Building a Naval Industrial Strategy: The UK Experience

1. Building a Naval Industrial Strategy: The UK Experience Hans Pung 27 February 2012

2. Agenda • Background—UK industrial policy post-1998 • Defence Industrial Strategy (DIS): 2005-2012 • Maritime Long Term Partnering • Emerging Challenges • Current UK Defence Industrial Policy • Key Themes • Maritime Impact • Lessons and Implications for Canada

3. RAND has undertaken a number of studies for the UK MOD examining maritime issues

4. Following the 1998 Strategic Defence Review, UK MOD looked to push acquisition risk to key suppliers • Major “Smart Acquisition” procurement review • MOD adopts “eyes-on, hands-off” approach • Followed years of gradual decline of MOD technical ability • Focus on competition • Where this is possible • Preference for fixed-price contracts • Minimize risk to MOD

5. This approach revealed some unintended consequences • Competition focus encouraged new market entrants • These did not always have domain knowledge • Contract awards did not focus on industrial capability • Fixed price contracts did not reduce risk to MOD • No redundancy in the event of contract default • Industry restructuring led to less risk appetite amongst big firms • Increased realisation that MOD required greater engagement/knowledge in defence procurement

6. The Astute submarine project providesa good example of these tensions • Contract awarded in 1997 to GEC Marconi • Limited experience in nuclear submarine construction • Later bought out by BAE Systems • Initial fixed-price contract for 3 boats • Contract later renegotiated in 2003 • A number of factors led to project overruns • Poor initial estimating • Lack of experienced personnel

7. The 2005 Defence Industrial Strategy providedclearer policy regarding naval procurement activity • Reversed previous policy that all shipbuilding would be carried out in UK • Commitment to sustain key capabilities with a core workload • Confirmed that a minimum ability to design build, integrate, support and upgrade complex ships in the UK must be retained • More sophisticated procurement strategies will be employed –but competition remains where effective (e.g. for equipment) • Industry consolidation expected/required

8. DIS developed a model to determineon-shore capability requirements In summary: • On-shore concept design for all vessels • On-shore build of complex warships • On-shore in-service support for all vessels

9. DIS also lead to a closer and strategic relationship between MOD and the shipbuilding industrial base • 15-year strategic partnering agreement between MOD and BVT (JV between VT Shipbuilding and BAE Systems) agreed in 2007 and finalised in 2009 • Carrier contract signed two days after ToBA Heads-of-Terms was agreed • BAE later exercised option to purchase VT maritime business • Similar agreement between MOD and Babcock Marine agreed in 2010

10. The BVT (later BAE) ToBA placed a number of commitments on both MOD and industry . . . MOD BVT Merge ex BAE/VT/FSL naval businesses to deliver integration savings; transform new business to generate efficiency savings Independent benchmarking to achieve upper-quartile performance Maintain competition in Supply Chain • 15 year exclusivity on specified Ship build and support programmes • Sustain Key Industrial Capabilities (via workload or funding) • Underwrite transformation and initial rationalisation costs

11. . . . but also promises a number of benefits to both MOD BVT Long-term certainty of workload Visibility of MOD forward planning £230m annual revenue throughput • £350-900m savings over 15-year term of ToBA • Assurance of Key Industrial Capabilities to meet future demand • Rationalised shipbuilding business fit for purpose • High performance of key shipbuilding partner

12. However, the ToBA did not prevent a largeproduction ‘gap’ in UK shipbuilding plans

13. Although, costs of the BAE ToBA were a keyfactor in deciding to build two aircraft carriers

14. When is a Long Term Partnering Agreement an appropriate government procurement strategy? • Transformation or rationalisation of a business sector • “Right sizing” of an industrial capability • Need to retain: • industrial capability • strategic capability to maintain freedom of action • Competition is impractical • Need for predictability in future workload • Financial benefit from partnering and collaboration • Government requirement to increase export potential • Political & business imperative for such an approach

15. In early February, the UK updatedits (defence) industrial policy • Applies across the national security space • Commitment to open procurement when possible • Tempered by: • Operational advantage • Freedom of action

16. Implications for the UK maritime industry • Too early to tell—paper is intentionally vague about specific sector strategies • Open systems and modular design will be encouraged • Industry may be reluctant to self-invest in new technologies • Clear definition of Value-for-Money precludes any impact on socio-economic factors (employment, local impact, tax receipts, etc.) • Rationale for ToBAs eroded

17. Lessons for Canada • Long-term partnership agreements can leverage benefits for government and industry • Enterprise-wide resource management • Transparency of planning • Commitment to increased productivity • Facility and skills investment • Efficiency in operations but . . . • Strategy must align with wider government priorities • Commitments must be sustainable and funded • Funding is not a substitute for true capability