UK Warship Procurement Strategies – Accident or Design?

1. UK Warship Procurement Strategies – Accident or Design? Stuart Young Deputy Director – Centre for Defence Acquisition +44 (0) 1793 785051 syoung.cu@da.mod.uk www.plandeliversustain.com

2. Agenda • Background – Development of Naval Shipbuilding in the UK since the 2nd World War • The Defence Industrial Strategy • Case Studies • Offshore Patrol Vessel • Type 45 Destroyer • CVF – Future Aircraft Carrier • Conclusions

3. Background – UK Warship Building since WW2 • Focus on commercial ships immediately after WW2 – sellers market. • Early 50s – first new ships since WW2. New technologies led to increased cost and delays. • Development of competitors from shipyards in Europe and Far East – problems in UK shipbuilding exposed. • Admiralty returned to competitive tendering – by 1965 ten shipyards closed or merged/ • Proposal to reduce to 3 specialist naval shipbuilders. • 1973 Oil Crisis – Ship building collapsed. UK Government nationalised the industry.

4. Background – UK Warship Building since WW2 • 1986 – Industry de-nationalised. Six yards designated as warship builders • Competition and reduced number of orders led to further rationalisation – 3 yards, 2 companies • 2005 - Defence Industrial Strategy. • Establishment of BVT Surface Fleet joint venture • 2009 - Signing of long agreement with MoD – cost savings (£350M) in exchange for guaranteed minimum workload (£235M/year) • Buyout of VT by BAE Systems – now 3 yards, 1 company

5. Defence Procurement Initiatives – 1998-2009

6. Defence Industrial Strategy - Aims • Giving a strategic view of defence capability requirements going forward, by sector, and specifying which industrial capabilities the government wished to see retained in the UK for Defence reasons to meet these requirements. • Providing details on the principles and processes that underpin procurement and industrial decisions. • Investigating how the mismatch, or gap, between the MoD’s plans and the level required to sustain desired industrial capabilities onshore might be addressed.

7. DIS – Maritime Sector – Key Points • Need only to retain a minimum ability to build and integrate complex ships in the UK. • Priority to retain and develop the systems engineering capability to design complex ships and their combat systems from concept to the point of build, and manage and support the associated maritime capability through-life (50% of the spend in the maritime sector is on support). • Need for the MoD to retain intelligent customer skills to control the procurement and support processes, with a particular focus on managing risk. • Supported the establishment of an Alliance/Partnering approach

8. DIS – What Happened • BAE Systems and VT Group established a joint venture, BVT Surface Fleet, in July 2008, as a condition of the signing of contracts for the Queen Elizabeth class aircraft carriers. • 15-Year Terms of Business Agreement (ToBA) signed between MoD and BVT in July 2009. • 15 years exclusivity to BVT to design, build, integrate and support specified MoD shipbuilding programmes • Maintenance of key industrial capabilities. • Guaranteed savings of at least £350M over 15-years • Aircraft Carrier Alliance • Other Maritime Change Programme initiatives: • Submarine Enterprise Collaborative Agreement • Surface Ship Support Programme • Alliance arrangement between MoD, BVT and Babcock Marine • Maritime and Engineering Waterfront Support

9. River Class Offshore Patrol Vessel • Urgent need to replace seven Island Class Offshore Patrol vessels, commissioned 1976-1979 • Roles: • Initially • Fishery Protection, Oil and Gas Field Protection • Additional roles, by late 1990s • Assisting HM Customs and Excise, Scientific and Environmental, Assisting vessels in distress • Island Class did not have the capabilities to perform these roles effectively and were costly to maintain and support • Acquisition timeline: • Dec 2000 - ITT issued • Mar 2001 – Vosper Thorneycroft selected as preferred bidder • May 2001 – Contract placed • Jan – Dec 2003 – Ships entered service • Total Cycle time – 3 years

10. The Proposal • VT to lease three ships to the Royal Navy with Support and Maintenance provided through a Contractor Logistics Support arrangement • VT retained ownership of the vessels and chartered them to the MOD for five years, with a daily charge for full Contractor Logistics Support • VT guarantees 960 days availability per year across the three ships. • Only when those ships are available for MoD tasking is the MoD liable for CLS costs.

11. Why was short Acquisition Cycle Time achieved? • Economic - Island Class ships expensive to maintain. Pressure to reduce short-term support costs. Gapping the capability was not an option. New, cheaper solution urgently required. • Smart Acquisition – Senior MoD management under pressure to deliver early Smart Acquisition savings. OPV provided an opportunity to deliver clear savings in the short term and demonstrate to politicians and tax payers the success of Smart Acquisition. • Political – In Dec 2000 VT issued redundancy notices to half its workforce. Considerable political pressure to ensure that VT won the contract with an order for at least three ships to maintain jobs and keep shipyard open. Eventually only 120 jobs were lost.

12. Result • In first year of operation, the three River Class OPVs achieved 97.5% availability , compared to a maximum of 82% for the five Island Class they replaced. • More capable – vessels are some 30% larger • More fuel efficient • Smaller crew – 30 (from pool of 45) compared to 35 on Island Class. Total RN Manpower: • Island – 175 (5x35) • River – 135 (3x45)

13. Key Points • Lease-based Availability Contract (CfA) most suited to relatively simple, commercially available technologies used in routine, predictable operations – normally second-line (OPV) rather than front-line (T45) capabilities. • Incentivises company to perform to meet and exceed capability and availability targets. • CfA most suited to well-defined capability requirements which do not cross many environmental boundaries and do not create significant DLoD coherence issues. • Leasing may not always be the cheapest option, but does provide smooth, predictable budget requirements – risk is transferred to industry.

14. Type 45 Destroyer • Successor to Type 42 Destroyers • History of procurement delays: • Type 43, 44 designs • NATO Frigate Replacement (NFR90) • Common New Generation Frigate (UK, France, Italy) • Type 45 (UK) with tri-national PAAMS weapon system • 8-years late, £1B over budget, 6 ships compared to original requirement of 12.

15. Timeline • 1999 – Type 45 established as Integrated Project Team in line with SMART Acquisition philosophy • Complex procurement strategy: • Work share between VT and BAE Systems on first 3 ships leading to effective competition on further batches • VT and BAE Systems unable to agree risk sharing arrangements • BAE Systems’ unsolicited bid for building all ships rejected. • 2001 RAND study examined other procurement options. • Final solution announced July 2001 – Batch production strategy, with different ship blocks constructed at different shipyards and assembled in one. • 2004 – number of ships reduced to 8 • 2008 – number of ships reduced to 6 • HMS Daring undergoing weapon trials – due to enter service Nov 2010 • Sixth ship enters service 2013

16. Key Points • International collaboration on large scale, complex, high-tech programmes almost impossible to achieve. • Cost increase due to: • Delays in establishing a clear industrial and procurement strategy for the programme • PAAMS weapon systems • Increased ship build cost • £200M to run on older Type 42 destroyers • Programme has led to rationalisation of UK shipbuilding industry – highly influential RAND report: • Competition v sole-source production – need to take into account factors other than cost. • Block construction proving a success, but not without risk • Learning curve effects are significant • Man-hour savings of 43% predicted from first to last ship

17. Future Carrier- CVF • Requirement for enhanced carrier capability identified in 1998 Strategic Defence Review. • Studies favoured option of a large ship with STOVL aircraft as most cost-effective option. • Aircraft and Infrastructure issues necessitated a programme approach – 2* Carrier Strike Senior Responsible Owner, as well as CVF IPT

18. Timeline • June 2001 – Joint Strike Fighter finally selected with knock–on effect to CVF programme. • Nov 2001 – Assessment Phase contract awarded to Thales and BAE Systems • Dec 2002 – CVF IPT concluded Thales proposal best. Costs similar. • Jan 2003 – Prime Minister decides politically unacceptable to award contract outright to Thales. • MoD proposes CVF Alliance • MoD – partner and customer • BAE Systems - Prime Contractor • Thales – CVF Design • Subsequent design and programme reviews to reduce cost – Budget £2.9B, Cost £3.8B • Potential French involvement • Mar 2007 – Treasury approval of £3.74B programme obtained. Max cost £3.9B • July 2007 – Orders for 2 ships placed • Work progressing rapidly (In-service dates now 2016 and 2018) but programme still uncertain until after General Election and subsequent Strategic Defence Review

19. Key Points • Political interference in project of this size inevitable. • Difficulties in getting competitors to subsequently work as Alliance partners. • Design reviews to reduce costs only succeeded in delaying programme and incurring associated increased costs. • Programme approach essential due to complex dependencies. • Affordability v Capability issue may still result in programme cancellation.

20. Conclusions • Competition in UK warship building impossible to sustain with current naval requirement. • Long-term partnering solution only way ahead if the Defence Industrial Strategy for the Maritime Sector is to be sustained. Government can’t take a hands-off approach as it tried to do in 80s and 90s • Requires transparency and commitment on both sides. • Value for Money obtained through partnering approach, innovation and continuous learning/improvement. • Political interference inevitable. • Project and programme teams must have the necessary skills. • Innovative procurement strategies can be successful - a one size fits all approach is not appropriate • Delays cost money, including additional costs of running on old systems. • Earlier decision-making and commitment can lead to increased capability through affordability of greater numbers. • Accident or Design Leadership - Openness – Trust – Behaviours - Cultures