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Ministry of Defence: Swan Hunter Contract

Volume 684: debated on Wednesday 12 July 2006

I wish to inform the House of developments in the Landing Ship Dock (Auxiliary) (LSD(A)) programme. The Ministry of Defence has reached a full and final settlement for the closure, by mutual agreement, of its contract with Swan Hunter (Tyneside) Limited in Newcastle for the design and construction of two of the vessels.

The programme is to deliver a new class of landing ship dock (auxiliary) to replace the ageing landing ship logistic, used to deploy amphibious task groups, vehicles and equipment directly into potentially hostile operational areas. Beyond their primary role to support amphibious operations, the vessels will provide wider support to joint operations by providing strategic sealift at high readiness, support to humanitarian and peacekeeping operations and sea-based support to deployed land formations. The total programme is for four vessels, two designed and constructed by Swan Hunter, with a further two built by BAE Systems.

The LSD(A) programme is well advanced. RFA “Mounts Bay”, the first ship built by BAE Systems, has completed sea trials and been accepted by the MoD. “Cardigan Bay”, the second BAE Systems ship, is due to be accepted in August. “Largs Bay”, the first of the Swan Hunter vessels, was accepted off-contract in April but this was over two years later than the original contract schedule. Initial indications are that the vessels will deliver excellent capability once in service.

The major programme issue has been, however, the poor performance and cost growth at Swan Hunter, which has also impacted on the costs of the ships being built by BAE Systems. Swan Hunter was awarded the LSD(A) contract in December 2000. It subsequently became apparent that Swan Hunter had underestimated the complexity of the programme and was unable to control costs effectively and, in December 2004, the contract value was uplifted by £84 million. Swan Hunter was also expected to improve its management performance. However, costs have continued to rise and this funding has been consumed without “Lyme Bay”, the second Swan Hunter ship, being completed.

Although the construction of “Lyme Bay” is well advanced, we cannot predict her acceptance date or her cost to completion with any confidence in the current contractual arrangements. Sustaining the current contract with Swan Hunter no longer provides value for money for the taxpayer, and to continue would be likely to lead to more delay and further cost overrun.

It has therefore been mutually agreed with the management of Swan Hunter that the contract should be closed. BAE Systems will instead provide lead yard services and design authority until completion of the programme and will complete the construction of “Lyme Bay” at Govan on the Clyde. There has been significant cost escalation on this programme and we now expect the revised combined contract values to be approximately £600 million. The details of the commercial agreements currently remain confidential, but the relevant cost data will be released once it is possible to do so. The new arrangements bring far more certainty to the programme, both in cost and timescales.

Our priority has always been effective delivery of the required military capability, which we have attempted to achieve through successful completion of the contract with Swan Hunter. The company has been given every encouragement and opportunity to succeed through additional funding and time. While the workforce itself has performed well, with excellent workmanship, we no longer have adequate confidence in the company's ability to complete the contract within an acceptable timescale or cost. We therefore have no choice left. It would be fundamentally incompatible with our obligations to the taxpayer, or indeed the principles of the Defence Industrial Strategy, for us to continue with this state of affairs.

We will be doing what we can to minimise the impact of this decision on the region. Discussions are under way with the trade unions, local MPs and others regarding the way ahead. The Ministry of Defence is also working with the Department of Trade and Industry and the regional development agency, One NorthEast, to identify opportunities for the workforce, including the apprentices currently employed within the company. We expect that a number of the main sub-contractors will be re-employed by BAE Systems to complete “Cardigan Bay” and “Lyme Bay”.

While the need for this decision has been unwelcome, we now look forward to introducing all four ships to service and providing our Armed Forces with the high level of capability and support they have the right to expect.