Wednesday, 6 February 2013

A most expensive shopping list - thoughts on the 10 year procurement plan


Last week the MOD announced plans for the equipment programme for the next 10 years (HERE) which ostensibly sets out the broad direction and levels of investment in UK defence capabilities over the next decade or so. This total spending plan covers over £160 billion in programmed funds, which cover everything from next generation nuclear reactors through to combat aircraft and logistics vehicles. It is also critical to note that this is not £160 billion of money just for procurement – in fact barely half the funding announced will be going on new procurement of capability (some £86 billion according to the National Audit Office), while the balance will go on equipment support and maintenance of the capability.

Humphrey took a keen interest in this announcement, and in particular the NAO report which underpins it (HERE) Due to time constraints, this article is being split into two shorter parts, but its aim is to try and look in a little more depth at what this announcement may mean for longer term procurement and support over the next 10 years.

The first thing to draw from this plan is to understand how expensive defence is, and how much has had to be slashed from the budget. The MOD and NAO is quite candid in noting that there was a likely disparity of some £74 billion in costs between planned funding, and projected costs over this time. What this means in real terms is that the MOD has had to apply some fairly significant reductions, deferments, descoping, early retirement without replacement or outright scrapping of procurement during this period to make the sums balance. That in itself is not an easy task, nor should it be underestimated how much effort would have gone into achieving this current situation where the sums seem to add up (more on that later).

Funding Defence properly is a seriously expensive business. This may seem a statement of the obvious but it is worth considering – when one looks at the detailed NAO report, particularly the table on Page Seven, there is a clear breakdown of how much money is being spent on procurement, support and other costs. With salaries stripped out of the mix, suddenly it becomes clear that the vast chunk of defence expenditure is dedicated to buying, or maintaining defence equipment. In fact, the total amount of either the equipment budget or the support budget each year is larger than most nations entire defence budgets. This gives a sense of scale that for all the cuts, the UK remains a significant player on defence expenditure.

The next issue is the realisation that if the UK wants to play a major role in international affairs, and back this with a global military provided with equipment produced at home, then it comes with a high price tag. The UK military capability is underpinned by a strong home defence industry which provides world leading capabilities in a wide range of areas. The challenge for the MOD is to balance the requirement to provide a reasonable level of military capability to meet likely operational tasks, while setting this against the wider requirement to sustain a high tech defence industry which creates wealth and valuable skilled jobs. There is no point investing in high capability military equipment overseas, if in doing so you destroy an indigenous defence industry and remove the ability to design, build, deliver and support said capability at home. So, any budget has to be a balancing act between delivering value for money, but also considering wider domestic political interests as well.

One thing that this document should (but sadly won’t) do is end the tedious process of internet ‘wishlisting’, whereby people blithely come up with statements about how the UK should be buying hundreds of warships for the future. This document sets out nicely how the defence budget is a closed system – while it would theoretically be possible to invest in dozens of new warships, it comes at the cost of the loss of vast swathes of wider defence capability and industry. It is perhaps unfortunate that people continue to believe that money can be magically injected into the system to fund their pet wishlist. The harsh reality is that the UK is the 4th largest defence spending nation in the world, and even spending close to 50% of its annual defence budget on procurement and support, it can still ‘only’ find £160 billion to spend in the next 10 years.

The next point worth considering is the sheer cost of equipment support. People often forget just how expensive military equipment is to operate these days. There is almost a 1:1 ratio between every pound projected to be spent on procurement, and every pound on equipment support over the next 10 years. This is again a key point – if you want to operate a world class military force, you need to be prepared to invest as heavily in supporting, upgrading and maintaining the military as you are in buying new shiny equipment in the first place. The days when equipment had short lifecycles has probably gone forever. Instead its fair to say that almost all countries will now see as much value in running on vehicles, planes and ships to the point where it no longer makes economic sense to do so as they will in purchasing new equipment. In the UK for instance, in the space of 40 years we’ve gone from seeing fast jets in service for 5-10 years, to seeing Tornado have a nearly 40 year lifespan.

One useful thought is that when looking at the cost of other nations procurement budgets and comparing them to the UK, it is worth looking at the size of the support budget that goes with this. It is a reality that many nations have yet to really grasp the concept that first rate equipment needs first rate support solutions, from timely purchasing of spares, through to delivery of long term support and maintenance contracts.

 So, at the end of the first part of the article, its worth noting that despite a lot of cuts, there remains a vast amount of funding committed to the long term support of the UK military. Its also worth noting that this plan has yet to survive contact with at least two Strategic Defence Reviews and at least one major spending review. In the next part of this article, it will look a little more at some of the funding figures quoted and consider what the implications may be.

8 comments:

  1. Sir Humphrey this was a very nice post. I sooo want to do the wish list - its lots of fun:).
    On a similar note to wish lists. As we are not likely to do a COIN mission again in the foreseeable future, do we need an army of ~80k men? shouldn't we have a large marine & 16AAB rather than an unwieldy land force?

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  2. Perhaps we should buy "Off the shelf" instead of specially designed, special to the UK, very expensive, equipment.
    Then we might be able to afford someone's wish list.

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    1. Ianeon - fair question and one I intend to cover in part two (time got in the way of completing this all in one part).

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  3. Ianeon
    everything we buy from UK manufactures will be taxed in the UK, and thus the treasury will get some of it back. this is how its supposed to work.
    On quite a few cases I would support you in the "Off the Self", but we would have to stay in markets that would continue to support our purchases in the most trying of circumstances.

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  4. OK buy off the shelf and arm ourselves to the teeth. Loose our profitable, hi tech, arms industry that employees tens of thousands of engineers. Loose the capability to make any descent equipment ourselves, not to mention any commercial offshoots that we could be making money from. Ten years down the line the country will be a lot poorer and potentially held to ransom by the countries that supply our arms. I think you will find off the shelf will rapidly become very very expensive. Our once armed to the teeth but now obsoletely equiped forces will have nothing worth fighting for!

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  5. This is very positive. Here is my concern though. The 1998 SDR looked equally promising at the time. Look at what happened though, even before the financial crisis struck, and strangely in the space of 10 years, we had lost fighter cover for the fleet, and laid the goundwork for a complete loss of carrier strike capability for 10 years, not to mention a completely unplanned loss of escort and submarine numbers! Now that is seriously failing to deliver in my book. This really cannot be allowed to happen again, we just have to make sure that this time we deliver and hope that nothing big kicks off before 2020+

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    1. The loss of escort and submarine numbers wasn't really unseen. It was always going to be the case that investment in costly new projects like CVF/F35 would lead to reductions in the rest of the fleet. For example, SDR confirmed a commitment to carrier strike but cut escort numbers from 35 to 30. Commentators at the time noted that there would not be sufficient funding to both build and equip the new carriers, deliver T45, Astute etc. and maintain existing critical mass. The cuts have been deeper than we could have imagined at the time, but it was always understood that some would be inevitable.

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  6. I agree WishListing based on imaginary new cash is tiresome, but questioning spending priorities is completely valid.

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