Key Points – The US Navy’s shipbuilding capacity critically lags behind China’s, necessitating urgent reforms beyond current approaches.
-Following Navy Secretary John Phelan’s recent testimony on the issue, proposed solutions include a large, one-time “Naval Act.”
-This act would use current reconciliation funds for multi-year warship procurement, achieving economies of scale. Crucially, implementing the Shipyard Accountability and Workforce Support (SAWS) contracting mechanism would allow future procurement funds to be used now for vital infrastructure and workforce investments.
-Combined with deregulation and tax reforms, these measures aim to revitalize the US naval industrial base and accelerate warship delivery.
We’re Way Behind China When It Comes to Building Naval Ships
Seven weeks into his job as Secretary of the Navy, John Phelan testified before Congress at a May 14 hearing. Top of the agenda: naval shipbuilding. The U.S. has been falling behind China for too long. For that to change, we need new contracting mechanisms to enable us to build more warships—and deliver them faster.
This attention to naval shipbuilding is certainly welcome. But we won’t achieve results with business-as-usual approaches.
This point was made evident when the last Secretary of the Navy exposed late in his tenure across-the-board delays in naval shipbuilding programs. As a detailed review completed a year ago showed, improvements remain elusive.
Funding is key. Plans without financial commitments are just paper.
Making smart infrastructure and workforce investments requires sending those in the shipbuilding industry orders with assured budgets to provide needed predictability. Knowing what ships are needed is not a mystery, as the last annual shipbuilding plan proves. Most of the needed warships are of stable designs and in series production, making a Naval Act a logical choice to link long-term budget obligations to a large multi-year procurement plan.
On the heels of Phelan’s testimony, there is an opportunity today to connect budget with a long-term naval shipbuilding program.
The ongoing debates over a potential $150 billion of additional defense spending in reconciliation is an opportunity for a one-time Naval Act procurement. This would realize savings via economies of scale evidenced in past naval block buys of upwards of 10 percent over typical procurement approaches.
Ensuring that such a large order is matched with long-term infrastructure and workforce investments will require a change in the way business is done.
Enter the Shipyard Accountability and Workforce Support (SAWS) contracting mechanism (unveiled last fall, which was bad timing and initially not well understood in Congress or the White House). SAWS would give the Navy and naval shipbuilders allowances to use planned ship procurement dollars today to make needed infrastructure investments and hire workforce. This would use monies already programmed into the shipbuilding budget – or Naval Act.
While the logic of SAWS is sound and familiar in industry, the White House’s Office of Management and Budget remains skeptical.
That skepticism is deserved given the Navy’s and industry’s past performance, but reservations about SAWS are misplaced. Done well, SAWS can enable better Congressional oversight of the Navy and more fully leverage industry’s existing accounting methods regarding use of federal monies. This is required to ensure requisite workforce and infrastructure investments are being made for on-time delivery of ordered warships—not stock buybacks, as the former Secretary of the Navy has argued.
Rather than Congress directing capital investments without associated warship orders, SAWS requires long-term capacity investments supporting future orders. SAWS paired with deregulation and tax reform could have the added benefit of getting the Congress out of the business of shipyards, and both giving more freedom to, and placing more onus on, the shipbuilders to make better business and engineering decisions.
SAWS can help rescue naval shipbuilders from bureaucracy and return their focus to the waterfront.
On average, American manufacturers face annual regulatory costs of more than $29,100 per worker, as well as some of the highest business tax rates in the world. These headwinds, paired with erratic and unreliable procurement policies, have made it unprofitable for our naval shipbuilders to do their part for the nation.
Likewise, over the course of the past 25 years, naval shipbuilding has become a publicly traded stock, thus having to respond not to the nation but to shareholders. The quarterly pursuit of profits and dividends and a federal cocktail of red tape has diminished strategic investment planning that is critical to sustaining, modernizing and growing needed shipbuilding capacity.
The aircraft carrier USS Gerald R. Ford (CVN 78) successfully completes the third and final scheduled explosive event of Full Ship Shock Trials while underway in the Atlantic Ocean, Aug. 8, 2021. The U.S. Navy conducts shock trials of new ship designs using live explosives to confirm that our warships can continue to meet demanding mission requirements under harsh conditions they might encounter in battle. (U.S. Navy photo by Mass Communication Specialist 3rd Class Novalee Manzella)
In tandem with SAWS, incentivizing investment in commercial shipbuilding and deregulation can encourage more investment in this strategic industry. For example, replacing current federal taxation of naval shipbuilders with a Distributed Profits Tax—which exempts capital investments from direct taxation—can make these businesses profitable and leverage Wall Street to service the Navy’s needs.
Reviving naval shipbuilding requires accountability of underperformers while invigorating shipbuilders to accelerate delivery of warships. Key to achieving this is unleashing better capital decisions by shipbuilders that support a decades long naval shipbuilding program. SAWS is a tool that can begin that revival.
About the Author: Brent Sadler
Brent Sadler is a Senior Research Fellow for Naval Warfare and Advanced Technology at The Heritage Foundation’s Allison Center for National Security.
