The controversy over the BAE Systems decision on warship building has been dominated by myth, emotion and pleading. Arguments are raging about English versus Scottish jobs, about shipbuilding as a key component of the UK defence industry, and about the loss of “essential” skills. Economists can help improve the debate by critically evaluating the arguments and identifying some of the basic economics of the BAE decision.
The UK warship industry comprises both surface warships and submarines. BAE is the UK monopoly supplier of both, but the current announcement only refers to surface warships, and to the yards at Portsmouth and on the Clyde where these are built.
Submarines, meanwhile, are made at the BAE yard at Barrow-in-Furness. This is a unique facility in that it builds nuclear-powered submarines in small numbers for a single customer, the Royal Navy. There is sufficient submarine work ahead to maintain Barrow to around 2025 – and beyond, if a new submarine deterrent system is ordered.
But even with Barrow’s future relatively assured, the UK warship industry cannot ignore the defence economics problem: falling defence budgets, costly equipment and rising unit costs.
Meanwhile, unit costs are rising in real terms; for example, while the current Type 45 costs £1 billion per unit, the Type 23 frigate, had a unit cost in 1989 of just £183 million (or just under three times as much in today’s prices).
These higher unit costs, along with falling defence budgets, mean fewer warships are being bought by the Royal Navy. Quite simply, the UK therefore needs fewer shipbuilding yards. In 1980, the Navy operated 66 destroyers and frigates; by 2012, this number had fallen to 18 vessels, and the future requirement for the Type 26 is 13 ships.
The defence economics problem means that difficult choices about the UK warship industry and the defence industrial base cannot be avoided. Something has to go – the only question is what.
How the industry can survive
Retaining a British warship industry is not costless. Its resources have potential alternative uses in other sectors; it might be more efficient to re-allocate resources to other higher value activities elsewhere in the economy. Much depends on society’s willingness to pay for such an industrial capability.
There are also other ways of retaining the industry. Some of the facilities could be mothballed and re-opened at some future date. This would require skilled labour for any future re-generation, and recruiting and training such labour will incur costs and take time; still, the costs of such an option need to be explored, and some skilled labour is generally available within the broader UK economy. While more specialised design skills for surface warships might be more difficult to obtain, they are usually only required in small numbers, and could be retained at reasonable cost by working on prototype designs.
Most importantly, preserving the industry’s current yards and industrial structure is not the only way to retain it. On the contrary, the introduction of supplier competition could play a major role. For instance, competition for the new Type 26 combat ships will lead to new designs, lower prices and novel forms of industrial organisation.
While a truly competitive industry would allow foreign firms to submit designs, a requirement that warships be built in the UK could still be imposed. A new manufacturer could act as systems integrator, and sub-contract the warship assembly to a UK yard. There are a number of yards owned by BAE, Babcock and others, including yards building oil platforms, which are potentially suitable for sub-contracted warship assembly.
The politics of warship building
Critics of the BAE decision have criticised it for being politically motivated. This should not be surprising. All defence procurement decisions are political, because they are ultimately made by governments. As the warship industry’s major buyer (for some ships, the only buyer), government necessarily determines the industry’s size, structure, performance and ownership.
Traditionally, UK Governments have required all Royal Navy warships to be built in the UK, mainly to guarantee security of supply. This is a unique commitment which does not apply to any other sectors of the UK’s defence industrial base, even highly sensitive ones: for example, the missiles for the British nuclear deterrent are imported from the USA.
Nor does commitment to domestic production and buying reflect the international competitiveness of the UK’s warship industry, which has not been particularly successful in export markets (unlike our aerospace industry, for instance). Nor is the warship industry a major employer in the grand scheme of the economy. If the case for retaining it is based on jobs, there are other industrial sectors that could offer more employment opportunities when given the same Government attention and support.
In short, to make informed decisions about the future of the domestic warship industry, we must answer a number of often ignored but vital questions. What, exactly, are the aims of our current policy, and what are the alternatives? Is the price of buying British warships a smaller and weaker Royal Navy? And could we buy our warships at a lower overall cost from foreign sources of supply?