Monday, October 18, 2010

New Sources of Revenue Might be the Answer

One thing that we can bet on coming from the SDSR will be less frigates. We are already in a position of not having enough frigates to cover our bare bones standing deployments let alone other commitments such as Anti Piracy and Counter Terrorism. While many people are screaming at the top of their lungs about the dangers of not having enough frigates I feel this could represent an opportunity for the Royal Navy.

Firstly when all you have is a hammer everything looks like a nail. Frigates are far from ideal choice for most missions they are assigned. They are too small and lightly armed for land projection, too costly and over armed for EEZ patrol. They are optimised for ASW work however if it ever came to a real ASW battle against and advanced enemy with SSN's it would be suicide to venture out of harbour in any frigate. In the past we have slotted frigates into these roles. Frigates such as the T22 and T23 as well as the classes that proceeded them replaced the old cruiser for flag flying and ocean patrol. We used frigates because they were cheap and we had allot of them sitting around. However with new frigates such as the T26 coming in at £400-£500 million a piece and at most 10 of them being built this is no longer the case.

Scrapping the bulk of the RN's frigates might allow the navy to get back to basics and start using warship's built for purpose. As I have written in previous post's vessels such as the Khareef Corvette and Port of Spain OPV built here in the United Kingdom and far cheaper and more suited too Anti Piracy, Counter Terrorism and EEZ patrol than a frigate.

The big problem they Navy faces however is a dramatic tightening in it's budget. Probably being cut to a bare bones fleet of 20 destroyers and frigates. At present the only way to finance some new OPV's and Corvettes would be to cut the number of frigates even more.

However using some innovative procurement strategies as well as new sources of revenue the Navy may be able to acquire a new fleet of these small boats with no detriment to the existing fleet.


UK Ship yards have been very willing to work on PFI basis with the military. River Class OPV's has been acquired on PFI deals in the last few year's. Acquiring a fleet of small boats in this way will allow the Navy to get ship's with out laying down any money in the near term. However as with all PFI's the cost would come in later years as the navy would have to pay to lease the vessels over time.

New Sources of Revenue

What we should remember is that the navy provides a service. Having warship's and patrol vessels in an ocean makes it a safer place. While the Navy is tasked with protecting merchant ship's registered under the Red Ensign it is not duty bound to protect other ship's flying under flags of convenience. Charging these vessels for protection could generate a substantial amount of additional revenue. There are three ways we might consider making additional revenue's from shipping.

Charging For Convoys - Merchant vessels could sail under the protection of a Royal Navy vessel. The ship owners would pay a fee for this protection. They may also have embarked marines on board to fend off any attacks from pirates. The benefit's to the ship owners would be two fold. Firstly lower insurance premiums. Secondly ships at present are having to steer far away from the African coast to avoid Somali pirates. Putting extra cost on for fuel and slower ship turn around. Escorted convoys would be able to take shorter journeys through more dangerous waters.

Charging Lloyd's- The navy could come to an arrangement with Lloyd's of London. If Lloyd's are insuring a vessel and its cargo possibly for $1 billion or more then it's worth their while to pay for that vessel to reach port safely.

Entering the Insurance Market - The RN could actually enter the insurance market. Covering vessels and cargo's travelling under it's protection. It would be relativley simple for the RN to set up in the Lloyd's Insurance market. Perhaps offering single insurance contracts for outbound vessels traveling across the Indian ocean. These contracts could be offered at a discount to the normal market under the condition the boats were travelling in a RN convoy. Under the presumption that prevention would be cheaper than compensation the Navy should be able to turn a profit.

Benefit for the Royal Navy

There would be several benefits for the Royal Navy. Firstly the Navy should aim to turn a profit on these operations. That profit could be plowed back into other operations such as Caribbean patrol, Frigates, Carriers etc. Secondly the increased demand for ship building would allow the navy to benefit from better economies of scale. If we offer too lease 10 OPV's from BAE we might expect to get a C2 frigate for half price. The vessels themselves once finished their PFI deals will be put up for sale. The RN might look to buy these vessels outright for a reasonable price in future to supplement the gaps left in the escort fleet. Thirdly having vessels deployed to a trouble spot weather convoying paying merchant men or not allows us to avoid having to send any of our escorts on NATO or EU missions under the guise that we are already participating heavily. The country would benefit from this too. Technically this would be an export and with building the ship's and maintaining them we could look to create hundreds of new jobs.

Increasing Demand

Somali Piracy will not go a way for some time (if ever). Somalia is a failed state, it's been a failed state since 1991. With out a large ground force and reconstruction effort piracy will not stop. America and the West will not get involved in Somalia and the Africans don't have the capability to sort it out themselves.

The combined might of the US, NATO, EU, Russia, China and many of the RIMPAC nations has cobbled together a fleet of around 27 warship's. While these ship's have made an impact on piracy they have not stopped it. A fleet of this size is unsustainable in the long term. The shipping industry will be crying out for something to be done once these naval forces are reduced or removed altogther. This means that the RN can reasonably expect to conduct these operations for a decade or more. Even if Somali piracy does stop it can always move else where as it has in the past.

Every nation on earth benefits from free trade across the high seas. However too many countries neglect to pay their dues to keep the sea lanes open. To many ship's register in tax heavens to avoid paying tax. It's high time these people paid for the service provided by the Royal Navy, US Navy and a handful of others.

1 comment:

  1. How about the Italian method of funding warships. You want OPV's for EEZ patrol - take the cash from the Customs / Border Patrol budget.

    You want new RFA's - well they have a civvy disaster response role, so pay for them from the DfID budget.

    You want a Corvette for global anti-piracy ? Well that's a constabulary function, I am sure the Metropolitan police would be happy to stump up the cash (well the Coast Guard - but that's not exactly well funded is it?)