Commission factions fire their last salvoes

BY PETER RODGERS and RUSSELL HOTTEN

The split on the Monopolies Commission over the impact of a GEC takeover of VSEL hinged on whether rationalisation of Britain's three warship builders was inevitable. If the industry did contract, could the Ministry of Defence get value for money from fewer suppliers?

The minority, backed by Michael Heseltine, President of the Board of Trade, believed either VSEL or Yarrow would eventually close, and it accepted the MoD's claim that it was a tough enough buyer to keep prices down.

In complete contrast, the commission majority rejected the MoD view that further concentration among warship builders was "largely a matter of time". It was sceptical of the MoD's assertion about achieving value for money in a more concentrated warship industry.

According to the majority, closure of any of the three remaining yards was unlikely in the next couple of years - whether or not GEC, which already owns Yarrow Shipbuilders Ltd, took over VSEL. The third yard, Vosper Thornycroft, is independent.

To 2000, there were orders in prospect that could provide work for all three yards and in that case, maintenance of competition would provide "valuable benefits".

There might be yard closures beyond 2000 but they were not inevitable because the evidence did not support the view that demand was bound to fall sharply.

The four-strong majority attacked figures put forward by the two dissenting members for possible savings at that stage as "highly speculative". If there were savings to come, they did not in any case depend on the GEC takeover of VSEL being allowed to proceed.

The majority report said: "We think it would be wrong to sacrifice the immediate benefits of competition for the hope that if and when closure of a yard became necessary, the MoD and the industry might gain extra financial benefits if the VSEL and YSL yards were already in common ownership."

The majority believed lack of competition for forthcoming warship orders - three Trafalgar class submarines to be followed by orders for the Common New Generation Frigate - would result in the MoD paying higher prices and would also lead to fewer design and technical production improvements for these vessels.

The note of dissent, by Sir Archibald Forster and Professor Patrick Minford, flatly contradicted the view that three yards could survive.

It said there was already large-scale excess capacity in UK warship building, gauged by predictions of falling manpower needs from 9,000 to 6,000 by the end of the century. Excess capacity would worsen in the following decade.

Either VSEL or Yarrow would close and the question was whether it would be by internal rationalisation - if GEC, which owns Yarrow had already taken over VSEL - or through one of the yards succumbing to lack of work.

Therefore, the result would be the same either way and a GEC takeover of VSEL would make no difference to competition. At the same time, the dissenters calculated rationalisation gains of pounds 34m in 1995 money.

The minority expected that if GEC did take over VSEL, it would close one of its yards, probably Yarrow, in 2003, which would save pounds 176m in 1995 money. Total gain could be pounds 210m.

The conclusive argument for the minority was that, given the inevitability of rationalisation and contraction, the MoD could still achieve value for money from its suppliers.

The MoD had firmly rejected the idea that the proposed merger would undermine its ability to strike a good deal, arguing throughout the inquiry that it had "the tools to achieve value for the taxpayer's money despite the warship-building industry's contraction".

These fierce arguments between the exponents of competition and the believers in the benefits of rationalisation among the warship yards are doubly significant, because they could crop up again on a vastly greater scale if GEC bids for British Aerospace.

Lord Weinstock, managing director of GEC, has dreamed for years of creating a single large British defence company. Mr Heseltine's siding with rationalisation is ominous for BAe.

Cuts in governments' defence budgets have forced a string of companies to merge or form joint ventures to survive. These alliances have not only been along national lines, but increasingly international.

Lord Weinstock has courted BAe for 15 years, and came close to agreeing a friendly deal on a couple of occasions. The hotline between the two companies buzzed last year as he intensified overtures towards Dick Evans, BAe's chief executive.

The two companies discussed a joint bid for VSEL, and exchanged sensitive information. This resulted in a one-year voluntary agreement that GEC would not bid for BAe - an agreement that expires in June.

The two men are said to get on well, but relations were strained when Mr Evans told Lord Weinstock that BAe would bid alone for VSEL. It indicated BAe was intent on remaining independent.

BAe is at its strongest for several years, having disposed of its Rover cars subsidiary and virtually sorted out its loss-making regional jets business. If Mr Evans succeeds in a bid for VSEL, it would make Lord Weinstock's task more difficult should he make a play for BAe.

BAe believes European-wide co-operation is the way forward, spreading resources across national boundaries to meet competitive needs.

Lord Weinstock, however, favours a restructuring across national lines with GEC's Marconi division at the centre of a UK defence conglomerate.