19 November 2015
The Art of Procuring
By John Watson
Try covering up a roof with not quite enough felt. Stretch it to cover the right edge, and the left edge becomes uncovered. Pull that side up, and a split opens down the middle. However many compromises you make, you always need just a little bit more material. It is a difficult business and the one thing you really don’t want is to find that some of your precious roofing felt has gone missing. Mr Osborne doesn’t deal in roofing felt. He deals in money, but his insistence that the construction of the new generation of nuclear submarines be supervised by the Treasury is to protect against a very similar contingency.
Mr Osborne is spending this week working out how to pay for the retention of working tax credits, due to cost up to £4.4 billion a year. Money like that is hard to find, with both pensions and health being protected and other departments already squeezed. Should it come from Mr Duncan Smith’s universal credit, and thus risk the most important reform of the benefit system for a generation? Should we trim defence further and hope that Mr Putin does not notice? Cut the libraries, then? Unpopular. Put up taxes? A political disaster. So it will probably be a bit here and a bit there like a thrush dining off worms, and his job may be like that for some years to come. One thing which he does not need to hear is that the costs of another big military project have overrun.
The project for the Astute submarines is a good example of what can go wrong. Begun in 1991, it was supposed to deliver the boats in 2005 with a project cost of £5.2 billion. In fact the first one arrived in 2010 and the total project cost is now estimated at £9.5 billion. That is an overspend of £4.3 billion, just enough to meet an extra year of tax credits. Other projects have misfired too. There was overspend of £1.4bn on the Type 4 destroyers and overspend of £3.2 billion is expected on the two new aircraft carriers; the Nimrod overspend was £1 billion. Mr Osborne’s view is that this sort of problem is less likely to arise where the project is overseen by the Treasury. The question is whether he is right.
Like most of the readers of Shaw Sheet, I have had little experience of ordering nuclear submarines. Nor have I ever ordered a conventional one, come to that. Nor a fleet of destroyers, nor a reconnaissance aircraft, nor any other piece of military hardware. There is no point, then, in my trying to apply lessons learned from other examples of defence procurement. Still, I have done what many of us have done. I have watched a business buying a new computer system.
I think the sequence is well-recognised. The first step is for the Board to interview salesmen techies from a number of possible suppliers. Each of them acknowledges the importance of moulding the system to the business and suggests working up a specification which, on delivery, will create a commercial advantage. They explain the many small ways in which the system will be better than that used by competitors. The words “bespoke” and “state-of-the-art” are bandied about freely. The next stage is to compare the proposals. The Board meets and, not being technically proficient in computer matters itself, is anxious not to purchase anything “fuddy-duddy” or “behind the curve”. Still, price is important so in the end they settle on a young, bright designer who does not have the overheads associated with big corporations. Contracts are duly signed, setting out price, milestones and penalties, and a subcommittee of the Board is appointed to liaise with the expert.
To begin with it goes well. The designer is clearly enthusiastic and anxious to earn the bonus promised if the contract runs to time. The Board tell him what they need and the specification gradually emerges. Then there is a delay. It is hard to say whether that is because the designer hadn’t thought things through or because the Board keeps changing the specification but, anyway, the design doesn’t fit the business. A lot of rewriting is necessary and the designer begins to look tired and a little less interested in the bonus. After a few more glitches, things are really in a jam. Although the fact that the designer works for a small consultancy was a help in agreeing a good price, it is a disadvantage when he needs support. Also the penalty provisions of the contract are useless because there is little substance with which to meet them and, in any case, the firm does not want to bankrupt the designer on whom it is relying. Things poodle on, getting less and less satisfactory, until the Board meeting when someone asks which computer system the competitors use. There is a bit of silence and then the Board decides they will buy an identical one. The million or two which has been paid to the designer is written off.
There must be things in common between the problems here and those encountered in commissioning nuclear submarines. To start with there is the difficulty of designing a system around the specific needs of the client. In the case of the Royal Navy these are particularly important. There is no point in building a submarine which other submarines can sink. Moreover it is likely that the weapons system of our enemies will improve during the development stage so that our design will have to change to accommodate them. That means several goes at redesigning the system as it is built with the risk that if you do not do that successfully the entire expenditure may be useless because the boat will not be fit for purpose. Then there is the blamestorming when things go wrong. Here it will be between the Contractors and the Ministry of Defence, but the truth is that the designing of complex machines is a difficult business and often the problem is one of mismatch of ideas rather than real fault. As to the penalties in the contract which could not be enforced against the designer of the business system, well, is the government really going to put a major British defence contractor out of business or will it agree revised terms?
One answer to all this would be to follow the course eventually espoused by our businessmen. We could simply go along to the American Navy and find out which of their submarines works best and then say, “we will have half a dozen of those”. That would be a secure and cheap approach but it is difficult politically. To the public we would be jeopardising the independence of our deterrent. More seriously, however, we would be depriving the British defence contractors of the opportunity to extend their reach and develop expertise which can later be used for international sales.
So that takes us back to our question. Should the operation be run from the Treasury or the Ministry of Defence? To a large extent, of course, the Navy as users will have to drive the design whichever option is chosen. I have the greatest respect for the Treasury but the idea of their flicking paper balls off their desks so that they can understand how a missile flies is not one which fills me with confidence. What we are talking about, then, is a layer of Treasury procurement people between the admirals and the contractors.
It is impossible to overstate the importance of the Royal Navy. It has kept us safe from invasion over the centuries and it was its expertise which provided the mobility around which the Empire was built. The names of battles such as Sluys, Trafalgar, Cape St Vincent, Aboukir Bay, the Armada and the Glorious First of June resonate through our history. It is a worthy custodian of our nuclear deterrent. Still, it is in the nature of admirals to like technology, not for its own sake of course but because it may give them an edge if it comes to a fight. That is understandable with conventional weapons but perhaps less so in the case of a nuclear deterrent which, unless things fail utterly, will never be used. What we need is something workable, sufficiently effective to worry the opposition and be reliable. That may mean that we should not always go for the latest gizmo, in which case someone needs to keep a cool hand on the shoulders of the admirals and the defence contractors. That someone must be the Treasury.
