Saturday, 9 February 2013

A Most Expensive Shopping List Part Two - 'Show Me the Money'



 
At the end of Part One, we’d taken a look at the size of the 10 year equipment programme and noted the sheer level of funding involved, the complexity of the challenge in supporting a UK industrial base and maintaining world class military capability  and also the length of time involved in procurement. On paper it is positive news that a 10 year programme exists, on paper at least, which will enable the MOD to push forward an equipment programme with some certainty and allow industry to plan with a reasonable level of confidence. In Part Two, Humphrey intends to focus on the bigger picture and look at some of the challenges and risks which may be associated with the programme.

The first thing to note is the announcement of a reserve of funding (some £4 billion) to cope with project cost increases, and a further contingency fund of some £8 billion over the period to allow spending on currently uncommitted items. On paper both of these are welcome announcements. One of the challenges of planning in the past has been the need to shift money from project to project in order to meet in year savings challenges, and wider fiscal growth.  This has often led to issues such as the delaying of carrier construction in order to make financial savings in year, but which can have significant knock on effects elsewhere on the programme.

The existence of the contingency funding is welcome, if only to reduce the likely impact on programmes by planning rounds, and hopefully reduce the impact on entry to service or equipment numbers. Similarly the existence of an £8 billion ‘pot’ ensures that if emerging requirements are identified, then in theory they could be funded – such as (hypothetically) a new maritime patrol aircraft.

The issue isn’t that these funds exist, but whether there is sufficient funding in them to meet the likely future demands on the equipment programme. The NAO report which underpins the programme was very clear that the programme would work while funding assumptions remained intact. If anything changed beyond those assumptions, then all bets were off. For instance, the NAO notes that a rise in inflation of just 0.5% beyond assumptions would see costs in the 10 year programme rise by £3.7 billion. This would all but wipe out the fund, and that is before any other unexpected cost growth is factored in.

Similarly, the NAO also notes that the budget is built around some fairly optimistic assumptions on both inflation (likely to be 2.7%) and also budget growth. The report notes on page 21 that the department is planning on a total budget uplift of 3.7% over the period in order to properly fund this programme. The report provides a series of tables which show that a 1.7% uplift would result in an £8 billion deficit to the equipment programme. In other words, if planned spending doesn’t meet expectations then there is likely to be further rounds of cuts as the MOD tries to balance the budget again. The report is similarly concerning when noting that even small cost growth would eat into the £8 billion allocated, and run the real risk of damaging existing procurement. This is a critical point to note – namely the MOD has only got a balanced 10 year programme if the funding matches the aspirations, and as seen in recent political debates, this is not yet 100% certain.

It is similarly worth noting that this period will encompass at least two General Elections and two Strategic Defence Reviews – and as events show, it is hard to predict what the world may look like by the time of the 2020 SDR.

The last key point to note is that the equipment support programme has apparently not been analysed by the NAO to the same level of rigour, and there may be further potential for cost growth there that has not been picked up. So, there is again no guarantee that the funding will be sufficient to support all requirements in the support world, particularly if costs grow or inflation increases above expectation.

So, in summary, while the outline programme looks good on paper, in reality it is dependent on a lot of things working to plan to be met. What this may mean is that the MOD finds itself in a challenging financial situation again in a few years if spending rounds, cost growth and the wider economic situation are not as good as planned.

One comment on part one of this article asked why the MOD didn’t save money by buying equipment ‘off the shelf’ rather than going for expensive bespoke designs. This on paper seems a reasonable request, after all one only has to flick through a copy of Janes Defence Weekly to see dozens of adverts for all kinds of military hardware, enticingly priced to attract buyers.

The issue with buying ‘off the shelf’ is that often the equipment may be designed to work in specific environments, or perform to certain standards. Similarly, it may not be completely interoperable with existing kit – one of the challenges of buying modern equipment is not so much the procurement phase, but the integration phase, and ensuring that everything works to plan. In the case of the UK, defence planning requires equipment which can be used across pretty much every climatic extreme, from the Arctic to the Desert. What is essential is that equipment is able to meet these requirements and work as intended, and also be interoperable with existing equipment. In addition, the equipment purchased needs to be able to meet existing Defence and NATO performance standards ( a very, very, dull subject, but something which is utterly essential), and then having done this be usable by HM Forces and supportable by  supply chain.

Sometimes this works, and works very well. The UOR process is in reality a very good example of where off the shelf purchases are able to meet a specific need or gap and address it for a short period of time. What has often been found though is that while some UOR kit is brilliant and is often then extended for wider service, other equipment is less than useful once it is taken out of theatre. A good example would be some of the armoured vehicles purchased for both Iraq and Afghanistan, which did an excellent job in the campaign, but which were not suitable for wider HM forces requirements elsewhere. Similarly, the process of taking UORs and upgrading them to be core equipment can often be expensive, as proper defence supply chains, upgrade paths, through life management and all the other dull, boring and utterly vital parts of sustaining a military capability come into play.

So, yes off the shelf sometimes works well, but the reality is that often what is commercially available doesn’t always meet the needs of the customer for the full gambit of requirements. Herein lies the dilemma – does the MOD procure something that may be an 80% solution, knowing that it is vastly cheaper than a bespoke solution, but know that it cannot do the same range of tasks, and that in the worst case scenario, its employment may result in the injury death of UK personnel if used on something it cannot do, but a bespoke solution could have done? There is no easy answer to this question, and it is perhaps not solvable at all.

However one looks at it though, there are some reasons to be positive as we look to the next 10 years. Firstly, the MOD has finally gotten through much of the financial pain of the last few years, and is seemingly (for a while at least) in a slightly more stable position (even if it could be undermined by wider factors). Secondly, the UK will remain able to procure mostly home built technology which gives assurances of supply, and no problem with securing support at a distance for the most complex systems. Never forget that the cost of buying off the shelf and overseas is that a nation is then reliant on another to continue to support the supply chain and approve export licences for the duration of the lifetime of the equipment. If the UK were to source significant quantities of complex equipment from overseas then it comes at a reduced ability to act independently of other nations who may not always remain aligned with UK interests.

Finally there is now some certainty for industry who will at least be able to plan with a somewhat higher level of certainty that equipment will, or will not, be likely to enter service. This means that they can make investment in some areas, and take on employees and grow as required. Never underestimate the importance of the UK defence industry to wider national security as a whole.

So, the next 10 years will be interesting, and may yet prove immensely challenging. But, the more interesting question may be to ask what the 2023-2033 equipment programme will look like, and what may, or may not, feature in the next iteration of this document?

3 comments:

  1. Little (No?) equipment is "Made in the UK" in any real sense.
    Take the Challenger 2.
    Made in Newcastle right?
    Wrong.
    Assembled in Newcastle.

    The fire control computer was made by a Canadian company, now owned by General Dynamics.
    The commanders sight is French, made by Sagem.
    The gunners sight is made by Thales, also French.
    The Engine was American, CAT via Perkins
    The Gearbox was American, Textron via David Brown.
    Both are now German, MTU and MAN (Renk)

    Shells are made in Belgium.

    So, there were have, provided we dont need extra sights, engines, or shells, we're set.


    Off the shelf is by no means perfect, but the reality is its already far deeper in than anyone believes. And efforts to avoid it are only driving it deeper.

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  2. If we don't know what we are going to make, we don't know what we are going to sell huh?

    Cosy up to our French pal Tina.

    Off the shelf is crap, dependency culture. Dealers sell the first hit cheap, then you are on the hook with no chance to roll your own.

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  3. Defence spending will be cut again in 2015, and probably in 2020, so the whole premise fails.

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