Thoughts on the NAO 2012 Major Project Report

The author has been travelling recently, and opportunities to write have been significantly reduced. That said, one news story which did catch his attention was the NAO Major Projects report into the MOD (the report can be found here at the link HERE) and a good summary of the major cost changes can be found over at Think Defence HERE.  Although it identified many positive aspects, it also picked up on cost growth across the board, with an overall increase of 12% to projected project costs. To many this seemed evidence of ‘business as usual’, with the MOD seemingly incapable of stamping down on project costs, and that UK troops were suffering as a result.

Having gone through it in some detail, Humphrey had a few thoughts about it and what it may mean more broadly. Firstly, one of the key details which was perhaps lost in the flurry of wider reporting bemoaning inept staff and out of date generals was that much of the cost was due to exchange rate fluctuations and rising fuel costs. In particular the costs of the Voyager tanker aircraft have grown significantly due to this rise.

There is not much that the MOD can do against a global rise in prices, particularly for oil, and while an element of risk can always be included in costings, sometimes it is outside of MOD control. The Voyager PFI is particularly interesting as its initially eyewatering costs (some £14 billion for what appears to be 14 aircraft) appears very steep. In reality this is the cost for the entire capability and not a fleet of aircraft per se. So, the total cost includes quite literally every cost that will be incurred by the project through the life of the PFI, ranging from the aircraft themselves, through to training and the provision of the infrastructure and fuel for the project.

So, Voyager is about the complete delivery of a guaranteed capability over a long period of time, and not just the procurement of airframes. While it is easy to knock the MOD for adding several hundred million to the bill, in reality this is a cost that the RAF would have incurred whether it was buying a PFI or the aircraft fleet outright. The fact that the cost is added to the PFI bill makes it look like procurement costs have risen, but in reality if the RAF had purchased the airframes outright, then the costs would have fallen to a different budget.

The lesson to take from this is simple – operating highly complex military capabilities is very expensive. You cannot just buy an aircraft now and run it for a small amount. The real cost lies in the long term support and operating the platform – it is entirely possible that sales people could have waved glossy brochures about airframes only costing X amount. This figure would doubtless be bandied about by commentators suggesting that the RAF had been seen off, but in reality the operating cost of the fleet over 25-30 years was always going to be in the region of £14 billion, its just that people don’t see the true figure when it isn’t frontloaded into a PFI.

Consider the annual running costs of a Frigate, which can be easily into the tens of millions per year (lets say £20 million) and take a thirty year life span (say £600 million through life costs in very broad terms)– by the time the last Type 23 pays off, then its likely that running that class of ship from 1989 to the mid 2030s will have cost the taxpayer well over £10 billion in running costs, let alone refits and procurement. Indeed if one were to cost up the entire Type 23 programme, then its cost to the nation from point of design in the early 80s to final disposal then the likely cost is likely to be well north of £20 billion.

If at the time of the 1981 Defence Review, it had been announced that the UK was going to fund a ‘cheap’ utility frigate project costing well over £20 billion in through life costs, then there would likely have been nothing short of uproar. Its always worth remembering that when looking at costs, you should never take the cheapest figure quoted in the press as the entire cost of the project. Remember that Voyager is perhaps unusual in that it is openly exposing the entire cost of a military capability for its lifetime.

Another reason why costs grew appears to have been down to currency fluctuations, particularly with the dollar. This is quite a significant observation as it is often argued in some quarters that the UK should abandon its sovereign design and production capabilities, and instead just buy off the shelf equipment, particularly from the USA.

Not withstanding the significant damage such a move would do to the UK industrial sector, it is worth considering how it could end up as a very expensive move. Purchasing of equipment from overseas will often tie the purchasing nation into long term support and maintenance contracts. If say the UK decided to purchase off the shelf the M1A1 Abrams as a new tank, then the costs would be almost exclusively fall in US dollars. This ties the UK into a long term dependency on support contracts priced in dollars, not just for the initial procurement, but for longer term sourcing of spares. Even small fluctuations in exchange rates can have significant impacts on budgets – in this case if the majority of UK equipment were sourced from overseas, then it is perhaps worth considering that a much higher reserve of cash would be assigned to handle currency fluctuations. This in turn would reduce the amount of cash able to fund procurement as a whole.

While this is a very simplistic argument, its worth remembering that adopting a policy of wholesale purchasing of equipment overseas would not necessarily make savings in the medium – long term for the MOD, and may in fact make things more financially challenging.

 One interesting thing to do in the report is read through and identify why costs have increased. In many cases it is due to planned upgrades or other work being cancelled or delayed in other projects. Where one looks at complex systems – for instance the ASTUTE class submarine, you can see that costs have risen in part due to planned work on other projects not going ahead ,necessitating remedial expenses to make obsolete equipment run on, or projected savings not occurring.

The reality here is that we are only now really beginning to understand the scale of the projects which have been cut or delayed during defence cuts earlier in the decade, and during the many Planning Rounds. At the time expenditure or projects may have been cut, delayed or descoped to try and reduce spending at a time when the budget was unable to meet the aspirations of the many projects needing funding. While this may have been a short term fix, and a necessary one which helped the process of bringing the equipment programme back on track, it has clearly had longer term impacts.

It is really only now that we are beginning to grasp the bigger picture of the costs incurred by adopting many of the measures taken a few years ago. It may well take several more years for the full growth in costs to work its way through the system – are there other nasty surprises lurking out there which have yet to expose themselves?

This perhaps neatly ties into the last point to make – namely that the report identified the challenge of keeping suitably qualified project management staff in the system. It is easy to cite the lack of suitable staff as a reason for project overrun or cost growth, but why is there a shortage? The authors very personal view is that several main factors hinder the retention of project management talent – firstly, the desire to reduce the headcount of the civil service has meant that many long serving staff see little reason to stay in the MOD. It was telling that the MOD managed to get sufficient voluntary applicants for civil service redundancy in the first year of the programme to meet all of its staff reduction requirement for the SDSR, which should have taken three years. There is an outflow of long serving staff who have a strong understanding of defence procurement and project management. At the other end, reductions in recruitment mean it is very difficult to bring a steady inflow of staff in to replenish the ranks at a more junior level. The lack of a co-ordinated HR management system means managing staff moves and development is challenging – so staff are leaving, and those few who join are unable to be managed centrally to ensure their development.

This, coupled with a certain amount of insecurity about how procurement may be handled soon means that many of the authors friends who work in procurement feel they have a long term future in this area.

The other challenge is the inability to offer a competitive package for suitably qualified staff – while entry level salaries are often on par with their private sector peers, this parity quickly reduces. By the time you approach mid management levels, staff are paid significantly less than their private sector peers, and with similar levels of job insecurity. A friend of the author worked out that his direct opposite number in the private sector was being paid three times more than he was, despite working on the same project and for similar hours. Faced with such temptations, it is hardly unsurprising that so many staff seem to jump ship to the private sector.

Similarly bringing suitably qualified staff back into the MOD though is immensely difficult – to recruit and retain the best possible project management skills means being prepared to pay a very large wages bill (or for the applicant to take a very large salary drop). It is hard to see many good project managers being tempted by the prospect of joining MOD for a salary of £25-£30,000 per year. Given this, how do you square the circle and bring in the best talent, or at the least pay closer to parity?

Moves towards changing the way DE&S operates may go someway to alleviating this problem, as a more independent procurement organisation may have greater flexibility to pay rates which could attract people back – providing the recruitment opportunities exist.

This project is not limited to the civil service – one only has to look at how regularly military staff rotate through posts to realise that very few will stay in post for more than two years. There is a real lack of continuity in the postings plot, as people constantly move for career development, or to relieve others. In reality this is perhaps less than helpful – given that it takes 6 months to become comfortable with most complex jobs portfolios, one realises that in every 24 months, there is probably only a 14-16 month period when the military officer is in post, able to deliver and not focused on taking over, or handing over. A longer period in post would not only increase stability, but also probably make it easier to deliver a project on time, or at the very least ensure a proper understanding of what would happen if a savings measure was taken. Based on the authors own experience, it is possible that many of the financial challenges occurring now are in part due to newly posted officers who didn’t fully understand their projects and portfolio approving a measure to be taken, which they perhaps later regretted due to realising the wider costs involved.

So, the lesson to draw from the NAO is that there often more complex reasons why things happen than perhaps seem obvious at first. It is very easy to criticise the MOD for not managing cost overruns, but as has been seen, these often occur despite the best efforts of MOD. It is also important to understand that procuring and running high end military equipment is expensive, and prone to all manner of costs which are often difficult to predict decades in advance.

Despite this, the author believes that the UK should be far more proud of its defence procurement staff than people seem to be. Despite problems, year on year, they have consistently managed to deliver hundreds, if not thousands of projects, ranging from simple equipment through to nuclear submarines. They’ve managed to do this despite financial uncertainty, staff changes and most importantly massive technological changes – which can make a real difference when the procurement of a major item can take several years to oversee. The end result has been the delivery of equipment which works, generally (although not always!) works well, and which has been tested in the most challenging environments known to man. The UK public should be rightly proud of the skills and expertise which enable the British military to operate from the depths of the ocean, across all the continents on the earth and into the depths of space. By all means focus on what can be done better, but lets not forget just how much we do well, particularly when compared to most other nations.