Gordon Brown and the TOBA that shafted the Navy
In this guest article, Jag Patel considers if Gordon Brown’s reputation as a prudent politician is deserved and the impact his policies are still having on the RN today.
During his 10 years as Chancellor of the Exchequer and then as Prime Minister, Gordon Brown cultivated a carefully crafted reputation as a prudent politician and trustworthy custodian of the public purse. Indeed, such was his penchant for using the word ‘prudence’ that political journalists took to playing a fun game of counting the number of times it was mentioned in his budget speeches. Some even jokingly suggested that Prudence was the name of his girlfriend, who had been kept out of the public eye. Either way, Brown’s record in office, as a “fiscally prudent politician”, does not tally with the evidence.
In his autobiography My Life, Our Times, Brown discusses among other things the financial crises, his economic record and that fateful promise made by Tony Blair. Not surprisingly, there is no mention of one of most disgraceful actions of his government. It concerns state-sponsored protectionism, and failure to install genuinely independent regulatory bodies. This shameful episode, which marred Brown’s time in office, relates to the procurement of military equipment.
What has been clear for many years is that, public subsidies handed out to defence equipment manufacturers over several decades, is the reason why they have failed so miserably, to deliver equipment to the Armed Forces which is fit for purpose, adequately sustained in-service and constitutes value for money through-life.
Means of defence production in the hands private interests
In the UK, as in many western countries, the means of defence production, distribution and exchange is exclusively in the hands of private interests, that is to say, the State is entirely dependent on for-profit organisations for the design, development, manufacture and delivery of new military equipment to the Armed Forces. Consequently, the government has no choice but to rely on the Private Sector for all its military equipment needs, including its subsequent upkeep when in-service with the user. The harsh reality is that, no department of state in Whitehall is as dependent on the Private Sector, as is the Ministry of Defence – putting it at serious risk of capture by private interests (if it hasn’t already been) which allows them to bend policy to their will, as it relates to the expenditure of public funds. Equally, these private interests are entirely dependent upon a steady flow of taxpayer funds for their very survival – no least, because they have not bothered to diversify at all.
For those not familiar with this concept of state capture, Transparency International, the anti-corruption watchdog, defines it as “a situation where powerful individuals, institutions, companies or groups within or outside a country use corruption to shape a nation’s policies, legal environment and economy to benefit their own private interests”.
The shipbuilding Terms of Business Agreement (TOBA)
The Terms of Business Agreement on naval shipbuilding was signed in secret by the Brown government with BAE Systems during the dying days of the 2005-10 Parliament. It locked the government into an appallingly poor 15-year commercial arrangement laced with a punitive get-out clause which, if made public, would have attracted an outcry during the run-up to the 2010 general election. The agreement left the incoming administration no room to manoeuvre at all, as it set about started the 2010 SDSR, the first defence review in 12 years.
The existence of the TOBA was only revealed to Parliament in 2011 by the coalition government, when it was confronted with the undeniable truth that MoD finances were in bad shape and needed to be declared publicly, to garner public support for deep cuts in the defence budget that ensued.
It is an open secret that the even the most fiscally prudent people in government are prone to softening their stance just before a general election, when they are up for re-election, which makes them more likely to open-up the public purse. Equally, defence contractors are aware of this weakness in top politicians and will take full advantage, by surreptitiously intensifying their lobbying efforts (in concert with trade unions), to apply political pressure spliced with threats of massive lay-offs, timed to coincide with the electoral cycle, to relieve politicians off taxpayers’ money and maximise their take – which is exactly what happened with this TOBA.
TOBA – What it is all about
Briefly, the TOBA commits the government to guaranteeing BAE Systems a minimum level of surface ship construction and support activity of about £230 million a year. Apparently, this level of work was independently verified as the minimum level of work required to sustain a credible warship building industry in the UK, and thus avoid the delays encountered during the Astute class submarine build programme, caused in part by the loss of skilled staff, which arose due to the gap between Astute and the Vanguard class submarine builds. MoD claims that the TOBA was designed in such a way as to incentivise major reductions in the size of the shipbuilding industry, on a managed basis, to minimise the rationalisation cost which MoD was liable to pay for, under historic Yellow Book rules.
However, delay after delay in letting the build contract for the Type 26 frigate, largely due to the considerable pressure on MoD finances brought on by the appearance of the so-called ‘black hole’, resulted in a gap in orders opening up between completion of the second aircraft carrier and the start of the Type 26 construction programme. It was to avoid exactly this type of situation from arising in the first place, that the TOBA was established!
So, in an attempt to fill this gap, the government agreed to buy five Offshore Patrol Vessels from BAE Systems, for a price of £348 million. But because the TOBA required £230 million to be spent with BAE Systems each year, the government ended up paying an additional £100 million, on top of the agreed price for the OPVs – making them the most expensive OPVs in the world. Worse still, these are ships the RN did not especially need as it already had 4 relatively modern OPVs.
The staggering incompetence of people in government who negotiated and then gave the green light to this agreement, that is, elite politicians, their special advisers, senior civil servants and military top brass, knows no bounds – it is there for all to see!
TOBA finds no mention in the National Shipbuilding Strategy
To be fair, this government inherited the TOBA from the last government. Notwithstanding, it is so embarrassed by the existence of the TOBA, that it couldn’t even bring itself to mention it in its new National Shipbuilding Strategy, released in September 2017 – yet the National Shipbuilding Strategy was shaped by the terrible experience of the TOBA.
Most notably, the National Shipbuilding Strategy abandons the failed policy of intervening in the market to dictate the composition of the shipbuilding industry and also extends (finally) use of the instrument of fair and open competition, to select the Prime Contractor for the new generation of Type 31e general purpose frigates, to be built for a fixed, not-to-exceed price of £250 million each.
What’s more, for the first time in the history of defence procurement in the UK, it will be mandatory for the ship to be designed with exports in mind from the outset, and accordingly, bidders will be required to prove that they have secured the commitment of potential export customer(s) which the government will verify, before placing the shipbuilding contract with the winning Prime Contractor, on the basis of best value for money. This requirement will also serve to achieve the government’s wider goal of a Global Britain in the post-Brexit era, so that it can pay its way in the world.
The only saving grace about this TOBA is that it has a sunset clause built into it, that is to say, it expires after 15 years, in 2024 – otherwise, it could have quite easily been much worse for taxpayers!
Protectionism and favouritism
So, instead of exposing defence equipment manufacturers to the full rigours of the free market, the Brown government chose to engage in protectionism and favouritism by handing out uncontested, long-term shipbuilding contracts worth billions of pounds – with virtually no checks and controls, or even guarantees, which has come to haunt this minority government. Nevertheless, it has decided to honour the TOBA because it simply has no choice.
What’s more, in the military equipment market, it has been long-standing policy to combine the role of the sponsoring agency and regulatory authority in a single department of state, the Ministry of Defence – which means that the crucial independent scrutiny function, free from political interference, is non-existent. So, capture of one amounts to taking control over both!
The revolving door
Worse still, people at the Ministry of Defence are, without exception, favourably disposed towards the defence industry because they are completely dependent upon it for their subsequent career when their time in public service comes to an end sometimes by political edict. Indeed, it is very hard to find anyone at MoD who will aggressively defend taxpayers’ interests, once they have enjoyed a cosy relationship with contractors.
A modern Defence Industrial Strategy
An innovative proposal (download the paper here) on how to go about eliciting Private Sector investment capital in defence procurement programmes is set out in a written submission to the Business, Energy and Industrial Strategy Committee, which reported on its inquiry into Industrial Strategy in the last Parliament. It introduces a modern Defence Industrial Strategy that puts financial security and the national interest first, not military equipment manufacturers’ commercial interests.
The signing of this TOBA is another contributing factor to the pressure the defence budget is now under. It is understandable why Treasury Ministers are disinclined to increase the MoD’s budget, given their historic record of mismanagement, with this TOBA being another example.
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
(Opinions expressed here are not necessarily that of Save the Royal Navy. We also recognise Conservative administrations have made just as many mistakes with defence as Labour)
- Three expensive new OPVs being built for the RN (Save the Royal Navy 2014)
- Minister opens up about his shipbuilding heartache (Save the Royal Navy 2016)