Tuesday, 15 May 2012

Has Sisyphus climbed the mountain? Thoughts on the PR12 announcement.

Well ladies and gentlemen, he’s done it. If you believe the announcement yesterday by the Secretary of State, the MOD has finally balanced its budget. The news was greeted with muted trumpets in most of the media, who perhaps fairly, seemed cynical that this had actually been achieved. If true though, this represents a major success for the MOD and helps pave the way for a more positive future.

What does it all mean though? At its most simple, yesterdays announcement has hopefully marked the close of a long and painful series of internal spending reviews within the MOD designed to make the books balance. Since the middle of the last decade there has been a consistent mismatch between the aspirations, the requirements, and the funding lines. This came about from a combination of defence requirements not being updated since SDR, meaning the MOD was mandated to deliver capability greater than that which was really affordable. At the same time the MOD had to sustain two high intensity land campaigns, and try to react to changing spending requirements as technology and lessons from campaigining emerged. Add to this the budget change in about 2004 which caused MOD to be thrown off course, and the perception in some eyes of a lack of sufficient funding to defence properly under the last Government, and you have a perfect storm.

The short term solution was to try to balance the books in year – move the funding around and ensure that in the short term costings things were in the black. For instance, defer spending in one year across a range of projects and slip it to the following year or two. Alternatively slip a major project one – two years to save money, but accept a hit a few years later as the spending then kicked in. In all honesty, it wasn’t so much deep strategic thinking that drove these reviews, more an effort to try to play ‘whack a mole’ as funding requirements emerged, and were pushed back into the ground, only to emerge again a bit later, and bit more expensively.

The MOD has been criticised for getting into this situation, but it could be argued that the MOD was merely carrying out the direction issued to it by the Government of the day. If it is mandated to deliver a defence capability and output, and there is no Strategic Defence Review to change these assumptions, and little political willingness to cancel projects, then what else could have been done but move the money around and hope for the best?

The SDSR in 2010 marked the first time in a generation that the MOD was really able to take a hard look at its aspirations and projects, and as has been seen, sacred cows were slaughtered to make the costs match up. This was the start of a process of cutting aspirations and equipment to meet the new financial reality.

The Known Knowns...
One of the interesting parts of yesterdays announcement was looking at what is funded. At its most cynical it reads as much as a ‘Defence Industrial Protection’ announcement as it does a statement on UK defence procurement. The sort of projects protected, including SSN, Successor, T26, Lynx, Merlin, Warrior CSP and so on are all major projects which generate thousands of UK jobs, and keep UK skills alive in specialist defence sectors. Loss of this sort of project would not only remove a capability from service, but more seriously almost certainly remove the UKs ability to build equipment like that in future. So, it is very good news to know that the shipbuilding programme, and much of the aircraft capability remains extant, and that new fleets will be introduced to service.
Also good news is that fact that there will be investment in communications and projects such as the future Merlin AEW package appear to have survived unscathed and that funding is assured. Although C4ISTAR procurement is perhaps less high profile than buying warships or tanks, it is of far greater importance in fighting in coalition warfare. Ensuring the UK has the ability to operate as an integrated partner with the US is absolutely critical in future. This extends to the ability to work in joint headquarters or to plug seamlessly into one anothers comms infrastructure. It is vital that this sort of investment is protected.

The Possibly Not Yet Knowns...
Although the headlines look good, and its clear that the budget is now balanced for some future equipment, what is less clear is the numbers game. The announcement seemed to steer clear of talking in any detail about numbers for both in service kit and also replacement programmes. This is likely to emerge over time as projects enter the procurement process and requirements are more clearly defined. Its not clear for instance how many Lynx or Merlin helicopters will enter service, nor how many T26 will be purchased.

Similarly the announcement steered clear of in service kit, and whether there would be any changes to force structures in the short – medium term. It also steered clear of mentioning what options had been taken to put the package together – in other words, in different budget areas what cuts had been made to make the sums add up. Its inevitable that many painful cuts in local areas have been made – for instance a 5% cut in one units travel budget, or a 10% post reduction in another. Over time these figures build into bigger and bigger savings, and theoretically have built the package required to make the books balance. What is not likely to be known is how this was done, and what impact it has had on the overall ability of HM Forces to operate. Similarly, a lot will depend on how many reduced units are being purchased – the significant downsizing of the Army opens the door to reduced purchases, upgrades and so on, but its not yet clear how this is being done. We may know more once the future structure of the Army is announced in the near future.

Another area not discussed is the level of risk taken with some of the figures – how many of the savings are actual (e.g. delete a project, facility, post or person) and how many are theoretical (e.g. assume savings against something coming into service which is not then realised). If the package has been built around theoretical savings, or if it has been built in a way which makes assumptions which cannot be realised due to changes in the operational environment, or to technical problems, then how much ability is there to absorb this? Hopefully there is no danger of the SofS having to return to Parliament to announce further cuts due to the current package not delivering on its promises.

Finally, one thing that seemed good news was the announcement of a contingency fund. On paper this sounds good, although this author was somewhat cynically thinking that this may be seen as the new UOR fund. It would be useful to hear whether HM Treasury intends to abolish UOR funding after HERRICK as a result of this contingency funding now existing, or whether it will run in parallel with the UOR system.

The Next Few Years
Several things now emerge as the next steps that need to occur to capitalise on this seemingly good news. Firstly, Defence is now in a position to enter the next Defence Review (currently due for 2015) in good financial health. If this remains the case, then hopefully the 2015 review will be about reviewing strategic choices and commitments and not necessarily about ensuring that commitments meet reduced budget aspirations. The door seems open to reviewing a range of options in 2015, such as Sentinel, Future MPA, and a second CVF if funding still exists – this is the chance to review the decisions made in 2010 and adjust aspirations accordingly.

The next challenge is to ensure that the package can deliver Force 2020 – right now, if as expected this continues and 1% real terms growth is achieved, then HM Forces are well placed to achieve a well balanced force in 2020. The issue becomes what happens when costs inevitably spiral, when challenges emerge, or when budget growth is not as great as it should be. How much scope is there to continue to deliver the Force 2020 structure if there is another fiscal shock to the budget?

The MOD needs to be able to retain good people to see the changes through too – the downsizing is having a massive impact on morale, and as the economy picks up over the next two-three years, many skilled military and Civil Servants may be tempted to leave rather than stay in and continue to work for the MOD. Delivering a complex package is going to be hard if the most experienced people are continually tempted away by the prospect of pay rises and promotion. The traditional lures of a Government job (pay, pension, career prospects) have been massively diminished in recent years, and many good people will leave unless the package is able to become more competitive as time goes by. The traditional job safety which compensated for loss of earning has gone forever, and many good and skilled project managers and delivery experts are now facing the future and realising they can earn far more in the private sector than they do in the MOD. Failure to keep the right people in threatens to undermine much of what has been announced this week.

The next two –three years will be interesting. The drawn down from HERRICK, the almost certain cancellation of projects slowly emerging into the public domain, the reality that the UK is likely to cease to be continually deployed on combat operations for the first time in over 20 years. All these things will come to pass, and delivering this will be challenging. Knowing there is financial stability will help plan for the replacement of some elements of kit, but equally the challenge is also going to be to work out what to stop doing as a result of kit replacement programmes being cancelled, or reduced in size. The lead in to the 2015 SDSR will be interesting and set the groundwork for the view out to 2025.

So, a cautious welcome to the good news that the budget is balanced, but until the full details emerge of what was sacrificed to make this achievement, it is hard to predict what this will really mean for the long term operational effectiveness and capability of HM Forces.


  1. OK, generally agree this is probably a relatively good news story and as a Civil Servant in DE&S basically happy a SofS starting to get a grip of the essentials of his business operation.

    Interesting observation on the contingency fund's potential to be seen as UOR. My worry is more that industry will see it as a target, why let it be on the MoD's books with potential to go to a competitor when they could just continue some ineffective practices on current, high profile (i.e. difficult cancel)projects and pull the cash onto their balance sheet. This has the potential to drive some fairly costly behaviour amongst our major suppiers.

  2. ""the reality that the UK is likely to cease to be continually deployed on combat operations for the first time in over 20 years.""

    Where can I order a copy of your crystal ball?