30 March 2012

What would be the cost of the South West’s gain?

For a Google Blogger it can be intriguing to examine the ‘Stats’, in particular ‘Traffic sources’. These often provide details of the search which led to someone being directed to a particular post. Recently, and rather optimistically, there was an attempt to find the cost of moving Trident from Faslane to Devonport. Hopefully this particular seeker after truth bothered to read all of Would Scotland’s loss be the South West’s gain?, a recent post here on this subject, because the only cost information appeared in an Addendum, as  a quote from The Times (£):
The cost of moving Britain’s four nuclear submarines from the Faslane base on the Clyde, along with stockpiles of warheads and missiles, could be £2.5 billion, according to former senior military commanders. Admiral Lord West of Spithead, the former First Sea Lord, said that the enormous logistical challenge would help those arguing that the £20 billion Trident renewal should not go ahead.
Where Admiral Lord West obtained these figures wasn’t explained, but some light on their derivation is shed from another quarter. BASIC (British American Security Council) describes itself as “a small but influential think tank with one very large idea: we want a world free from the threat of nuclear weapons”. One of its initiatives has been to set up “set up the Trident Commission, an independent, cross-party panel to examine the United Kingdom’s nuclear weapons policy and the issue of Trident renewal”. According to its website, the Commission is under the co-chairmanship of:

Lord Browne of Ladyton (Des Browne), former Labour Secretary of State for Defence,
Sir Malcolm Rifkind, former Conservative Defence and Foreign Secretary, and
Sir Menzies Campbell, former leader of the Liberal Democrats and Shadow Foreign Secretary.
Other members of the Trident Commission are:
Professor Alyson Bailes, Former Head of the Security Policy Department at the Foreign and Commonwealth Office
Sir Jeremy Greenstock, former UK Ambassador to the UN
Lord Guthrie of Craigiebank, former Chief of the Defence Staff
Professor Lord Hennessy of Nympsfield, Queen Mary, University College London
Lord Rees of Ludlow, Astronomer Royal and recent President of the Royal Society
Dr Ian Kearns, Chief Executive of the European Leadership Network.

What a lot of Top Kneddies! And in the usual British (though not American) way, none of these luminaries has any direct experience of submarines, missiles or things nuclear. (Incidentally, Lord Hennessy is a Professor at Queen Mary, University of London, not UCL).

Launched on 9 February 2011, the Commission has just produced its second Discussion paper, Defence-Industrial Issues: Employment, Skills, Technology and Regional Impacts, written by Keith Hartley, a retired academic with expertise in defence economics. Drawing on MoD figures (linked below), he states at paragraph 17 that:
The acquisition costs of the replacement are estimated at £20 billion to £25 billion for a four boat fleet (2011 prices: Fox, 2011; MoD, 2011). These cost estimates comprise: i) The submarines at a cost of £14.6 billion to £17.5 billion; ii) Warheads at a cost of £2.7 billion to £3.75 billion; iii) Infrastructure at a cost of £2.7 billion to £3.75 billion.
Hartley estimates that the annual running costs of the fleet of four submarines, once acquired, would be £1.1 billion (paragraph 68) so:
Aggregating acquisition and annual running costs suggests total costs for a four boat Trident replacement … of £87.4 billion over the period 2007 to 2062: hence, average annual costs of some £1.6 billion (2010/11 prices).
Although Hartley makes no such comparisons, it might be worth noting that the revenue needed to support the BBC is about £3.1 billion a year currently, and the International Development Department’s Jellbyish expenditures are about £6 billion pa. Defence in all costs about £39 billion a year.

Anyway, it’s clear from this where West’s £20 billion came from – the MoD’s minimum acquisition cost. Did Hartley shed any light on West’s other figure? Curiously, Scottish independence is mentioned in his paper, but only as a footnote to a discussion of the consequences for the Barrow-in-Furness shipyard if Trident were cancelled:
For example, if Scotland votes for independence, there might be questions about the future of the warship yards in Scotland. Current MoD policy favours retaining a UK warship building industry, including submarine construction. Scottish independence might mean that future warship building is undertaken in English shipbuilding yards, such as Barrow and Portsmouth. (page 25 footnote 29)
Perhaps the BASIC Trident Commission will be looking at the issue separately.

The National Audit Office (NAO) conducts examinations of major projects which might provide some perspective on the potential cost of re-siting Trident, if not exactly a benchmark. One such project, recently reported on, was HS1, the high speed railway between London and the Channel Tunnel. This was completed in November 2007 at a cost of £6.2 billion. HS2 comprised 68 miles (109 kilometres) of high speed railway line, twenty kilometres of tunnels under central London, a new maintenance depot, two new railway stations and refurbishing St Pancras station. 2010/11 prices could be 25% or so higher, say £7.8 billion, or about three times West’s figure.

Another NAO report in 2010 had looked at the BBC’s management of three major estate projects. One of these, the Broadcasting House project is a combination of refurbishment and new build on a site already owned by the BBC. According to the NAO, the BBC did not always follow best practice in running this project in its early stages, and presumably the outturn cost, expected to be just over £1 billion on completion in 2013, could have been lower. It is of interest in that it is a mixture of new build, re-siting and, presumably, above average technology requirements and is less than half the West figure.

Neither of these examples would suggest that £2.5 billion is a wild over- or underestimate. Using this figure, Hartley’s total costs for a four boat Trident replacement of £87.4 billion over the period 2007 to 2062 would rise to £89.9 billion (assuming that his £1.1 billion annual running costs are not significantly affected) and his average annual cost would be about £45 million higher. As Hartley explains in footnote 24 on page 22, he has chosen not to discount cash flows over time and make comparisons on a net present value (NPV) basis. This is the approach required by HM Treasury in their Green Book on Appraisal and Evaluation in Central Government. If he had, the increase in the average annual cost would have been greater.

In this context it is worth pointing out that HM Treasury are concerned that, for a variety of reasons:
The UK is an expensive place in which to build infrastructure. The weight of evidence confirms that costs are higher than in other European countries and demonstrates that, irrespective of its comparative position, there are significant opportunities to reduce costs in the delivery of infrastructure. (Infrastructure Cost Review: Main Report, paragraph 1.1)


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