Linda Pearson: Why we may see the cost of Trident renewal rocket even further

Writer and activist Linda Pearson digs a little deeper into the true cost of Trident

IN July 2016, Westminster MPs gave a green light to the renewal of the UK’s Trident nuclear weapons system. The Trident successor programme will see massive amounts of taxpayer money transferred to arms companies, instead of being spent on socially beneficial projects.

The programme is already crippling the Ministry of Defence’s (MoD) budget and the UK Government is considering shifting the cost to the Treasury. As Campaign for Nuclear Disarmament (CND) chair Dave Webb says: “This can mean only one thing - further cuts to schools, hospitals or other areas of social spending.”

CND has put the total cost of the project at £205bn over three decades, but there is a serious risk that costs will escalate even higher. Military contractors have a tendency to conceal technical risks during the design and development phase, and there are indications that the project is being badly managed.

Single source contracts

Underlying these factors is the problem of the project’s dependence on monopoly, or “single source”, providers. BAE Systems is the sole manufacturer of Britain’s nuclear submarines, Rolls Royce is the sole maker of the submarines’ nuclear reactors, and Babcock International is the sole provider of repair and refitting services.

When there is only one choice of contractor, delays and costs blowouts are difficult to avoid. Suppliers “can set prices without the worry of being undercut by competitors”, as the Ministry of Defence has acknowledged, “meaning they can be confident of follow-on work even when performance and efficiency is poor”.

The first of BAE’s Astute Class nuclear-powered submarines, for example, was delivered four years late and 53 per cent over budget. In 2014, the UK Government introduced new regulations governing large military single source contracts, including those related to the Trident successor programme. The regulations established statutory rules on contract pricing and require contractors to be more transparent about their costs, with the aim of securing greater value for taxpayer money.

A new regulator, the Single Source Regulations Office (SSRO), was established to oversee the regime.

While there are indications that the changes are producing savings, the new regime has significant shortcomings. As a regulator, the SSRO is ill-equipped to take on the power of the arms industry. Some contractors are simply refusing to be regulated by it and enforcement has been left to the MoD, which is compromised by its close relationship with the arms industry.

Profits

Under the new regulations, the price of a single source contract is calculated as “allowable costs” plus a percentage of those costs, that percentage being the “contract profit rate”. The contract profit rate is derived from a “baseline profit rate”, which is set annually by the secretary of state for defence.

Since 2015, the baseline rate has been cut by 30 per cent on the advice the SSRO, much to the ire of the arms industry. When then defence secretary, Michael Fallon, announced that the 2017 baseline rate would be cut from 8.95 per cent to 7.46 per cent, Paul Everitt, chief executive of the industry’s trade association, ADS, said that the new rate sent “completely the wrong signal for long-term investment into UK defence”.

The baseline rate can be increased to a higher contract profit rate during negotiations, using a six-step process outlined in the regulations. The adjustment is intended to “take account of factors such as risk, performance incentives and capital servicing rates”. In the financial year 2016-2017 the baseline profit rate was 8.88 per cent but the average contract profit rate was 10.72 per cent.

The SSRO’s limited ability to scrutinise contracts (see below) means that it’s not always possible to tell why an adjustment has been made and whether it was made in accordance with the regulations. The SSRO’s 2017 annual report on the single source regime noted that it has a large number of outstanding queries with the MoD concerning the information supplied to it about single source contracts, including instances “where an adjustment has been made to the baseline profit rate but” either “no description has been provided of the calculation to determine the contract profit rate” or “the adjustment has been said to represent a negotiated position without further description”.

Costs

According to guidelines issued by the SSRO, to be “allowable”, contract costs must be “appropriate, attributable and reasonable”. The burden of proof is on the contractor to demonstrate that its costs meet these requirements.

The SSRO made headlines in July 2016 when it revealed that it had challenged £61m of “potentially non-allowable costs” in contracts, including £10,000 for “entertaining costs” and £34,000 for “staff welfare”, which included a Christmas party. “The suppliers then get profit on top of these amounts,” the SSRO noted.

However, as the SSRO’s former chief executive, Marcine Waterman, told the House of Commons Defence Committee in December 2016, the SSRO can only challenge such egregious costs when it is notified of their existence by the parties to the contract. Despite being charged with regulating single source spending, the SSRO has no statutory right to examine single source contracts, as they are deemed to be “commercially sensitive”.

Instead, the organisation relies on information submitted by contractors via online forms, meaning “we don’t know if what we are being told is the truth”. Moreover, the minister for defence can exempt some contracts from the SSRO’s scrutiny entirely and “the department is not required to share with the SSRO the extent of contracts excluded and exempted from the regulations, or the underlying reasoning”. According to Waterman, “pressure put on from industry” has often been the reason for such exemptions.

Details of costs may be revealed to the SSRO if a matter is referred to it for determination, such as when there is there is disagreement between the parties about whether certain costs are allowable, or uncertainty over how the regulations should be interpreted. In 2016 the SSRO determined after a referral that marketing costs charged by Rolls Royce in a contract to provide support for the RAF’s Hawk jet engines were not allowable.

The move prompted a furious response from the company’s CEO, Warren East, who said that the UK arms industry would “wither on the vine” if it was not allowed to reap sufficiently high profits. The results of the SSRO’s limited scrutiny to date suggest that it has only seen the tip of the non-allowable costs iceberg. According to Waterman, in 2015-2016 the SSRO only saw information relating to 15-20 per cent of the MoD’s single source spending.

Furthermore, 78 per cent of the costs that it had challenged came from one contract, where “we [were] actually given them pricing schedule”.

Obstructing the SSRO

The MoD is supposed to enforce compliance with the regulations, but it appears to be reluctant to take on this role.

Between 2015 and 2017, the SSRO referred 376 queries about information submitted by contractors to the MoD, 67 per cent of which remained unresolved by June this year. In a recent response to a written question, Parliamentary Under-Secretary of State for Defence People and Veterans Tobias Ellwood revealed that the SSRO had sought clarification from the MoD about information provided by Babcock International, although it is not known which contracts are involved.

In 46 of the cases referred to it, the MoD told the SSRO that contractors would be requested to amend their submissions. “As at June 2017, however,” the SSRO’s annual report states, “none of these amendments had been made by contractors”. The MoD also has the power to issue penalty notices against companies which do not disclose the required information to the SSRO, but has not done so since the regulations were enacted.

The National Audit Office recently reported that “[t]here is currently disagreement between the department and certain suppliers, who are either refusing to be subject to the regulations or will not provide the required information about costs and prices ... the regulations will fail if contractors can evade them by not cooperating”.

Three SSRO chief executives have resigned in two years, including Waterman, with reports suggesting that they were frustrated by a lack of cooperation from the arms industry and the Ministry of Defence. The organisation has recommended that it be given the power to demand information from contractors and to issue and penalty notices when they fail to comply, but there has been no indication yet that the UK Government supports this.

Trident problems

During a House of Commons debate on Trident in April 2016, Shadow Defence Secretary Emily Thornberry questioned why there had been no meetings between the SSRO and the MoD about the Trident successor project. She accused Defence Secretary Fallon of not letting the regulator “do its job properly”, citing an MoD response to a freedom of information request about the estimated cost of the project.

The response said that the government “needs a safe space away from the public gaze to allow it to consider policy options … unfettered from public comment about the affordability”. Fallon responded: “I am certainly not going to go into the details with her or, indeed, in the House until [the contract] is signed. Once it is signed, we will of course ensure that it is properly scrutinised.”

Exactly how much scrutiny is unknown, given the limitations of the SSRO and the reluctance of the MoD to fully embrace the new regulatory framework. But we do know that the programme is in trouble. In July 2017, the government’s Infrastructure and Projects Authority (IPA) reported that the project to construct manufacturing plants for nuclear reactors at Rolls Royce “appears to be unachievable”.

It gave the project a “red” rating, meaning “there are major issues with project definition, schedule, budget, quality and/or benefits delivery, which at this stage do not appear to be manageable or resolvable”.

The £31.6bn project to build Dreadnought submarines was given an “amber/red” rating, meaning “successful delivery of the project is in doubt, with major risks or issues apparent in a number of key areas”.

The Atomic Weapons Establishment (AWE) manufactures Britain’s nuclear warheads and is reported to be developing upgrades to the existing weapons. In 2017, AWE’s warhead factory in Aldermaston was placed in “special measures” by the Office for the Nuclear Regulation (ONR) for the fifth year in a row, along with its site at Burghfield.

The ONR issued AWE with five enforcement notices in 2016-2017, after inspections revealed that it had “failed to meet the safety and security expectations required by law”. And in November 2017, the MoD was accused of deliberately suppressing safety concerns about Trident after it censored the Defence Nuclear Safety Regulator’s annual report.

The burden of funding the Trident vanity project should not be borne by British taxpayers, whether the money comes from the MoD’s budget or from the Treasury. Nuclear weapons possession is immoral and has just been outlawed by 122 countries. Britain’s nuclear weapons do not make us more secure, they simply draw vast sums of money away from socially useful projects.

The only sensible way to deal with Trident-related budget problems is to scrap the project altogether.

Picture courtesy of Defence Images

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