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?
Little (No?) equipment is "Made in the UK" in any real sense.
ReplyDeleteTake 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.
If we don't know what we are going to make, we don't know what we are going to sell huh?
ReplyDeleteCosy 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.
Defence spending will be cut again in 2015, and probably in 2020, so the whole premise fails.
ReplyDelete