All at sea

Written by Civil Service World on 12 April 2012 in Feature
Feature

The aircraft carrier replacement programme has been dogged by indecision, delays and rising costs – and now a U-turn looms. Becky Slack examines one of Britain’s biggest and most dysfunctional public procurements.

“We will build both carriers, but hold one in extended readiness. We will fit ‘cats and traps’ to the operational carrier. This will allow our allies to operate from that carrier, and allow us to buy the carrier version of the joint strike fighter, which is more capable, less expensive, has a longer range and carries more weapons.”

These were the words of David Cameron in October 2010, when he announced plans to change the specifications of two aircraft carriers commissioned by the previous government. But now it looks likely that he’ll backtrack, following reports that the conversion cost will be at least £1.8bn more than expected.

A U-turn would be the latest instalment in a very long saga. Since the carrier replacement programme began in 1998, there has been endless changing of minds. The UK is now looking at a bill of £6.2bn – almost £4bn more than the original projected cost – for one operational carrier and another for which we have no suitable aircraft. The UK will spend a decade without the ability to launch an air strike from the sea.

What went wrong? We have had plenty of time to plan a replacement for our ageing aircraft carrier Ark Royal: as long ago as 1998, the new Labour government’s Strategic Defence Review foresaw a continued need for a UK ‘Carrier Strike’ capability, and orders were placed for two aircraft carriers that would “project power more flexibly around the world”.
The two largest warships ever to be made in the UK were commissioned, at an expected cost of £2.14bn. The contract was awarded in 2003 to BAE Systems and Thales UK. This partnership – which was eventually to be extended to other manufacturers including BVT Surface Fleet, Babcock Marine and Rolls Royce – included commitments to transparency and cost minimisation. The contracts also committed the Ministry of Defence to guaranteeing a certain number of days’ work each year for the 10,000-odd staff employed at the four shipyards involved in the build – something which was later to scupper the coalition government’s plans to scrap one of the carriers.

The design of the carriers depends on the aircraft they are made for. In 2002, the US Joint Strike Fighter STOVL (Short Take-Off & Vertical Landing) was provisionally selected. This was by no means the cheaper option, but was felt to be the one that met the most political, military and industrial requirements.

Institutional problems
By the time the new coalition government launched its own Strategic Defence and Security Review, however, the project cost had more than doubled to £5.24bn. Unfortunately, this is not an unfamiliar picture.

In 2009, the Labour government had commissioned defence expert Bernard Grey to conduct a Review of Acquisition in the MoD. He found that the average programme overran by 80 per cent, or five years, while the average cost increase was 40 per cent, or around £300m. The study estimated that the “frictional costs” to the MoD of these delays was over £900m a year.

In part Grey put this down to project managers within the MoD under-estimating costs and timescales in order to get approval for their plans – a problem that arose because equipment orders were rarely cancelled, so “the process of over-ordering and under-costing is not constrained by a fear on the part of those ordering equipment that the programme will be lost”. He also said it wasn’t clear which systems needed to be the most technically advanced, because all the services always tried to secure the very best equipment.

Dr Lee Willett, senior research fellow for maritime studies at the Royal United Services Institute (RUSI), believes this was the carrier project’s problem. “There is an unprecedented level of rivalry between the services, which is causing a lack of balanced debate about what is the right capability for our armed forces,” he says.

Willett also says that a shortage of expertise continues to hinder progress, with staff cuts causing a “skills drain”. This is a view backed by the Prospect Union, which represents many specialist workers.

“A few years ago, the MoD decided to restructure and downsize its Pricing Forecast Group, which was made up of engineers who would check what the contractors were doing,” says Steve Jary, Prospect’s national secretary. “We say this is one of the most significant reasons why there are procurement problems. The MoD is no longer equipped to make intelligent purchasing decisions or to monitor the work of contractors”.

As far back as 2009, Grey recognised that skills are crucial to improving MoD purchasing. He suggested the organisation responsible for buying equipment, DE&S (Defence Equipment and Support), should be made a government-owned company in an attempt to inject greater expertise. His suggestion is still being explored.

Grey has since been recruited by the government to the role of chief of defence materiel, responsible for developing a ‘Materiel Strategy’ to ensure value in spending – though uncertainty has delayed its progress.

Unforeseen risks
Now ministerial decisions have created new problems. The SDSR Committee recommended dropping the F-35B STOVL for the cheaper and more capable F-35C to save money. It also saw no need for one of the carriers, which would be mothballed (a cheaper option than scrapping it). The current carrier and its jets would be immediately withdrawn. Though the plan would leave the UK without aircraft carrier capabilities until 2020, it would save billions.

However, the National Audit Office disagreed. In its 2011 Carrier Strike report, it said it had concerns that radically changing the project could introduce big risks. “The 2010 Strategic Defence and Security Review has radically changed the Carrier Strike concept,” said Michael Whitehouse, the NAO’s chief operating officer. “It generated £3.4 billion of savings but introduced significant levels of operational, technical, cost and schedule uncertainty. It will take two years for the department to reach a mature understanding of the consequences of the decision.”

Those fears may well prove justified. Although F-35Cs are £50m cheaper and have more capabilities than F-35Bs, the cost of equipping them and training personnel in their use has reportedly risen from £300m to £1.8bn. Worse, their ‘stealth’ design means the arrester hook is in the wrong place, so the expensive built-in traps may not work. It has also been discovered that the aircraft are too heavy for French carriers, removing the benefit of compatibility with UK allies deemed critical by the prime minister back in 2010.

The MoD refuses to confirm or discuss these alleged errors. “We are currently finalising the 2012-13 budget and balancing the Equipment Plan,” it said. “As part of this process we are reviewing all programmes, including elements of the Carrier Strike programme, to validate costs and ensure risks are properly maintained. The defence secretary will announce the outcome of this process to Parliament in due course.”

If Philip Hammond does announce a U-turn, though, it will be difficult to shine a positive light on it. Institutional problems that caused delays and drove up the price under Labour led to coalition decisions designed to radically cut back costs. Now, though, it looks like Cameron’s announcement may have heralded a fresh round of delays and cost increases. ?

Timeline
1998    Strategic Defence Review; decision made to replace current carriers with two larger, more versatile carriers by around 2012.
2002    US Joint Strike Fighter STOVL provisionally selected as carrier aircraft
2003    Procurement strategy: alliance with BAE systems and Thales UK announced
2005    Government announces its policy for UK warship-building industry; demonstration and manufacture phase begins; costs to be refined and finalised in 2010
2007    Terms of business agreed with commercial alliance; final design selected based on the operation of STOVL aircraft from the carriers
2008    (Jan) MoD promises to provide compensation if work falls below set levels; (Jul) manufacture contract signed with BVT for £3.2bn, with £337m cost challenge to industry; (Dec) equipment examination; short-term affordability issues addressed in equipment budget; £1.6bn increase reported due to inflation and delays
2009    First steel cut on first carrier; terms of business agreed with BAE systems
2010    Final target cost negotiated at £5.24bn, including £312m cost challenge to industry; Strategic Defence and Security Review recommends building both carriers but holding one in readiness, fitting caps and traps, buying carrier variant of JSF instead of STOVL
2011    Final target cost approved at £5.24bn; first steel cut on second carrier
2012    David Cameron expected to reverse decision to use carrier variant
2014    Previous in-service deadline for first carrier
2016    Previous in-service deadline for second carrier
2020    New in-service deadline
Source: National Audit Office

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