Vsel

– in the House of Commons at 4:22 pm on 23rd May 1995.

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Photo of Mr Michael Heseltine Mr Michael Heseltine President of the Board of Trade 4:22 pm, 23rd May 1995

I would like to make a statement about the proposed acquisition of VSEL.

I released to the House and to the stock exchange this morning my decisions on regulatory approval for the proposed acquisition of VSEL by either British Aerospace or GEC. I shall now make a statement on the basis for my decisions in the two cases.

Because both bids satisfied the turnover criteria of the European Community merger regulation, the question of regulatory approval would normally have been a matter exclusively for the European Commission, but VSEL's facilities for the construction of nuclear submarines and other warships are plainly vital for United Kingdom national security. Accordingly, the Government took action, through the use of article 223 of the EC treaty, to assert UK jurisdiction over the two merger proposals in so far as they related to the military activities of VSEL. That was the first occasion on which the United Kingdom had invoked the procedure. In practice, the civil component of VSEL's activities is very small, but at the end of last year the EC Commission gave its approval for the acquisition of the non-military component by either British Aerospace or GEC.

The United Kingdom reserved for itself a judgment on how the Royal Navy's requirements for submarine and warship procurement would be affected by a prospective change in the ownership of VSEL. I referred both bids to the Monopolies and Mergers Commission because, given the nature of the target company, I felt it right to have a comprehensive analysis of the UK public interest in both cases, and because I was conscious of potential competition concerns in relation to the GEC bid.

I am grateful to the MMC for the thorough exercise that it has undertaken. Complex issues are involved, as is shown by the fact that the MMC Group did not reach a unanimous view on the GEC bid. But the reports have provided me with a sound basis of analysis from which I can proceed to make the decisions that fall to me under the Fair Trading Act 1973.

The MMC identified no adverse effects for the UK public interest in relation to an acquisition by British Aerospace. The British Aerospace bid is thus cleared to proceed.

The MMC was unable to agree its view in relation to the GEC bid. The majority, consisting of four out of six members, found that there would be adverse effects resulting from a GEC acquisition. Their view was that those effects would arise from a reduction in competition at both prime contractor and subcontractor levels with consequent risks to innovation and to the Ministry of Defence's ability to achieve the best value for money. The recommendation from the majority was, therefore, that the GEC bid should be blocked.

The minority view taken by the remaining two of the MMC Group was that, because of the Ministry of Defence's skills as a monopsony buyer, the GEC acquisition would make no significant difference to the degree of competition in the industries involved in warship making and would contribute to the ease of an ultimately necessary industrial rationalisation.

The advice from the Ministry of Defence to the MMC took the same view as the minority report. As the United Kingdom had claimed jurisdiction over those mergers in the light of our defence interests, I also had to give particular weight to the views of the Ministry of Defence as the customer. As will be seen from the report, the Ministry of Defence judged that the imminent bidding process for Trafalgar class submarines and type 23 frigates would be largely unaffected by a GEC acquisition. It was also confident that it had the resources and means to extract the best value for money, whoever acquired VSEL.

In the light of those considerations, I have decided to allow the GEC bid for VSEL to proceed. I take no view on whether British Aerospace or GEC should prevail. I note the assurance given to the Ministry of Defence by Lord Weinstock that, if GEC wins the competition for the next type 23 frigates, those vessels will in any event be built at Yarrow. The Government will of course be ready to use their well-established arrangements to support British Aerospace or GEC, whichever acquires VSEL, in seeking additional exports of warships to buttress declining domestic demand.

I recognise that it is unusual to set aside an adverse finding by the MMC on a prospective merger. But it is my responsibility under the Fair Trading Act to look at the UK public interest in the round, having regard to all relevant factors, including, in this case, the United Kingdom's defence interests. I have concluded that the public interest will be best served by allowing the market to determine the future ownership of VSEL and hence the industrial structure best adapted to meet the UK's foreseeable naval defence needs.

Photo of Dr Jack Cunningham Dr Jack Cunningham Shadow Secretary of State, Shadow Secretary of State for Trade and Industry

The President of the Board of Trade is right to assert to the House that those important matters touch on Britain's defence capability and the skills and jobs of many thousands of workers at Barrow-in-Furness, on the Clyde and, for that matter, at Vosper Thornycroft in Southampton. We welcome his decision to make a statement in response to my repeated request that he should do so.

Like the right hon. Gentleman, we have never taken sides in the matter but have pressed for both bids to be referred to the Monopolies and Mergers Commission. The President of the Board of Trade was right to make such a reference. But the first and perhaps central question that he must answer after what is an almost unprecedented decision and statement today is: why has he not accepted the decision of the Monopolies and Mergers Commission? There was little of substance in his statement to justify his decision to reject a clear and emphatic majority decision by the MMC. It is worth asking the right hon. Gentleman what in his arguments can counteract the conclusions and recommendations of the MMC that retaining the pressure of competition between prime contractors would be even more effective in promoting change and securing value for money … We see no reason to sacrifice the benefits of competition now in the hope that, if the merger were allowed to proceed,"— this is in respect of GECthere would then be possible benefits …We conclude that the proposed merger may be expected to operate against the public interest. Is the right hon. Gentleman aware that those conclusions are emphatic? The MMC also stated: As we are unable to identify any appropriate remedies for the detriments we have identified we recommend that the proposed merger should not be allowed to proceed. That is what the MMC concluded after a long and thorough study. The right hon. Gentleman needs to offer the House more of an argument than that in his statement about why those emphatic, clear and unequivocal recommendations should not be accepted.

What is the status of the assurances that GEC has apparently given? Were they given to the MMC or simply to the Ministry of Defence? Can the right hon. Gentleman specifically tell the House what those assurances are and what they amount to? Will those assurances be legally binding or will GEC be able to negotiate them away as events unfold? Those important questions remain, as yet, unanswered.

In allowing the bid from British Aerospace to proceed—and quite rightly—did the President of the Board of Trade or his right hon. and learned Friend the Secretary of State for Defence seek any assurances from British Aerospace about predatory pricing policy? Will there be complete transparency of bids for warship contracts in the future, whoever may emerge as the successful bidder for VSEL?

The right hon. Gentleman and the Government have decided to leave the matter completely to the market—so much for the right hon. Gentleman's apparent commitment to and belief in stringent competition policy in the United Kingdom, which he reiterated to the House yesterday. The right hon. Gentleman has taken no strategic view on the maintenance of jobs or skills in our defence industries nor, apparently, have he or his colleagues taken any strategic view on maintaining our defence capability for the future. Those two requirements are left to the market and could easily be under threat as a result.

Photo of Mr Michael Heseltine Mr Michael Heseltine President of the Board of Trade

I am grateful to the right hon. Gentleman for some of the generous things that he said at the beginning of his statement.

I do not think that the right hon. Gentleman fully appreciated what I said in my statement. If the MMC had come forward with an emphatic, clear and unequivocal recommendation, unanimously reached, I would, of course, have recognised it as part of the evidence that I had to consider. It is quite apparent, however, that the MMC found it as difficult a decision as it undoubtedly is, and as the right hon. Gentleman recognised. The fact is that the MMC divided 4:2 on the issue—the chairman is a member of the committee. If one comes down to simple numbers, one is talking about one person's view, because if one of the four had changed his mind, the outcome would have been three all. The MMC obviously reached a narrow decision.

Photo of Mr Derek Fatchett Mr Derek Fatchett , Leeds Central

If another had changed his mind, it would have been 4:2 the other way—so what?

Photo of Mr Michael Heseltine Mr Michael Heseltine President of the Board of Trade

That is perfectly right. The division merely reveals that the MMC report does not represent an emphatic, clear and unequivocal set of advice to me. It is a majority-minority view.

I have also had to take into account the views of the Ministry of Defence. We went to Europe to claim jurisdiction over this particular case because of the essential defence interests as we saw them. The MOD told me—its view was clearly expressed to the MMC—that it believes that both bids should be allowed to proceed, because the MOD, which is the custodian of our defence interests, believes that it could handle the competitive issues involved in the process. I was influenced by its views; I believe that it is appropriate that I should be.

It is not just a question of the assurances given by GEC, because the MOD places the contracts. It is in a position to ensure that any assurances given by Lord Weinstock are honoured. He gave clear assurances that if Yarrow wins the type 23 frigate order, those frigates will be built at Yarrow. The MOD is in a position to ensure that that happens—not that I would like to cast any doubt on the integrity of Lord Weinstock's assurances.

Photo of Barry Sheerman Barry Sheerman , Huddersfield

What about small and medium-sized contractors if GEC gets the yard?

Photo of Mr Michael Heseltine Mr Michael Heseltine President of the Board of Trade

The hon. Gentleman asked a question from a sedentary position. If he asks it formally, I shall answer it.

The Ministry of Defence has every interest in securing the transparency of the competitive process. The Ministry of Defence is a customer. I know from experience that it does that job with great concern and care, and it has every interest in ensuring that it obtains the best value for money. It will continue to do so, and the minority view clearly made the point that it is expert in doing that.

I hope that the right hon. Gentleman will recognise that, as I said, this is not an easy decision. I take very seriously the opinions of the MMC, but I think that, in view of the fact that it was a split decision, and in view of the fact that the Ministry of Defence had such clear opinions about what the interests of the customer were, it is right to allow either of those two bids to proceed, and right for the market to determine what happens. I have no preferences one way or another. I have no knowledge whether either or both the bids will proceed.

Photo of Peter Viggers Peter Viggers , Gosport

Bearing in mind the fact that the market for warships has inevitably shrunk in recent years; that, increasingly, the electronic and support systems of warships are becoming proportionately more important, so the hulls are becoming less important in the manufacture of warships; that there are other yards where warships—steel ships—can be built, including Vosper Thornycroft, which has been extremely successful in recent years, and indeed Harland and Wolff; and bearing in mind the increasing internationalisation of defence procurement regarding issues such as the Horizon frigate, does my right hon. Friend agree that it would have been unwise and artificial to prevent VSEL merging with the company that eventually emerges as the most successful of those bidding for it, and that that would not have been a wise way to proceed in international competition?

Photo of Mr Michael Heseltine Mr Michael Heseltine President of the Board of Trade

I am grateful to my hon. Friend, who represents the constituency in which Vosper is based. I have had the pleasure of visiting that company and, as everyone is, I was much impressed by the work that is going on there.

My hon. Friend makes an important argument about the nature of the purchaser of large defence procurement orders of that type. The purchaser will insist on the break-up of the contract into very large numbers of individual parts, to ensure that there is competition between subcontractors for specific items, amounting to a very large proportion of the total contract.

The Ministry of Defence is expert at doing that. It must face British Aerospace, which is the only source of our military fighter aircraft. It must deal with Rolls-Royce, which is the key supplier of engines for the defence budget. So the Ministry of Defence is very experienced at ensuring that it obtains value for money compatible with the quality that it wants.

Photo of Nick Harvey Nick Harvey Shadow Spokesperson (Trade and Industry)

The President of the Board of Trade made a statement in the House yesterday about competitiveness, but if GEC should go ahead and acquire VSEL, where will the competition come from for the type 23s or for other future big projects? The right hon. Gentleman rightly paid tribute to Vosper, which will be in a position to bid on some occasions, but if the Government believe in competitive tendering, where will the competitive tenders come from for the big projects?

Photo of Mr Michael Heseltine Mr Michael Heseltine President of the Board of Trade

The two competitions that are likely in the immediate future—for the type 23 and the batch 2 Trafalgar class submarines—are imminent, so the competitive arrangements are likely to be in place in the event of either of those two bids proceeding. In the longer term—one is talking about, for example, project Horizon, which is the new generation frigate, as my hon. Friend the Member for Gosport (Mr. Viggers) has just said—Yarrow will be a potential competitor, as it is today.

However, I would be the first to recognise that, although in the short term the MMC says that it does not think that there are implications for the existing orders in the existing yards, in the longer term there may be rationalisation, and that has always been the dilemma that has confronted Defence Secretaries or those of us interested in competition policy.

Photo of Mr Phil Gallie Mr Phil Gallie , Ayr

My right hon. Friend put great store on the Ministry of Defence's comments about competitiveness and on the three undertakings given by Lord Weinstock if GEC were to take over. How one can split the bids of Yarrow and VSEL to ensure that there is competition when they belong to the same company? When there are bids for subcontractors to supply those contracts, how will the interests of one company be sustained?

Photo of Mr Michael Heseltine Mr Michael Heseltine President of the Board of Trade

My hon. Friend will realise that the urgent and imminent competitions will involve the continuation of the existing teams that are at work at present and that will shortly submit the tenders that the Ministry of Defence is contemplating. That division exists already.

I do not know what length of time my hon. Friend is thinking about, but there has been a falling order book—a fall in demand—that may well lead to some rationalisation. If one considers project Horizon, the bid does not involve Vosper, which has the capability—albeit one that is perhaps spread over a longer period than other yards—to become involved in the process. Lord Weinstock has given assurances about the existence of the two teams in the immediate future for the competitions that will take place.

Photo of Richard Caborn Richard Caborn , Sheffield Central

Does the President of the Board of Trade believe that his decision to reject the Monopolies and Mergers Commission's proposal is sound? Many people are concerned about the basis upon which the decision has been taken—value for money for the Ministry of Defence rather than competition. That is a concern as we downsize the military budget and possibly change the landscape of British industry. Will the right hon. Gentleman assure the House that that decision will not trigger a potential takeover of British Aerospace and leave only one major company to compete in Europe? In rejecting the MMC decision, the President of the Board of Trade has signalled a reorganisation of that part of British industry. Many people are concerned that we shall not receive the value for money that the right hon. Gentleman has said will flow from his decision.

Photo of Mr Michael Heseltine Mr Michael Heseltine President of the Board of Trade

I understand the difficulties associated with my decision, and many people have agonised over the various choices. That is why I have had to recognise the fact that the MMC was not able to reach a unanimous view about the matter. Therefore, I take considerable note of the views of the customer—the Ministry of Defence—which believes that it is correct to move in the direction that is possible in the light of the two bids.

Photo of Frank Field Frank Field Chair, Social Security Committee

While the House is naturally concerned about the strategic needs of the country and, more specifically, the Government's procurement requirements, is the President of the Board of Trade aware that, when the Government announced their privatisation proposals, his Cabinet colleague, the right hon. Member for Wirral, West (Mr. Hunt), and I tried to persuade GEC to break up the Government's preferred bidding so that it could buy the Cammell Laird yard? Is the President of the Board of Trade aware of our concerns about the long-term future of Laird if VSEL were to acquire it? When the future owners of VSEL emerge and the dust has settled, will he remind the new owners that the people of the Wirral peninsula will be waiting for that company to join with local forces, to try to recreate the skilled jobs that VSEL felt that it had to destroy?

Photo of Mr Michael Heseltine Mr Michael Heseltine President of the Board of Trade

I know the hon. Gentleman's concern about his constituency and the wider region. I hope that he will understand when I say that I have tried, to the limits of my endeavour, to find a buyer or to find work for Cammell. I have done the same thing for Swan—[Interruption.] No. The fact is that my Department and I have literally travelled the world trying to find a solution to Swan Hunter's problems. We have not found a solution—I do not like to tell the House that, but I must do so. We have explored every practical suggestion or alternative that we could think of, without success in that case. We all know that demand has diminished.

I have looked up the sorts of speeches that Labour Ministers in my position made in order to justify nationalising the aircraft and shipbuilding industries—I shall not weary the House with the details, unless hon. Members wish me to do so. Nevertheless, Labour Ministers explained to the House as clearly as I have done the need to take difficult decisions in changing circumstances.

Photo of Dr Norman Godman Dr Norman Godman , Greenock and Port Glasgow

Many of my constituents who are employed at Yarrow in Scotstoun will be keenly interested in the statement by the President of the Board of Trade. He will not be surprised to hear me say that I sincerely hope that Yarrow wins the order for the type 23s. I must point out to him a misleading statement that appears in paragraph 2.10 of the document. It is entirely wrong when it talks about VSEL being the only United Kingdom shipyard that has the capacity to build warships of more than 7,000 tonnes. The President of the Board of Trade knows as well as I do that Kvaerner of Govan is building the hull for the landing platform for helicopters.

Will the right hon. Gentleman assure the House that, if Yarrow and VSEL seek to secure orders for the bigger warships, he and his right hon. and learned Friend the Secretary of State for Defence will remember that Kvaerner, as a subcontracting yard, has the capacity to build such hulls?

Photo of Mr Michael Heseltine Mr Michael Heseltine President of the Board of Trade

I fully understand the hon. Gentleman's views and his representations on behalf of his constituency. He will have noticed already that my right hon. and learned Friend has heard what he said. I shall make it my business to forward the hon. Gentleman's views to the MMC in the light of his observations about its report.

Photo of Mr Tony Worthington Mr Tony Worthington , Clydebank and Milngavie

I obviously also speak on behalf of many of my constituents who work for Yarrow. I invite the President of the Board of Trade to make it absolutely clear what assurances have been given to him or to the Monopolies and Mergers Commission about the future of the Yarrow yard should the GEC bid be successful.

Photo of Mr Michael Heseltine Mr Michael Heseltine President of the Board of Trade

I think that we have covered that ground. Lord Weinstock has made it absolutely clear that, if his group wins the order, the type 23s will be built at the Yarrow yard. I hope that Lord Weinstock's assurance will be sufficient in those circumstances. The Ministry of Defence is also in a position to insist that the contract be fulfilled at Yarrow.

Photo of Mr Barry Jones Mr Barry Jones , Alyn and Deeside

Does the right hon. Gentleman acknowledge that British Aerospace plc has a magnificent exporting record and that it is the largest employer of skilled labour in this country? Does he also know that 2,000 aerospace jobs have been lost in my constituency in the past two years? My constituents would like to know what consequences the statement that he has made today will have for them.

Photo of Mr Michael Heseltine Mr Michael Heseltine President of the Board of Trade

I am proud to say that I think that I have helped British Aerospace to conclude the largest overseas contract ever won by any company in this country. I was proud to negotiate with British Aerospace the conclusion of the European fighter aircraft deal, which I think was the largest international contract that this country has ever entered into.

I have every sympathy for British Aerospace's position. I do not know whether it will continue its bid or whether it will be successful. British Aerospace has not been prejudiced in any way; it is a matter for British Aerospace to decide how it wishes to expand its activities.

Photo of Mr Tam Dalyell Mr Tam Dalyell , Linlithgow

Although I do not doubt Lord Weinstock's good faith, the fact remains that he, like the rest of us, is not immortal. The President of the Board of Trade has told us about assurances; is there any way in which such assurances could be made legally binding, even for a limited period? I realise that it is unrealistic to insist that they should be legally binding for ever, but is there not an argument that they should be legally binding at least in the medium term?

Photo of Mr Michael Heseltine Mr Michael Heseltine President of the Board of Trade

I think that the hon. Gentleman can rest upon the assurances, particularly in the light of the fact that the customer happens to be a Government Department—the Ministry of Defence. Perhaps the House should be aware of another fact. Yarrow already has the first of class of the CNGF, the common new generation frigate, so from the point of view of GEC, there is every interest in filling the work load of Yarrow until it can compete for the common new generation frigate.

Photo of Brian H Donohoe Brian H Donohoe , Cunninghame South

What assurances can the President give my constituents who work at Jetstream in Prestwick?

Photo of Mr Michael Heseltine Mr Michael Heseltine President of the Board of Trade

I am not sure whether it will be affected by the decision of either of the companies to bid for VSEL. I would have to have specific information as to any concerns that exist, but I do not immediately see them.