Government ‘hiding behind EU rules’ to offshore shipbuilding contracts say union

Unions have told Ministers that shipbuilding in Britain could face multiple yard closures in 2019 if they continue to use European regulations to avoid building support vessels in the UK.

Minister for Defence Procurement, Stewart Andrew MP, who invited competitive tenders from shipyards in Spain, Italy, Japan and South Korea last Friday has told MPs and campaigners that the MoD will not classify the vessels as warships, which would guarantee their design, manufacture and maintenance in Britain.

Instead they say the ships are subject to EU state aid funding rules (Article 346 of the Treaty of the Functioning of the European Union) which say that commercial ships must be open to international competition.

What is Article 346?

EU law requires most government contracts to be procured via an open, competitive process. The main EU legislation in the defence domain is the Defence and Security Directive 2009/81/EC, transposed into UK law by Defence and Security Public Contracts Regulations 2011.13

However, Article 346 of the Treaty on the Functioning of the European Union (TFEU) provides for an exemption to the procurement rules where a country considers it to be necessary for national security reasons: “any Member State may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material”. Article 346 refers to a list drawn up in 1958 by the Council of Ministers of products to which the provisions

At a meeting with national officials and representatives from yards who are either closing or under threat, the unions’ anger was expressed that UK shipyards are being forced to compete against shipyards who receive direct or indirect state subsidy.

They are calling on the Ministers to apply for a derogation under existing EU regulations on national security grounds. Independent research, conducted by Defence Analysis, shows that £7.5bn worth of contracts for fleet auxiliary ships, minesweepers, survey ships and landing docks could potentially be put out to international competition by 2030 under the current plans.

The support vessels, known as the Future Solid Support (FSS) programme, are designed to supply the Royal Navy in all conditions, tendering especially to the needs of the new Queen Elizabeth-class carriers. The vessels are armed with self-defence weapons.

The carrier programme has already seen 900 jobs threatened this year. The closure of Appledore Shipyard, operated in Devon by Babcock, was announced recently and the Rosyth Dockyard, also operated by Babcock, in Scotland is facing the threat of hundreds of job losses. Workers at Cammell Laird on Merseyside are on strike after a third of the skilled workforce were told they were to be made redundant.

Ian Waddell, General Secretary of the Confederation of Shipbuilding and Engineering Unions, said:

“Ministers have hidden behind EU regulations to avoid building these ships in Britain, even though our yards are world-class. British shipbuilding will become the first strategically important industry to fail because of Brexit. Ironically, it is the communities in Brexit voting areas like Devon, Tyneside and Merseyside who are being hardest hit. Ministers say they are starting to listen because of the strength of this campaign and because they’re getting the same message from multiple sources and that it is to be welcomed. European Member States including France, Germany, Italy and Spain all build support ships domestically because they are classed as military ships for national security reasons.

It is through the looking glass stuff when these same countries are invited by our own Government to bid for combat support ships armed with anti-submarine and anti-surface warfare helicopters because the Government says they are commercial ships. By simply applying for a derogation under EU rules we can build these ships in Britain and safeguard a supply chain which extends to some 30,000 skilled workers in every part of the UK. It beggars belief that instead, Defence Ministers are prepared to sacrifice an iconic industry on the altar of competition, pretending their hands are tied by the EU while calling for Brexit.”

Overseas shipyards who have been invited to tender for the FSS programme include:

• Fincantieri: 70% owned by Fintecna S.p.A the Italian owned investment agency
• Navantia: 100% owned by the Spanish government
• Daewoo Shipbuilding and Marine Engineering (DSME): received a  USD6billion rescue package from the Korean Development Bank and Export-Import Bank of Korea

Recently, former shipyard worker turned MP for Glasgow North East Paul Sweeney has criticised the Government for failing to restrict the tendering for Fleet Solid Support Ships to the UK.

During a recent debate on UK sovereign capability, All-Party Parliamentary Group for Shipbuilding & Ship Repair Vice-Chair Paul Sweeney pointed out that despite claims to the contrary from some corners, the UK was well within its rights to protect this tendering process from international competition:

“In the context of major shipyard closures and significant downsizing, whether that is at Rosyth or Appledore, it is bizarre that the Government are quite happy to tender contracts overseas in international open competition. Under article 346 of the treaty on the functioning of the European Union, the Government could quite easily designate the industry as UK protected. It is entirely at their discretion. Any notion that their hands are tied is bogus.

They could do that, smooth the production cycles and build a firm and stable footprint for UK shipyards, which would enable them to get match fit and then go out into the world and compete effectively for other orders. That is exactly what they do in Italy with Fincantieri, and what they do in France with DCNS. It is exactly what happens in Germany.

I do not understand why other European Union member states can achieve the same objectives much more effectively than us, but we are so holier than thou that it hurts when it comes to the zealous application of these EU rules and we seem to undermine our own industrial base and our prosperity as a result, meaning that communities are broken and skills are lost. Ultimately, we undermine our objective of building a more resilient and effective industrial base to serve our defence industry and, potentially, commercial spin-offs.”This was also highlighted during the debate in this exchange, prompted by Stuart Andrew, Minister for Defence Procurement, saying the following:

“It is not a warship by definition, for the simple reason that the definition is based on the UK’s requirement to retain the ability to design, build and integrate frigates, destroyers and aircraft carriers for reasons of national security, ensuring that the complex nature of the construct is an important part of it from the very beginning. We will continue to have this argument—unions are coming to meet me very soon to discuss it.”

Sweeney responded:

“The Minister’s last remark about the need to maintain the UK’s sovereign ​capability to build complex warships being arbitrarily restricted to frigates, destroyers and aircraft carriers, the only reason we can build those ships in the UK today is that the last Labour Government placed an order for an auxiliary ship, the RFA Wave Ruler, at Govan shipyard in 1999, which enabled that yard to continue in operation.

Also, there are five River class batch 2 patrol vessels being built at Govan to sustain production there until the Type 26 kicks in. By utilising those less complex, but none the less complex, warships to smooth the build cycle, we can retain the skills, infrastructure and critical mass we need to build complex warships including frigates, destroyers and aircraft carriers. 

We must look beyond that arbitrary restriction and maximise the purchasing power of the Ministry of Defence to deliver UK sovereign capability in the long term. We should broaden our horizons.”

Two major unions, GMB and the Confederation of Shipbuilding and Engineering Unions (CSEU), also published reports outlining why they believe the ships should be classified as warships and why they should be competed domestically. The Unions arguments can be summarised as:

• The FSS should be seen as warships. They are armed and take part in counter-piracy and counter-narcotic missions;
• The Government’s commitment to revitalising domestic naval shipbuilding (as espoused in the National Shipbuilding Strategy) will only be achievable with a steady stream of orders;
• Building the FSS in the UK will help protect the UK shipbuilding industry, protect jobs and retain skills: GMB estimates up to 6,500 jobs could be created or secured, including 1,805 shipyard jobs;
• Rosyth shipyard will have a gap between the completion of HMS Prince of Wales (the second aircraft carrier) in 2019 and the expected refit of HMS Queen Elizabeth (the first aircraft carrier) in 2030, and FSS work could keep the shipyard operational in between these dates;
• The UK will financially benefit from returns to the Treasury in the form of taxes and national insurance contributions and lower welfare payments: GMB estimates £285m of the estimated £1bn contract could be returned to taxpayers this way; CSEU estimates 20% of the contract cost could be returned to the Treasury;
• The Government should factor in the revenue that could be returned to the Treasury when scoring bids between domestic suppliers and foreign competitors;
• There isn’t a level playing field as, the CSEU argues, “many foreign yards are either state owned, or receive significant direct or indirect subsidy… UK yards do not benefit in this way and are therefore at an unfair disadvantage.”

The Trades Union Congress has also assessed the Article 346 exemption argument and argues the Government “has the sole right to determine” what its essential national security interests are. The TUC claims “other European nations have used the exemption to place orders for similar support ships with their own shipyards since the Directive was introduced.”

December this year will see the formal issue of documentation inviting bids for the design and build contract and in 2020, the contract for design and build is to be awarded.