What will happen to the Clyde's two naval shipyards after they've finished building large chunks of two giant aircraft carriers, for which the first steel will be cut next Tuesday at Govan?

The yards have five years of secure work, which is an unusual level of job security for around 4,000 workers, and helpful in getting them through the recession. But there's uncertainty about what follows.

What I've just learned is that the uncertainty is over which of them will close. And it could be both.

A leaked memo from the chief executive of BVT, which owns and runs the yards at Govan and Scotstoun as well as Portsmouth, makes the case for shutting two out of three yards, saying it has already promised the Ministry of Defence that it will scale down its capacity.

The memo argues that shutting two yards will provide multiple savings. It states the that Government has promised to pay the cost of closure, including thousands of redundancies - with a price tag for the taxpayer of between £115m and £165m.

The Government has also piled on the pressure, by refusing to pay the overheads for keeping more than one yard open during future periods when they don't have work. And although there could be £8bn of work coming down the slipway after the super-carriers - for 18 ships in two classes, according to BVT - that is not sufficient to sustain three yards.

So while the shipyards have plenty of work to keep them going until 2014, we are now looking at a strong likelihood that half the Clyde's remaining shipbuilding capacity is going to shut within two years of the super-carrier work being complete. If Portsmouth is the single site chosen to carry on Britain's specialist naval shipbuilding, then both Clyde yards would be forced to close.

Portsmouth, however, is in a weak position if there are to be closures, as I understand it can't build the size of ships necessary for replacement of the Royal Navy's Type 42 destroyers. Only a Clyde yard can now do that.

Apart from Scotstoun and Govan, Ferguson Shipbuilders at Port Glasgow is the only other yard now operating on the Clyde. It is for much smaller commercial ships and it rarely builds hulls these days.

Elsewhere around the United Kingdom, naval capacity has been shut down and scaled back. While the Tyne has some super-carrier work and Merseyside is expected to secure some, Appledore in Devon is at risk as a result of a £110m cost-cutting drive to get the multi-yard super-carrier contract under control. The future of Barrow's yard in Cumbria, owned by BAE Systems, is likely to depend on a submarine-based replacement for the nuclear deterrent.

The leaked memo follows another from the team building the two super-carriers - as also revealed by the BBC earlier this week - warning that the contract has run up an overspend of roughly £1bn before work starts. That's on top of the £3.9bn costing when it was signed off in July last year.

The latest information is contained in a detailed memo circulated within the management team by Alan Johnston, chief executive of BVT. His firm was created from a Government-forced merger of BAE Systems Surface Ships, which owned the Clyde yards, and VT Group (formerly Vosper Thorneycroft) which owned the yard at Portsmouth.

Mr Johnston wrote: "BVT has committed to review its industrial footprint in light of the projected reduction in UK shipbuilding requirements post completion of the CVF (aircraft carrier) programme (current projections show that at the time the MoD requirements could be delivered from a single BVT facility) and MoD has committed to underwrite the necessary closure costs.

"These one-off rationalisation/investment costs are estimated to be between £115m to £165m for redundancies, site closure, environmental clean-up, equipment disposal and asset write-downs. Discussions are under way to agree the specific mechanism by which they will be recovered (e.g. via overheads over an agreed time frame)."

The memo goes on to suggest that the "one-base option" could save £350m to £500m, after the Government has paid for the rationalisation.

The timescale is for BVT to complete its options appraisal by next March, then developing an implementation plan for the preferred option by March 2011. Yard closures would be complete by the end of 2017, with investment in the upgraded remaining yard complete a year later.

However, there remain tensions within the teams that were forced to merge into BVT by the Government as its dominant customer.

Because VT Group was losing money on two naval vessel export contracts, for Trinidad and Tobago and for Oman, most of that work has been moved from Portsmouth to the Clyde, and BAE Systems is fighting over the damage that will do to the joint venture's balance sheet.

Until that can be resolved, it's unlikely the new company can sign off a delayed Terms of Business Agreement, which is seen as essential to the path-breaking new relationship between private sector shipbuilder and the Government.

The negotiations on that agreement also have tensions. Mr Johnston wrote in early May that the MoD's demands were overly complex and verbose, too legalistic and one-sided, and that the purpose of it had been left unclear.

There is resentment at MoD "far-reaching and intrusive" micro-management, insisting on getting involved in all supply chain tenders over £200,000, as well as approval of BVT supply chain strategy and tender criteria.

The corporate and Government sides were also in dispute on the MoD's requirement that a cap be placed on its financial liabilities if it decides to cancel major orders, explicitly including the super-carrier contracts.

The memo makes clear that Portsmouth remains the "irreducible" base port for the Royal Navy, and that plans are being drawn up for a "Pan-Portsmouth" strategy, which would see Royal Navy personnel transferred to BVT in a joint public/private venture providing support for the main surface ships.

Those watching closely what the Ministry of Defence and BVT's Mr Johnston have been saying in public may find these new disclosures come as no surprise. The chief executive has been dropping hints, saying the future for the yards is "bleak" unless BVT can break into export markets.

The key to that is building on the designs for Royal Navy ships and selling versions of them to foreign navies. The British have been poor at doing that in recent years when compared with other European countries, where they win international contracts at the less complex end of the market.

The Government set the framework for this sharp contraction in UK shipbuilding with a strategy for the defence industry published in 2005. It said for the first time that the lower-tech end of Royal Navy shipbuilding could be carried out overseas, only leaving a requirement for the most technically demanding and confidential of weapons systems to be handled using British expertise.

And there's another catch, this time European. Competition rules within the EU have long been waived for countries protecting their arms industries. That has helped preserve Britain's naval shipyards while merchant shipping yards have lost out to cheaper competitors on the Baltic, Mediterranean and in east Asia.

According to the leaked memo, BVT's legal advice is that there is a two-fold threat. One is that the cosy relationship between the MoD and a company that is being given an exclusivity deal on Royal Navy contracts (though not quite a guarantee, whatever the difference might be) is contrary to competition laws. Internal MoD legal advice says there's no problem. BVT's lawyers disagree. The other is that a new European directive on military contracts is being prepared for 2011, and that could force open the market across borders.

The response to the leak from BVT is that the memo was about "worse case scenario planning", even though the yard closures are presented as if that would be a preferred option and would be in line with the exclusivity deal providing future MoD contracts.

According to a spokesman: "BVT Surface Fleet has a solid order book for the next seven to eight years and is in the strongest position that the shipbuilding industry in the UK has seen for a generation. As part of its prudent long-term planning, it considers a broad range of options, including worse case scenario planning. However, it is also planning for and confident in an extremely positive outlook."

The shipbuilder goes on: "To that end, BVT continues to invest in designs, facilities and skills to secure the long-term future of both its Clyde and Portsmouth facilities. BVT continues to win orders both in the UK and overseas and is progressing well with a unique 15 years partnering agreement with the MoD that will further secure that future."

A spokesman for the Ministry of Defence said discussions with the shipbuilding industry are continuing over the consequences of reduced demand for navy shipbuilding. "There will be a need for rationalisation and efficiency measures going forward," he said.

He said it is too early to say which yards could be affected, and that nothing has been decided.

About this blog

Hullo, I'm Douglas Fraser, and I'm business and economy editor at BBC Scotland. Welcome to my blog, where you can read my take on money matters, viewed from a Scottish perspective.






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