Building a Naval Industrial Strategy: The UK Experience Hans Pung 27 February 2012
Feb 05, 2016
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