Hans Pung, RAND Europe

Building a Naval Industrial Strategy:
The UK Experience
Hans Pung
27 February 2012
• 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-2
RAND has undertaken a number of studies for
the UK MOD examining maritime issues
UK Experience / Slide-3
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-4
This approach revealed some unintended
• Competition focus encouraged new market entrants
– These did not always have domain knowledge
– Contract awards did not focus on industrial
• 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-5
The Astute submarine project provides
a good example of these tensions
• Contract awarded in 1997 to
GEC Marconi
– Limited experience in
nuclear submarine
– Later bought out by BAE
• Initial fixed-price contract for 3
– Contract later renegotiated
in 2003
• A number of factors led to
project overruns
– Poor initial estimating
– Lack of experienced
UK Experience / Slide-6
The 2005 Defence Industrial Strategy provided
clearer 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
UK Experience / Slide-7
DIS developed a model to determine
on-shore capability requirements
In summary:
• On-shore
concept design
for all vessels
• On-shore build
of complex
• On-shore inservice support
for all vessels
UK Experience / Slide-8
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-9
The BVT (later BAE) ToBA placed a number of
commitments on both MOD and industry . . .
• 15 year exclusivity on specified
• Merge ex BAE/VT/FSL naval
Ship build and support
businesses to deliver
integration savings;
• Sustain Key Industrial Capabilities transform new business to
generate efficiency savings
(via workload or funding)
• Independent benchmarking
• Underwrite transformation and
to achieve upper-quartile
initial rationalisation costs
• Maintain competition in
Supply Chain
UK Experience / Slide-10
. . . but also promises a number of benefits to
• £350-900m savings over 15-year
• Long-term certainty of
term of ToBA
• Assurance of Key Industrial
Capabilities to meet future
• Rationalised shipbuilding
business fit for purpose
• High performance of key
shipbuilding partner
• Visibility of MOD forward
• £230m annual revenue
UK Experience / Slide-11
However, the ToBA did not prevent a large
production ‘gap’ in UK shipbuilding plans
UK Experience / Slide-12
Although, costs of the BAE ToBA were a key
factor in deciding to build two aircraft carriers
UK Experience / Slide-13
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-14
In early February, the UK updated
its (defence) industrial policy
• Applies across the
national security space
• Commitment to open
procurement when
• Tempered by:
– Operational
– Freedom of action
UK Experience / Slide-15
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
Industry may be reluctant to self-invest in new
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-16
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
• Commitments must be sustainable and funded
• Funding is not a substitute for true capability
UK Experience / Slide-17