompass the entirety of the shipbuilding enterprise and to refocus our attention to areas of increased importance including green technology, sub-systems and the supply chain.

The vision set out in the new strategy was developed with inputs from industry, including those based in Scotland. It sets out that by 2030, we will be a globally successful, innovative and sustainable UK shipbuilding enterprise. Given its footprint right across the UK, expanding our scope in this way is expected to make a significant contribution to the Government’s strategies of Levelling Up, Strengthening the Union and Building Back Better and Greener and is expected to directly benefit Scotland.

Pipeline

The strategy also sets out how Government will create the conditions for success in the shipbuilding enterprise. Firstly, it provides a clear demand signal through our 30 Year Cross-Government Shipbuilding Pipeline and the policy objectives that will underpin Government procurement programmes. This pipeline ranges from large warships to Border Force cutters and lighthouse vessels.

There are opportunities for Scottish shipyards and suppliers across the pipeline, which provides industry with clarity on Government’s future requirements and confidence in industry’s orderbooks. This is a substantial opportunity to create a baseline of volume to encourage industry investment in facilities, infrastructure and innovation. This will be augmented by improving access to finance and support for exports through the Home Shipbuilding Credit Guarantee Scheme (HSCGS), UK Export Finance (UKEF) and the establishment of the Maritime Capability Campaign Office (MCCO). This will encourage a greater number of commercial and export orders into Scottish yards, as well as the rest of the UK, and will reduce the reliance on Government as a customer.

Green Technology

Technology and innovation are clear themes throughout the strategy as we position our industry to be a world leader in complex, high-value and green shipbuilding. Industry across the UK will benefit from the UK Shipping Office for Reducing Emissions (UK SHORE) within the Department for Transport (DfT). UK SHORE brings with it £206 million of matched R&D investment to support industry to bring essential new shipbuilding technology to market, particularly green technology. It builds on the success of the Clean Maritime Demonstration Competition (CMDC) which was launched by the DfT in March 2021, which already allocated over £23 million of R&D funding to 55 projects across the UK.

The 55 winning projects consisted of 208 partner organisations from across the UK, 32 of which are based in Scotland. A further 8 CMDC projects are also being led by organisations based in Scotland. The total funding allocated to organisations in Scotland was over £2.4 million, approximately 11% of the total allocation. Some of these Scottish projects include the ‘Hydrogen in an Integrated Maritime Energy Transition’ project led by the European Marine Energy Centre Limited, which focused on the decarbonisation of ferry services and cruise terminal operations in Orkney.

Another Scottish project, led by the University of Strathclyde, aimed to research the technical and economic feasibility of hydrogen powered ocean-going and short-sea shipping vessels as a retrofit solution. Scotland particularly benefited from the CMDC due to the number of innovative maritime businesses and academia in the country and, although subject to the applications received, they are expected to see further benefits from UK SHORE.

Skills

One of the most critical enablers of a thriving UK shipbuilding enterprise is a highly skilled and motivated workforce who will support our industry to become more productive and ultimately more competitive. Skills, as a devolved issue, will be delivered through a UK Shipbuilding Skills Taskforce. This will work collaboratively with the Devolved Administrations and complement the excellent work already undertaken by the Scottish Government. The Taskforce will build a picture of industry’s skills needs and provide solutions to skills shortages, particularly those related to new and emerging technologies for businesses in Scotland and across the UK. The National Shipbuilding Office (NSO) has also engaged with BAE Systems regarding their long-term ambition to develop a National Applied Shipbuilding Academy on the Clyde. This proposal would enable the development of critical skills locally, to increase the talent pool for industry.

Overall, these measures will increase the shipbuilding enterprise in Scotland’s competitiveness and productivity. In turn, this will create a virtuous cycle whereby shipyards win further orders from the commercial sector, Government or through exports, providing even greater confidence in orderbooks and allowing for further investment.

National Shipbuilding Office

To ensure the implementation of the strategy happens at pace, in September 2021 the Shipbuilding Tsar announced the creation of the NSO. From its Whitehall and Edinburgh offices, the NSO will oversee all the UK Government’s interests in shipbuilding, from coordinating the long-term pipeline of Government vessels to ensuring alignment of essential skills.

How many and what types of Royal Navy ships will likely be built in Scotland in the years ahead? Will the sector grow?

The Royal Navy contributes to the UK and global security and ensures UK resilience and prosperity through such activity, enabling the flow of global maritime trade. To deliver the fleet of the future, the Royal Navy will upgrade its capabilities and modernise, developing the next generation of warships throughout the 2020s (the full pipeline has been attached as an annex). This will bring about a generational shift in UK naval technology, as well as growing the fleet at pace. UK industry will build ships and develop systems that deliver innovative and battle winning capability, bolstering the UK global influence and preserving the security of our nation for the future.

The settlement for Defence announced as part of the 2020 Spending Review provided the MOD with additional funding of over £24 billion over the subsequent four years. In the short term for Scotland, the shipbuilding pipeline sees eight Type 26 Frigates being built by BAE Systems on the Clyde, sustaining some 1,700 jobs in Scotland; and five Type 31 frigates being built at Rosyth by Babcock, supporting around 1,250 jobs. These are both significant programmes and will sustain shipbuilding jobs across Scotland well into this decade. We cannot make a commitment on where subsequent parts of the pipeline will be built, however Scottish shipyards and supply chain companies will have the opportunity to benefit from programmes across the pipeline, including build programmes, conversion work and through-life support. It is also important to note that the 30 Year Cross-Government Shipbuilding Pipeline includes a vast array of non-naval vessels from across UK Government and the Devolved Administrations.

How does the procurement approach for each class of Royal Navy ship determined on a case-by-case basis (including whether or not there should be international competition) affect Scottish shipbuilding?

All Royal Navy ships and Royal Fleet Auxiliaries (RFA) are operated by the UK in support of our national defence and security requirements. From frigates to naval auxiliaries, they contribute to the wide range of defence tasks, in peace or conflict, and it is entirely logical to view them as component parts of a broad maritime defence capability. For national security reasons, the UK needs to maintain a maritime enterprise with the industrial capabilities to design, manufacture, integrate, modify and support current and future naval ships (both Royal Navy and RFA). The 2021 Defence and Security Industrial Strategy (DSIS) therefore updated the MOD's shipbuilding policy so that:

The procurement approach for each class of ship will be determined on a case-by-case basis. As well as considering the specific capability requirements, the MOD will consider the long-term industrial impact of different options, including delivering value for money for the overall programme and maintaining the key industrial capabilities required for operational independence. These considerations will determine whether the optimum approach would be a single source procurement, a UK competition, an international competition or a blended competitive approach. The chosen procurement approach will be communicated with industry as early as possible to allow for forward planning.[1]

Further to the DSIS, through the NSbS Refresh, the MOD set out how it will adapt our approach across the different segments of the shipbuilding enterprise. Type 32 will be the pathfinder for this new approach, but the NSO and the MOD will work with industry, including Scottish industry, and stakeholders across Government to develop more bespoke strategies and plans to allow the sector and its constituent elements to flourish. We will consider whether the volume and spending on the Government's shipbuilding portfolio is sufficient to sustain a competitive market or whether a more collaborative approach would generate better value for the taxpayer and better industrial outcomes. Our new approach will focus on improving our global competitiveness in these segments, stimulating investment in advanced production techniques and working with industry, which will be of further benefit to Scotland.

Overall, the NSO considers this new approach as beneficial to the shipbuilding enterprise. The policy gives far greater flexibility when deciding the procurement approach for each class of vessel. As championed by the Shipbuilding Tsar, when competition is selected as the preferred procurement approach, then for all MOD shipbuilding competitions a minimum 20% weighting for social value will be applied in the evaluation criteria. This is double the mandated minimum of 10% for other Government competitive contracts. This will benefit business across the UK, including Scotland and right across the supply chain. The social value criteria will vary between specific programme, but the current priority themes include COVID-19 recovery, fighting climate change and tackling economic inequality. Our choices will align with the strategic priorities set out in the refreshed NSbS and we can be clear that value in a competition does not just mean the lowest price.

To what extent does Scotland benefit from exporting military ships (or parts of them) and/or their design licences? How can these opportunities be maximised?

Scotland benefits significantly from the export of military ships and their designs. The export variant classes of the Type 26 and Type 31 (Arrowhead 140) have been successfully marketed and sold overseas through the provision of design licences to a number of international customers, including Australia, Canada, Indonesia and Poland. There are several active campaigns with other overseas customers at the development stage for both types of ships and success in these will have significant benefits for the wider enterprise, including their associated supply chains, for work across the pipeline, including build programmes, conversion work and through-life support. Whilst building vessels for export in Scotland certainly provides further jobs, the export of a design also brings significant benefit. Indeed, BAES estimate that, through the export of the Type 26 design, which amounts to 32 new ships in total for the UK, Australia and Canada, this endeavour will create or sustain 5,000 export led jobs in the UK and will enable c.£6 billion of potential export contracts to flow to UK suppliers, some of which are based in Scotland.

Maritime Capability Campaign Office

Through the refreshed NSbS, the MCCO was established to proactively pursue export opportunities for the whole of the UK, including Scotland, through a coordinated approach with Government and Industry. In so doing, it will help deliver our commitment to maximise exports and enhance Government's approach to working with industry. Our significant ambition for exports was set out through the strategy, stating the aim that by 2030, shipbuilding, boat building and marine engineering exports increase by 45%. The MCCO is supporting over 70 maritime campaigns across more than 20 countries.

What more could the UK Government do to maintain and foster military shipbuilding in Scotland?

Through the implementation of the refreshed NSbS, work is well underway to deliver a globally successful, innovative and sustainable UK shipbuilding enterprise. Given the significant links between the Royal Navy and shipbuilding and support industry in Scotland, the Royal Navy has committed funding to lead a comprehensive cross-sectoral analysis of the maritime enterprise in Scotland. The aim of the study is to identify shared challenges, priorities and ambitions in the maritime sector in Scotland and to identify options for future Royal Navy and MOD participation and investment. The Royal Navy is also engaging with the Clyde Mission, a Scottish Government led mission that brings together public and private sector partners to harness the opportunities of the River Clyde, with a particular focus on improving the wider maritime logistics supply chain.

The NSO will continue to work closely with the Scottish shipbuilding sector, including through the new Shipbuilding Enterprise for Growth (SEG) and with the Devolved Administration in Scotland. The SEG is an integrated and collaborative community with membership from across the UK shipbuilding enterprise, including Scotland, and Government. It will identify opportunities for members to work together, outside of any competitive procurement processes, which will deliver tangible improvements to the shipbuilding enterprise.

The NSO will work with the SEG to implement the refreshed NSbS and determine what further action is required to tackle barriers to growth, boost exports and grow high-value skilled jobs across the enterprise.

Annex A: Glossary

May 2022