Two carriers; the right decision for MoD or industry?

Posted on 25 Oct 2010 by The Manufacturer

The second aircraft carrier has stolen the limelight, but has the SDSR demonstrated an adequate level of dialogue between government and industry? No, Will Stirling discovers.

Pictures of submarines and aircraft carriers have decorated newspapers recently. This weekend it was HMS Astute, perched embarrassingly on a silt bank in an Isle of Skye bay. Three days earlier, The Times led with a full page photo of an aircraft carrier, with the headline “HMS Ignominious”, in reference to the decision in the Strategic Defence and Security Review to keep both carriers but not equip them with the original jets they were designed for. The Queen Elizabeth II carrier programme has seemingly had more changes than Commander Andy Coles’ navigation plan of the Western Isles.

Grand, high spend and provocative big ticket items, the carriers and Astute have dominated the defence budget in the lead up to the Strategic Defence and Security Review (SDSR) last week. At £5.2bn – a number forever etched in my memory – it’s hardly surprising the carriers take centre stage as a media tool in decisions over the budget, the SDSR and the Defence Industrial Strategy (DIS). The DIS was devised in 2007 to create a plan for, among other things, guaranteeing that throughput in Barrow, Scotsdoun and the Clyde was consistent. This would avoid regional unemployment, provide equipment consistent with the needs of the MoD and the legacy 1998 Strategic Defence Review, and ensure that skills would not be lost at these yards forever.

But it can be easy to forget that there is more to the SDSR than an extra aircraft carrier and some submarines. Following the review, many defence industry stakeholders, including many companies in defence procurement supply chains, have felt shortchanged over the low level of consultation concerning how the money was spent. Specifically, there appears to have been remarkably little consultation about the existing assumptions of what was contracted in to the carriers – and therefore unbreakable – and what was not yet contracted in and therefore disposable. There is a sense that the Government had to deliver two carriers and protect the Astute programme come what may.

The coalition government had found itself in an unenviable position; once it set the date for the Comprehensive Spending Review, the SDSR had to come first, leaving the new Defence and Treasury team with about four months to throw it together. It inherited an SDSR in-waiting from the Labour government – while it would be disingenuous for the Coalition to say that they disapproved of two carriers, there was not an array of defence review options open to them in June.
There was a wide recognition from industry that the Government really had to provide the defence budget by November, but the complete strategy itself – the UK’s most important for 12 years – would have benefited from a higher level of consultation with industry before making decisions that will effect jobs and factories for 15 years and more. The strategy detail could have waited.

Confirming the second carrier – Boat Two – was a win for many, such as Darchem Engineering in Newcastle. Managing director Graham Payne is delighted, as the programme will secure work worth about £11m for the small firm, which makes air intakes and exhaust manifolds for the ships, through to 2014. It’s a double win for Darchem; modifications to the ship to accommodate conventional take-off jets will allow it to bid for components to the catapult system required to launch such aircraft. Defence secretary Liam Fox, relatively late in the day, had made the point that it would be more costly to discontinue Boat Two than to complete it. The actual maths for this calculation is probably only known by a handful of people.

Industry commentators say the MoD has lost an opportunity to make a brave decision: cut or constrain the capability of Boat Two, while putting more investment into other defence budget components that are strategic; that is, adjust the parameters of the Defence Industrial Strategy to reflect a new National Security Strategy. “This would have kept defence manufacturing onshore, such that the DIS mandates, but just different things onshore,” says Alex Hand, a defence industry law specialist at Eversheds. “My sense is that industry would have been quite open to that kind of discussion, rather than saying we can’t cut the carriers so we’ll have to cancel a load of other smaller projects that we can’t build instead because the money is not there.” Its not as simple as cutting a carrier, says Hand, rather finding ways to adjust its capability without ringing the death knell for other, subordinate programmes. “If you look at the amount of time that went into the 2007 DIS, and you look at how much time they’ve devoted to the SDSR, it has been done at such breakneck pace with such a fixed deadline – a full review in four to five months – there hasn’t been the time to consult industry properly.”

What price a £2.6bn boat?
Some will take cold comfort from the decision to keep the second carrier, or at least at the near-full capability it will have. The employees of BAE Systems’ factories at Samlesbury, Warton, Brough and Chadderton for example, may feel that more consultation over the real strategic needs of the MoD was appropriate. In September, BAE announced that nearly 1,000 jobs would be lost by end 2011, 740 in manufacturing at these sites, which manufacture aircraft. One of those is the Nimrod MRA4, originally intended to replace the Nimrod MR-2 anti-submarine aircraft in 2003. They have worked hard for years on a very capable aircraft that has become a white elephant, the RAF’s answer to the Millenium Dome (although worse, because the planes may be mothballed while the Dome has a use). The MRA4 programme had a budget of £3.5bn. It is believed that only about £200 million of that is left. The entire programme is being canned as a cost saving exercise because the support and service of the aircraft is expected to cost another £3bn over their lifetime.

Hard times require tough decisions and some will feel Nimrod will just have to take the bullet – after all, these planes cannot do the work of a carrier. But it’s not that simple. The MRA4 role is a key part of the UK defence strategy; whether its protecting an aging Vanguard nuclear trident mechanism, or whether its protecting from piracy off the Horn of Africa, Nimrod or a long range reconnaissance aircraft plays an important role in that. “Sentinel, the Nimrod equivalent, will be retired when it’s done in Afghanistan in two years time,” says Eversheds’ Alex Hand. “Once gone, there are a few Rivet Joint planes, which won’t be ready for a while. Aside from those we will have a very limited reconnaissance, anti-submarine and COMINT intercept operations unless they’ve got something in terms of UAV capability in that timescale, but that is not apparent.” The UK, with BAE Systems at the front, is pushing unmanned aerial vehicle (UAV) technologies hard, but they are still a long way behind where they need to be to replace the Nimrod MRA4’s specific function.

Legal issues: time to play hardball
The big decisions are announced, and these herald a new era for defence contractors, where a review of the Review brings to light three important legal themes. Certainly the age of [further] austerity imposed on the UK’s military services will force stakeholders to be more ‘black and white’ in their contractual language, says Hand.
“Firstly, we’ll see a change in the extent to which both the MoD as customer and contractor with the defence primes, and then the primes down the chain to the Tier Twos and Threes, will be prepared to hold people to the letter of their contracts, litigate and even reopen contracts as cost pressures increase. To date, people have worked through problems rather than litigate them. Even if its behind the scenes people will be turning up the heat in a way they’ve not done to date.”

Outsourcing is the second area, with a greater drive to do this and strip out public sector costs from the military and put them onto the private sector as much as possible. “The big question, and it feeds into a wider issue, is around pensions,” says Hand. “One of the biggest barriers to the free market outsourcing of defence works at the moment is the stated policy that to outsource these jobs, the pension provision offered to the outsourced employees must be broadly equivalent to that which they’re getting in the public sector. Public sector pay may be frozen, but they’re still way off [higher than] the defined contributions that people tend to receive in the private sector. It will be interesting to see the extent to which the Government is prepared to soften that position in order to encourage more outsourcing.”

Finally, there is more pressure on MoD asset disposals, and whether the value of these calculated in the SDSR measure up. “Whether its things like the DSG (Defence Support Group) being disposed of, which was announced in the SDSR, or things like the MoD’s real estate portfolio, there is pressure to free up cash. The returns from these sorts of asset disposals are part of the assumptions that the SDSR’s budget has built into it. If they’re not getting the kind of values or interest in those asset disposals that they assumed, then it puts the rest of the numbers in the Review in jeopardy. Especially thinking whether the real estate asset disposals are realistic in an environment where the real estate market as a whole is pretty depressed.”

While with 7.5% rather than 25% cuts to the budget, the axe fell on defence with more of a slice than a cry of ‘Timber’, it is still clear that its crunch time for the MoD. The carrier is a gamble that will support industry and thousands of jobs, but at what ultimate cost to a host of other RAF and naval surface programmes that will have to be shelved – even though the Type 26 destroyer programme remains on track. Like piloting a nuclear submarine in shallow waters, politicians must make tough decisions – but UK industry may rightly feel aggrieved that it was not consulted adequately over such an important, long term spending decision.