Costing Up The Value of Everything - Is There Really £13bn Waste' in Defence?

The MOD has been accused of wasting some £13bn of taxpayers money since 2010. This serious charge, levied by the  main UK political opposition party, is at the core of a ‘dossier’ which suggests that there has been serious and profligate mismanagement in Defence, with enormous amounts of public money wasted, which could have been spent elsewhere. Is this a fair and reasonable accusation to make?

From the outset, it is important to be clear that this blog article is not taking a subjective view on the political party in question, nor is it taking political sides. This blog is, and always has been apolitical in its approach, and has not, and will not, express any views on the political views or policies of Political parties. This blog should be seen as an impartial attempt to understand the charges, and present an alternative perspective on some parts of them.

Waste is an enormously emotive word, and one that brings to mind images of inept public sector workers intentionally taking decisions that knowingly are poor value for money, or which represent decisions that will hurt the front line, because they simply don’t care.

Image by Ministry of Defence; © Crown copyright

Speak to anyone who has dealt with the public sector and they will all provide similar stories of how this organisation seems bloated and inefficient, or another seems far too profligate with the cash. There is a strong sense among some that the MOD is not an organisation fit for purpose, and in turn it is wasteful with vast sums of public money.

There is a counter view here, which is that the MOD is a department which is charged with handling perhaps the most diverse spending portfolio of any Governmental department. It must handle responsibility for everything from nuclear missiles to educational facilities and housing estates – over a quarter of a million people on practically every continent of the planet are in some way linked to Defence.

Defence has to both be a strategic department of state, taking a long term perspective on developments that may not come to pass for decades to come, and make assumptions on costs, capabilities and threats that may never materialise. An example of this is the Type 23 frigate, which has its genesis in the late 1970s and early 1980s, and whose procurement was a key part of the Knott 1981 Defence Review, 41 years ago, and will be in service in the UK until the mid 2030s.

Intended for a design life of 18 years in the North Atlantic, the Type 23 force will have been in UK service for almost 50 years by the time the last UK hull finally pays off in the middle of the next decade. From concept to disposal, this is a life cycle of roughly 60 years.

To ask the Royal Navy of 1980, led by WW2 veterans like Admiral Sir Henry Leach, who fought in big gun actions against the Scharnhorst to imagine the role of a vessel design that would still be in service almost 100 years after he joined the Royal Navy is a sign of how significant the passage of time is in Defence. This matters because when financial decisions are taken, they can have effects that may be felt for many years to come in a variety of ways and means.

To look at the arguments for waste, there appear to be several core themes. Firstly that the MOD paid off equipment early, thus incurring a waste against its net asset value. There is also an argument that cost overruns, procurement delay and extensions to keeping equipment in service longer also helped incur ‘waste’ by requiring spending that could have saved money and been used elsewhere.

The report highlights the sums of money that could be saved and how many types of equipment could have been bought with this if it had been spent differently. This is perhaps somewhat disingenuous as it supposes that there is a central pool of money and that all the funding could be reallocated to a new project.

In reality cost changes can sit across multiple budget areas, meaning that while on paper a decision to do something may save £1bn, in reality this may break down into penny packets of cash, split into different budgets and over many years – there is not a lump sum of £1bn magically available.

Image by Ministry of Defence; © Crown copyright

One example is that the report suggests that the theoretical £2.1bn cost of a force of 14 new ‘Super Hercules’ aircraft is equivalent to the ‘write off’ cost of MOD assets paid off since 2010 which are counted as waste.

The problem is that this is an entirely theoretical saving – the assets that have been ‘written off’ in the report include the aircraft carrier HMS ARK ROYAL, which theoretically had a value of £95m according to MOD accounting practise.

The problem with this argument is that it has essentially taken the theoretical book value of assets at the time of their disposal, and assumed that this equated to actual money which could have been spent. In reality this is a notional argument – HMS ARK ROYAL for example was 25 years old and the cost of her construction had been paid decades previously.

To suggest that this ‘write off’ cost could pay for new equipment also ignores why the MOD has chosen to pay equipment off in the first place. Generally speaking a decision to scrap a capability early is taken either as part of a wider defence review, which sees a change to UK policy and capability requirements, or in order to make some short term savings.

A good example of the former is the 1998 Strategic Defence Review, held by the last Labour Government. This identified a range of areas where new investment and capability was required, for example in procuring two new highly capable aircraft carriers, and also areas where the anticipated requirements were reduced.

In the latter case, this could include the ASW frigate force, where the decision was taken to take risk and pay off 4 (later 6) of the Batch 2 Type 22 Frigates, which were about 9 – 14 years old at the time (barely half way through their planned life).

In both cases, the decision to scrap equipment is taken as a way to build up savings that can be accrued over many years (usually up to about 10 years out) and reduce spending both on the in year budget and for several years to come.

For example in 2010, the decision to pay off the ARK ROYAL and Type 22 Frigates was made because of both policy and cost saving reasons. The defence policy had shifted, noting that the UK main effort for the next 10 years would be Afghanistan focused, then focus on force regeneration, and the UK would be stepping away from expeditionary operations for much of this time while the military regenerated from HERRICK.

At the same time delays to the entry to service for the CVF, and changes to requirements meant that there was unlikely to be a need for a carrier for about 8-9 years.

This meant that there was no need for a Harrier style capability, and in turn no need for a carrier to operate the Harrier, and in turn you could switch the ARK off, while retaining HMS ILLUSTRIOUS to cover the LPH gap when OCEAN went in for her final refit.

By removing the requirement, you created immediate savings from running costs – a Hansard answer from 1995 put the cost of running an INVINCIBLE class at £35m – assuming this had grown to £40m by 2010, and noting that ARK ROYAL was due to pay off anyway in 2015, this decision immediately saved £200m of public money over 5 years.

From a financial planning perspective, this means you have created £40m of savings in each of the following few years as you no longer run the carrier. When you add this to the saving accrued from deletion of the Harrier GR9, which were considerable given that it meant you took the aircraft out of service, deleted supply chain support, maintenance contracts, could close down two major RAF bases and so on, and suddenly there is a huge amount of savings realised here.

Therefore, it is, bluntly, rather misleading to suggest that the MOD has ‘wasted’ £94m by scrapping the ARK ROYAL early, when in fact this decision saved the taxpayer at least double this sum of money in reduced running costs.

The suggestion that Defence wastes money by projects overrunning is also somewhat disingenuous. There is no doubt that in a perfect world, projects would come in more closely to time and budget, but particularly with cutting edge technology and incredibly complex supply chains required to deliver highly advanced capabilities, this isn’t always going to be the case.

The vast majority of complex projects in civilian and military use overrun by some degree, or have their costs increase. In the case of Defence it is particularly difficult as the MOD has to balance off a finite budget to cover a very diverse and demanding list of acquisition plans.

Sometimes the reason for the delay is not to waste money, but because there is a need to balance off spending in year, and over the next few years. MOD projects are not budgeted with a big lump sum of cash at the start that gets smaller over time – instead spending is allocated annually and spent in accordance with the state of the project, how things are going and when payments are needed – this can create a very uneven spend profile over several years.

One of the big challenges for the MOD centrally is trying to balance off the different demand on the budget. It may be that a project that is costing £100m and still has to spend £80m needs to find £30m next financial year, but then only £10m for the next 2 years. If your wider budget is £30m in the red for the next financial year, but has space in the following years, then actually slipping the project by a year, deferring activity or descoping it to reduce costs makes sense from keeping the overall programme solvent.

Financial management is about evening out spending plans to ensure that the overall programme remains affordable within the constrains of the challenges facing Defence, and working out what the best course of action is to do this. Sometimes this means delay, which can increase costs, but this could be cheaper and less harmful both to UK industry and defence than other measures like cancelling a project outright to save money.

Is it waste to do this? Arguably spending more when you could spend the budgeted amount is not ideal, but at the same time it is about prioritisation of spending to slip projects to balance it all out.

A wider complaint is that the MOD wasted money by scrapping vehicles such as the Mastiff and Ridgeback in 2020. This is a good example of the challenge facing defence planners – these vehicles were procured at speed, under the UOR system to provide an answer for Afghanistan that met the very specific theatre requirements. They were not designed for, or intended to provide the perfect long term solution for Army protected mobility.

This places planners in a quandary – do you keep vehicles like this on after they’ve been used on operations, spending money to refit them and keep them in service, providing a short term solution, or do you scrap them and free up resources to bring in new kit that is properly designed for UK requirements?

Sometimes it is the case that the solution for one theatre of operations, and which made perfect sense for that mission isn’t the right answer for the emerging missions – at this stage is it more wasteful to keep it in service, throwing good money after bad to try to make it right, or to let it go and try again?

In a similar vein, there is often a good reason to bring equipment out of service earlier than planned if it is no longer needed. As requirements change, and views on what the needs of the Service are, it can make sense to free people and resources up early to take on new tasks, instead of running on older equipment.

This process of early disposal has been criticised as ‘waste’ but equally it could be said that if paying a capability off produces budgetary and people headroom to get ahead and bring new kit into service properly tried and tested, is this better overall than keeping something until the bitter end of its life?

Image by Ministry of Defence; © Crown copyright

That is perhaps the biggest challenge in reading this report – it applies a literal value of everything on a purely cost basis without looking at the rationale or reason for why things can and do happen. It then tries to use strawman arguments of saying ‘this could have bought X’ instead, which would never have happened.

The problem with using the ‘this could have bought 4 more Type 45 destroyers’ (as was suggested) is that firstly there is no lump sum of money generated to buy these ships – it does not exist. Secondly, it ignores every part of the wider costs associated with owning and operating a new military asset.

Yes £2.1bn could very theoretically have bought 14 new C130 aircraft – but that is literally the aircraft and a tank of fuel, and does not take into account any other cost – no operating costs, no training costs, no people costs. Even if the money was there, the MOD would not have planned or budgeted for any of the huge range of costs needed to bring a new aircraft into service and operate it for many years to come.

The best case outcome in this particular scenario is that the MOD would have found itself with lots of shiny new aircraft and no money to operate them, and no training pipeline to find the crew to operate them. It would have caused significant challenges, financial problems and long term headaches to resolve – military equipment procurement is far more than just buying kit – it is about bringing something into service that is likely to keep going for half a century or more.

Perhaps the most frustrating part of reading this report is that it attempts to politicise the defence procurement debate. There is no doubt that things can be done better, but so many of the decisions criticised in it stem back to cost saving decisions that had to be taken in 2010 when the Defence budget was £36bn in the red, and the so-called ‘black hole’ needed to be closed to make the department financially able to live within its means.

The decisions taken in the early 2000s, for example on delaying carrier procurement or the Nimrod were felt then, and had an impact then. Much of these savings that are being attacked as ‘waste’ are a direct result of decisions taken 15-20 years ago under a different political administration.

The final question to ask is a more pragmatic one – is it really that much money that we are talking about here? £13bn sounds an enormous sum, but in contrast to the sum spent on Defence over the last 11 years, which in very rough handfuls, is about £440bn, we are talking about a sum of money equivalent to roughly 3% of the total amount of money spent on Defence in this time.

Given that significant chunk of this ‘waste’ is essentially an accounting trick under the RAB financial budgeting system (e.g. write off costs) and is purely theoretical in nature, it seems that ‘only’ about £10n can be accounted for as a result of run on costs, cost growth or other reasons.

If you took a whole of government view, to get to the point where after 11 years of constant operations, your level of cost growth equates to roughly 2% of total spending over that time, that is a not unreasonable level of growth, and certainly well under prevailing levels of inflation.

There is a danger that in trying to highlight the cost of the little things, we lose sight of the value of the bigger picture. It would be fair to say that this report knows the price of everything, but arguably the value of far less.