Building a Naval Industrial Strategy: The UK Experience

Hans Pung27 February 2012

UK Experience / Slide-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

UK Experience / Slide-3

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

UK Experience / Slide-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

UK Experience / Slide-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

UK Experience / Slide-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

UK Experience / Slide-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

UK Experience / Slide-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

UK Experience / Slide-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

UK Experience / Slide-10

The BVT (later BAE) ToBA placed a number of commitments on both MOD and industry . . .

MOD• 15 year exclusivity on specified

Ship build and support programmes

• Sustain Key Industrial Capabilities (via workload or funding)

• Underwrite transformation and initial rationalisation costs

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

UK Experience / Slide-11

. . . but also promises a number of benefits to both

MOD• £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

BVT• Long-term certainty of

workload• Visibility of MOD forward

planning• £230m annual revenue

throughput

UK Experience / Slide-12

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

UK Experience / Slide-13

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

UK Experience / Slide-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

UK Experience / Slide-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

UK Experience / Slide-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

UK Experience / Slide-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