DefenceSynergia – Ministry of Defence Funding Problems – More Money or Use it Better?

DS examines defence funding: More Money or Use it Better?

On 9th Apr 2017, Roger Bootle, a financial consultant, published an article for the Telegraph entitled “Why the Government should be spending more on defence”. His position can be summarized using two of his statements:

“It is all a matter of how much of your GDP you are prepared to spend on defence. The current figure of 2pc is too low. We spend on welfare about six times what we spend on defence. Yet during the early 1990s, defence spending ran at about 4pc of GDP. Today Russia spends about 5pc of GDP and the US 3.3pc.”

The bigger our defence budget the stronger Prime Minister May’s hand will be in negotiating with our soon-to-be-erstwhile EU partners. Money spent on ships and planes may pay dividends in trade and investment. “

Whilst all government departments would welcome more funding, DefenceSynergia (DS) recognises that the Ministry of Defence (MoD), too, believes that it desperately requires an uplift in funding to generate the capabilities and resources necessary for the United Kingdom’s (UK) global Defence and Security aspirations and tasks – “The First Priority of Government”. However, given the pressures on the public finances, the reality is that MoD should: plan on the assumption that it must live within the current budget and balance the books with the already allocated funds for the foreseeable future; so far as is practicable, each Service should operate within its already allocated funds and resources; and should urgently reappraise how it could better spend the budget it has.

One of the fundamental problems to be addressed is the historically incoherent way in which the MoD deals with the acquisition of new equipment. A good example of this byzantine procurement strategy is the future warship build programme. Beset by excessive domestic warship build cost, driven in part by MoD inspired changes to the required operational requirements, at other times by political interference, and inherent industrial procurement inflation from industry, Royal Navy (RN) procurement has led to a very dramatic and, in DS’s view, dangerous reduction in destroyer (DD) and frigate (FF) numbers. This will, in turn, impact on the RN’s ambitions to play her part in a national and global maritime role.

The recent review of the national shipbuilding (warship building) strategy by Sir John Parker has made it clear that, had the MoD employed methodology and disciplines much more akin to that of merchant, foreign naval, and commercial cruise ship builders, the RN could have significantly more ships at her disposal. This uplift in numbers to ensure that the RN’s many commitments might be achieved with a proper redundancy to take account of downtime to rectify damage, repair and refit, whilst not forgetting an essential need to take account of attrition in times of conflict. The Type 26 class of FFs seems likely to cost in excess of £1bn per ship. However, given that the contract has not been signed, this provides a window of opportunity to rectify the situation with a radical change in procurement approach and focus whilst, at the same time, learning from a number of warship building performances abroad. This might well mean a slight delay in the Type 23 frigates replacement programme, but, if taken forward rapidly, could achieve the planned de-commissioning timetable in a timely way.

Whether the Treasury will sign up to such a radical change is an open question, and if not, and the build programme slides to the right, this will result in FF/DD/ numbers falling to something below 19 unless the expected Type 31e programme is got on with. Sir John made this very clear in his report which the MoD is taking its time to react to. The advantage of a radical change in RN FF procurement programme could result in FF numbers climbing to sustainable and operationally required numbers around 20 FFs for less than the combined T26 and T31e planned budgets. If this new class of FF ship could be constrained by Sir John’s proposed discipline to a cost that approximates to that of our allies, this would go some way to alleviating much of the cost of the extra 3000-4000 personnel the RN states it desperately requires to man, effectively, even the present ship numbers. It would also genuinely ‘grow the fleet’ as Sir Michael Fallon is so fond of saying.

What is the answer to the failing Frigate (FF) build programme? There may be many, DS offers an option to consider:

Cease the current T26 programme, and in a true reflection of Sir John Parker’s Type 31e concept, implement an immediate one year limited open competition with a maximum contract price, for instance not to exceed £100M, to design a modular and export-enabled Adaptable Frigate (AFF). Each AFF should be designed to be manufactured and delivered to a ceiling cost of £400-600M including build and installed operational equipment, ready to deploy with fully functioning kit and trained personnel. Frigates such as the De Zeven Provincien (Netherlands)-$532 million, FREMM (Franco/Italian)-$745 million, and Iver Huitfeldt (Danish)-$350 million are all 6000 tonne, 4000-9000 NM, 30 knot, Air Defence (AD), Anti-ship, and Anti-Submarine Warfare (ASW) armed FFs. The target flotillas should number at least 20-24 AFFs, with a minimum number (possibly 6 each) dedicated AD and ASW role – the majority to be general purpose but fitted for but not with rapidly added specialist role equipment.

Once the modular design is agreed, the fundamental hull and general displacement, scantlings and performance should be frozen although the design would have to take account of the likely immediate weapon fit (in its broadest terms) and make proper allowance for future upgrades and modifications. These ships might then be built in batches of 4 across at least two UK shipyards run by different companies taking no more than 3 years from laying steel to commissioning and sea trials. The contracts should ensure that any cost penalties would be very strictly managed so that the MoD would be prevented from unnecessary tinkering with the requirement, whilst the contractor would not be allowed to apply defence procurement inflation, or resource cost increases. Very importantly, there must be no political interference with the programme – once set the programme should be ring-fenced until completion.

Export sales must be an important consideration in the design since this will encourage a reducing cost scale to the advantage of all customers. Low through-life support, maintenance, re-fit and obsolescence management costs will form another important element in the selection of the winning design.

It must be emphasised that the driving force for such an approach must be the overall capability of the Future Fleet, at the earliest practicable date, in order to fulfil the currently vaunted ambitions declared by the Secretary of State for Defence and brandished in the public forum by others. The costs of getting DD/FF numbers up to that declared level will require better spending on defence and security by the Treasury and MOD and these will be mitigated by the inherent advantages of lower cost, exportable units. There are examples of how this is already achieved and these include the Iver Huitfeldt and FREMM frigates, already mentioned, the latter has been ordered by the Egyptian and Moroccan navies. Naturally, these are but examples, so, one must take into account the target navies in any design of the AFF (could be the T31e). To this end, overseas and wider UK ship designs beyond the current Naval Design Partnership must be considered to provide the innovation, invigoration and competition required in UK warship design. MOD should ensure that any selected design should be wholly or predominantly built under licence in UK yards to keep employment, economical benefit and skills on shore. To support the transformation of the UK warship sector, a first/partial batch could be manufactured in NATO countries with mixed foreign/UK workforces to allow knowledge and skills benefits to be transferred back to the UK for the manufacture and commissioning of the remaining batches. As the proposal assumes a build of 20/24 ships, economies of scale and reduced costs would be expected after the first batch is complete and the manufacturing process becomes mainstream.

The first three T23 FFs to be de-commissioned are HMS Argyll in 2023, HMS Lancaster in 2024 and HMS Iron Duke in 2025. If the proposed procurement programme, above, was taken forward, the first 3 AFFs could be with the RN in 2023/24. A timetable might look like this: FY18-19 run the design competition; FY19-20 run the batch 1 competition; FY21-23 build the batch 1 (4 AFFs), test and commission. Thus, between 2023 and 2025 3 x T23s would be replaced with a one-for-one replacement of AFF with an extra one (the first) that might be commissioned for fleet training. Thereafter, AFFs would be streamed to replace T23s in batches of 4, with batches assigned via a rolling competition based on proven batch delivery performance to cost, time and operational capability. Failure to deliver a batch to contract should be taken into account in further contract awards, which might result in exclusion from further batch build.

To get Defence Equipment and Support (DE&S) evolving to a more effective procurement and support organisation, Sir John Parker’s recommendations should be accepted and used, in principle, across all major maritime, land, air and joint procurement programmes. Expertise from proven warship building military procurement organisations, as an example the Danish Acquisition and Logistics Organisation (DALO), might be employed to manage/mentor the design and competition stages and hold an integrated advisory role during build, commissioning and through life maintenance stages. Importantly, MoD must question the value of buying-in commercial ‘consultancy’ that often does not understand military procurement, yet charge high fees despite being able to fail and then walk away with little or no penalty. It seems to DS that tapping into established wider UK domestic and allied shipbuilding expertise already accrued – commercial and naval – makes much more sense.

Warship procurement, like MOD procurement more generally, requires strong will and a professional rationale to enable radical change in the procurement approach, a cultural and personnel refresh within DE&S, customer realism, and a new more customer-focused and cost effective commercial acumen and relationship with industry. Such an approach is required to ensure a more combat and cost effective UK ship building industrial strategy, greater ship building capacity, and the rekindling of UK’s ship building sector. Not least, in the final analysis, this must provide affordable national defence capability and capacity that can match the threats we face. MOD must break the ‘rob Peter to pay Paul’ procurement cycle as a means to juggle budgets to address cyclic Defence procurement/programme inflation. A cross party parliamentary agreement on a ring-fenced budget and timescale would assist in ensuring the enduring and stable approach required to meet this future RN FF and wider RN combat fleet regeneration need.

Many of these suggestions have been considered, tried and failed in the past when the failure to maintain the size and strength of the Fleet was not critical. This new approach must be accompanied by commitment to succeed at all costs by politicians, civil servants, Service personnel and Industry: Britons working together with pride for the future world status of the UK shipbuilding sector. The threats in the world today make the loss of each warship yet another gap in the national defences that can be exploited by our adversaries, reduce our ability to defend UK interests, and accentuate an already growing perception that the UK is becoming an unreliable and ineffective ally with operationally capable ships secured alongside for want of ships companies. The RN DD/FF flotilla is in a steady state of numerical decline which can be directly attributed to the ever escalating cost of warship building in the UK, whilst at the same time our NATO allies are able to construct complex warships at lower overall cost despite relatively small production runs. This at least must surely give Her Majesty’s Government and the MoD pause for thought and to ask the question, why?

As has been rightly or wrongly attributed to Albert Einstein the definition of insanity is doing the same thing over and over again and expecting a different result. In the oft heralded cry that ‘2017 is the Year of the Navy’, perhaps it is time for the Defence Secretary to change MoD’s approach to procurement radically and achieve a different, more effective outcome by listening to an engineer and business man who has decades of success behind him.