Navy’s Challenge Is Financial Not Strategic

Defense strategy is always a balancing act between requirements and resources. Sometimes the scales are tipped in favor of requirements, as has been the case since September 11, and other times it tips in the direction of resource constraints as in the aftermath of the end of the Cold War and, it seems, the decade to come. Although senior Pentagon officials claim that the new defense strategy with its “strategic pivot” to the Asia-Pacific region was driven by changing circumstances, the truth is that it was necessitated by looming cuts in the defense budget. Now the services are struggling to come up with ways of responding to the operational requirements of the new strategy and particularly to the “strategic pivot” with reduced resources.

The Navy’s problem is not strategic, it is structural, which is to say, financial. The size of the fleet is shrinking while the demands on the Navy are growing. As Bret Stephens observed in today’s Wall Street Journal, “The Navy doesn’t like to advertise this, but it is trying to fulfill its traditional global role with a fleet of 285 ships — the smallest it has been since before the First World War, even if modern warships are more capable than ever before.” The size of the fleet is shrinking because the cost of modern warships has been increasing faster than the overall shipbuilding budget. The reason costs are not being contained is because the Navy refuses to take common sense steps to change the way they finance and manage the shipbuilding program. It fails to make sufficient use of best practices common in the commercial world that would result in tens of billions of savings annually.

The Navy could transform both its force structure and budget problem by taking one step: change from full funding to advanced appropriations for ships. Full funding requires that the entire cost of a ship be budgeted in the year that construction commences. Since combat ships take many years to build most of the money just sits in an account. Under advanced appropriations only the amount actually to be expended in a given year is budgeted, although the Congress must commit to funding the remaining cost of that ship in equal increments for however many years are required to build it. Based on the desired force structure, the service life of individual classes of ships and the total amount of funding available, it is possible to define a stable shipbuilding budget.

In fact, by shifting now to an advanced appropriations approach, without increasing the money allocated to shipbuilding the Navy could achieve a temporary fiscal breathing space. This could be used either to buy more ships than called for in the current plan, thereby addressing the strategy-forces mismatch identified by Bret Stephens, or to create a financial cushion in anticipation of deeper budget cuts to come. Once a stable funding program is in place, the Navy could institute a number of additional, proven reforms in shipbuilding that could save billions annually. There is no reason the Navy could not contract for block acquisition of aircraft carriers, amphibious warfare ships and all other large surface combatants. Committing to buy ships in quantity and to freezing the design for each block would allow for enormous savings through learning curve improvements in the shipyard workforce, the economical purchase of materials, a reduction in change orders, increased commonality of systems and simplified contracting and oversight.

The Navy’s failure to embrace modern financing and management techniques when it comes to building ships is all the more inexplicable because others parts of the same service have done so and are saving lots of money. The poster child for a modern approach to platform acquisition is the Virginia-class SSN program. The combination of multi-year procurements, advance purchases and restricting design upgrades to new block purchases has resulted in hundreds of millions of dollars annually in savings per boat. The Navy also has saved lots of money using multi-year procurements for the DDG-51, V-22 Osprey, F/A-18E/F and Blackhawk helicopter.

The Navy is in desperate need of a “financial pivot” that allows it to address current and emerging challenges. Fortunately, this is the time it can afford to make the change. With the exception of a future missile ship to replace the Ticonderoga-class cruisers, all the classes of combatants are defined. Even the new missile ship could be based on an existing hull and use common elements in order to lower its costs. The Navy needs to prevent the size of the fleet, particularly the number of large combatants, from declining further. If anything, the size of the fleet should be increased. A new approach to funding the shipbuilding budget and managing long-term ship construction programs is the solution.