Financial risks on Trident successor – a Conspiracy of Concealment

Computer generated image of the Dreadnought Submarine - © Crown Copyright 2013

This blog is a guest post by Defence Procurement Adviser Jag Patel

Now that Parliament has given its approval for the Trident successor nuclear submarine programme to proceed to the manufacture and build phase, the focus of attention turns to the ability of the Ministry of Defence (MoD) to deliver this project without incurring the usual delays and cost overruns, which have dogged military equipment programmes for as long as anyone can remember.

The mainstream press and media are, as usual, infatuated with the human interest story of the person who will be appointed as head of the newly established Submarine Delivery Agency and the organisational construct within which he will operate. As such, the intellectually engaging public interest story of failings in the existing business processes used by the MoD to procure this highly complex weapons platform is certain to escape scrutiny.

These failings greatly increase the likelihood that financial risks on this uncontested, single-source contract, which involves substantial design, development and systems integration work, will materialise sometime soon. This was a concern expressed by the then Permanent Secretary at the MoD Jon Thompson, who admitted that the possibility of this happening keeps him awake at night, when he appeared before the Public Accounts Committee in October 2015.

The way in which financial risks emerge will be familiar to anyone who has worked in the defence engineering industry. They usually start-out as innocuous looking technical risks on the Defence Contractor’s premises, where selected risks are deliberately concealed by the Contractor during the design and development phase, then skilfully transferred to MoD Abbey Wood, Bristol where they suddenly morph into ‘show stopping’ risks and come to the fore immediately after the main investment decision has been taken. A spectacular example of problems emerging after the investment decision is the Type 45 destroyers, which are known to have suffered from engine shut-downs and with it, total loss of electrical power due to their inability to deal with higher air temperatures in warmer climes, beyond UK territorial waters. The risks ultimately end up as an additional cost burden on the Front Line Commands, who have recently been given day-to-day responsibility for managing the defence equipment budget – resulting in sleepless nights for many other people too!

This happens because Defence Contractors who are driven by the commercial imperative, will always choose to conceal technical risks identified early in the programme. They do this by engaging with procurement officials and getting them to focus on the declared risks which are relatively trivial, whilst skilfully diverting their attention away from those really huge ‘show stopping’ risks which they will only reveal later on, when things go wrong. This inevitably means that the MoD will have to raise Contract Amendments and/or Post Design Services Contracts, resulting in additional payments being made to the Contractor, over and above the initial approved contact value.

This is done by contriving situations which entice procurement officials into partaking in detailed design decisions relating to the evolving Technical Solution, and then using this involvement to coerce procurement officials into raising Contract Amendments later on.  Indeed, it is the very existence of Contract Amendments and Post Design Services Contracts that causes contractors to conceal ‘show stopping’ risks in the first place!

These concealed risks then come to the fore immediately after (never before) the main investment decision has been taken, surprising everyone (except the contractor) and imposing a budget-busting burden on the MoD.

People on the contractor’s payroll who might be driven to blow the whistle on this conspiracy of concealment are discouraged from doing so because they have no protection, but it is an open secret that this way of doing business is the norm in the defence industry.
The only people who are not in the know about this blatant scam are those in the pay of the state!
As such, the chances of financial risks coming to the fore on Trident soon after the main investment decision has been taken are about as certain as night follows day.

 

UK Government strongly favours buying off-the-shelf equipment

It is clear that recent UK military hardware acquisitions have been made because of their commonality and interoperability with US Armed Forces. This offers certainty that replacement spare parts will be made available via a common logistics supply chain. This substantially reduces the burden of in-service sustainment costs, which can be in the order of four to five times the prime equipment costs over the whole life cycle, from inception to disposal.

But there is yet another, even more important reason for this choice.

The Government has recently revised its defence procurement policy so that its first choice is to consider buying new military equipment for the armed forces off-the-shelf. This is because off-the-shelf equipment is a fully engineered and supported technical solution which satisfies the key user requirements at no additional cost or risk to the Exchequer. In other words, it does not require any user-specified modifications or related, risk-laden development work to be performed upon it.
The Government has moved away from its long-standing procurement policy of buying equipment designed to a tailored technical specification requirement set by the military customer. It will not publicly admit this because it is no longer confident in the ability of its own people to identify, manage and control technical risks inherent in a starting-point for the technical solution that requires development work to be performed upon it. This lack of capability has been the cause of persistent delays and cost overruns on equipment acquisition programmes for the last several decades.

This shameful situation has come about because the MoD does not possess the capability in the form of knowledgeable and experienced procurement officials who have an adequate understanding of what it takes (in terms of skill types, funding, tools, processes, materials, scheduled work plan, inter-business contractual agreements etc.) to advance an immature technical solution to a point where it will satisfy the technical specification requirement. This is particularly apparent when dealing with private sector actors who are driven by the profit motive and who instinctively employ unethical business practices. Consequently, they are not able to establish the true status of the evolving technical solution based upon claims made by contractors. The harsh reality is that procurement officials have no business acumen – on account of not having worked a single day in the private sector.

Nor does the existing defence procurement process, which has evolved over the years, serve its purpose any more because it has been tampered with by the big defence contractors, who have monopolised most of the contracts by skewing it decisively in their favour, at every turn. As such, it is unable to deliver equipment to the Armed Forces which is fit for purpose, adequately sustained in-service and good value for money throughout its service life.

The Government’s considered assessment is that it is unlikely to accumulate an in-house capability of the desired quality and numbers anytime soon, certainly not in the foreseeable future. It has also been realistic and concluded that it is nigh on impossible to reconstitute the existing, flawed procurement process alongside the tough 2015 spending review commitments. The situation is further complicated by Brexit, which has commandeered the most talented people in Whitehall and made the task of balancing the UK’s finances even more difficult – hence the Government’s preference for the off-the-shelf option.

Ironically, one of the most spectacular benefits to be derived from buying off-the-shelf equipment is that the leadership at the MoD will be absolved from its burdensome responsibility of having to upskill its existing procurement staff to a level comparable with that exhibited by counterparts in industry. Because this type of acquisition is relatively straightforward; it can even be undertaken by mediocre post holders with no business sense – not least, because it is devoid of any hidden financial, technical or schedule risks.

 

There is no doubting the Government’s determination

If anyone has any doubt about the determination of this government to press ahead with considering the off-the-shelf solution as its first option, then they should look no further than its decision to buy the standard Boeing P-8A Poseidon maritime patrol aircraft to plug the capability gap left behind by the cancellation of Nimrod MRA4.  Settling on the choice of the P-8A Poseidon means that these aircraft cannot be refuelled in-flight by the RAF’s Voyager tanker planes to extend their range and endurance on-station, because the former are fitted with the flying-boom receptacle whereas the latter are equipped with the probe-and-drogue system – making them entirely incompatible.  The Government has taken a lot of flak from informed commentators and endured negative publicity in the press and media for this serious operational deficiency – nevertheless, it has decided to go ahead with the purchase.

All the indications are that the Government does not intend to fund a modification programme to install in-flight refuelling probes in place of the receptacles after the aircraft have been delivered to the UK, given that the P-8A seedcorn crew have been trained to refuel their own aircraft, even at civilian airports, using standard commercial aircraft refuelling equipment.  The rationale behind this posture is that the Government is dead against undertaking any sort of modification work which entails the Treasury having to take on unknown risks and the usual, attendant spiralling costs that go with them.

Whereas the Government would want to look at indigenous equipment suppliers as the first port of call for entirely good reasons, the undeniable fact of the matter is that, after decades of unwavering support lavished upon them by political parties of all persuasions, none of them are able to offer suitable off-the-shelf equipment because they simply haven’t got any – not least, because they have not been innovating at all, and have consequently become seriously uncompetitive, both in the domestic market as well as in export markets.

So what impact does this policy shift have on defence contractors’ business prospects in the years ahead?

UK-based military equipment manufacturers who do not possess desirable off-the-shelf equipment and are in the business of developing and building weapons platforms, are most likely to be adversely affected by this adjustment in defence procurement policy. To avoid haemorrhaging their domestic market share to similarly positioned players from the US and elsewhere, UK-based Defence Contractors have little choice but to increase their competitiveness significantly. They will need to do this by first selling their products in the international marketplace – on price, superior technical performance, timely delivery and without bribing public officials via intermediaries – and then re-entering the domestic market with fully developed products that can be sold as off-the-shelf offerings, to satisfy UK Government needs, just as the Americans have done.

In addition to the three hugely significant off-the-shelf buys the Government has already confirmed, namely the P-8A Poseidon maritime patrol aircraft, the Apache AH-64E attack helicopter and the Protector UAV (Certifiable Predator B) armed drone that can be operated in UK civilian airspace, it is planning to make known its choice for the Mechanised Infantry Vehicle capability requirement sometime this year.

It is believed that some twenty percent of the equipment procurement budget is currently being spent on buying off-the-shelf equipment.  This slice is only set to increase, as more and more projects which involve significant development work are side-lined in favour of off-the-shelf purchases.

 

Conclusion

It is clear from the preceding analysis that, the Government’s procurement strategy for Trident successor is completely at odds with its latest thinking on acquisition of military equipment for the Armed Forces, specifically the policy of buying off-the-shelf.

It has not got the full complement of acquisition staff to populate the newly established Submarine Delivery Agency who have the necessary skills, qualities and attributes to initiate and conclude this highly complex development programme – making the chances of the usual delays and cost overruns becoming a reality an absolute certainty, especially as Trident is crowding out spending on conventional weapons systems right now.

Many people will know that the Trident nuclear capability comprises the submarines with their associated mission equipment and life-support systems, the missiles that serve as the delivery vehicles and the nuclear warhead fitted on top of the missiles.

Given that the UK leases the Trident missiles from the US, which also builds and maintains them, why not  procure all four Trident successor submarines off-the-shelf from the Americans too?  While they are at it, the Government could even try to buy the nuclear warheads directly from the US, instead of designing and manufacturing them separately, at its dedicated facility at AWE Aldermaston.

In so doing, the Government will get a much reduced price for Trident successor due to the operation of the market-based mechanism of economies of scale – as the UK’s order will be added to that of the US.

It makes sense.  In fact, it is common sense because the dreaded financial risks will also be dealt with and consequently, taxpayers will get better value for money – an issue which is sure to come up again and again in the future.

Jag Patel is an independent Defence Procurement Adviser with over 30 years experience of researching, analysing, publicising and solving a wide range of entrenched procurement problems.  He tweets as @JagPatel3, where he tells it ‘exactly how it is – no lies, no spin’.