Select Committee on Defence Fourth Report


(a)Shrinking demand in a market with surplus capacity appears to be the backdrop for many areas of the defence industry, and perhaps it can be said to be a more intractable problem for the warship construction industry. It is clear to us that in the Type-45 programme the MoD has sought to weave a strategy through often conflicting pressures, not just for minimising costs and maximising competition (when it can be effective), but also balancing what might be best in the long-term as well as the near-term. And with the complexities of warship procurement, the MoD appears at least to have made reasonable choices, backed by expert advice. There are clearly dangers still in the approach adopted. There is uncertainty about the prospects for genuine competition for future programmes, like the Future Surface Combatant, from shipyards which may only by then have experience of fabricating 'blocks' rather than assembling ships. The MoD will have to determine how to support warship building capacity for the lean short-term to ensure that it is available when needed in nearly a decade's time. And even the smooth passage of ship work at Barrow's Devonshire Dock Hall will have to be monitored carefully (paragraph 23).
(b)But at least the problems of the warship construction industry are starting to be addressed. It is clear to us that the sort of work commissioned by the MoD from RAND provides a valuable and timely analysis of the state of the warship construction market in the UK. From their examination of the procurement options available to the MoD, it is evident that a clear strategy is now needed for warship procurement. The RAND analysis would be a useful starting point (paragraph 24).
(c)There have been some beneficial developments in warship repair practices which have increased their efficiency, such as 'reliability centred maintenance' and 'underwater engineering', and a trend towards in-service support-inclusive contracting (paragraph 34).
(d)The underlying trend of reducing warships maintenance workloads, from such initiatives and from a contracting fleet, has been long and deeply entrenched. Surplus capacity has remained, despite contractorising and then selling the dockyards, and the major job losses that have formed their backdrop. However, in seeking to tackle that problem the MoD brought two years of still greater uncertainty as it developed its warship support modernisation proposals. It must not be surprised if further anxieties have developed over that time. With the contracts in place, the MoD must now clear the air over its plans for the future of the naval bases in the longer term, and how it expects work (and jobs) to be divided between the dockyards and the naval bases. A start would be a wide-ranging review by the National Audit Office to clarify and report to the House on the way the initiative was developed and managed by the MoD, the value for money of the new arrangements and on whether the approach now followed is an appropriate response to the challenge of managing surplus warship repair capacity (paragraph 48).
(e)Looking to the future, there remains much uncertainty for the naval bases and dockyards, and their workforces. The MoD will still be the party most able to influence how events are played out; a role which it must exercise with the same responsibility as it had before it contractorised the management of the naval bases. The MoD will remain in the driving seat, particularly in terms of the future of the naval bases. (paragraph 49).
(f)If as a result of implementing the warship support modernisation initiative Faslane is in for a period of painful adjustment, the position regarding the naval bases more generally seems more certain. We were assured indeed that the MoD needs three naval bases. The MoD considers that its recent decisions on the base-porting of future warships will provide a continuing need for all three bases (paragraphs 47, 49).
(g)As regards the dockyards, the warship support modernisation initiative will by 2005-06 increase the estimated percentage of refit work exposed to competition by a half—93% rather than 61% (paragraph 44).
(h)The output-focussed contracts with the new commercial managers will prompt efficiency initiatives that might place the longer term viability of some dockyards in greater doubt. Despite the caveats of the Minister and his officials, we noted that they were prepared to accept that ultimately market forces would sort out over-capacity in the dockyards. Market forces should not however be the only determinant. The MoD will need to ensure that it monitors the contractors' performance and its effect on the service provided to the Fleet, and that it is able to safeguard essential facilities at the bases and Rosyth Dockyard. We believe that all major planned refit and maintenance work must be undertaken in the UK (paragraph 49).
(i)In regard to the Future Strategic Tanker Aircraft programme, it seems to us remarkable that, though founded on the use of sponsored reserves, this is an area not regarded to be sufficiently in the front-line to make a PFI service inappropriate. The MoD needs to produce a clear set of criteria to define what constitutes the 'front-line' for the purposes of assessing the potential for using the PFI. The MoD must also make a thorough assessment of how well the sponsored reserve concept works in practice for the Heavy Equipment Transporter 'pathfinder', and be prepared to adjust its usage if any limitations on operational effectiveness are revealed (paragraph 58).
(j)We welcome the assurance that the Chief of Defence Procurement was able to give us about the capability that Skynet 5 will deliver (paragraph 62).
(k)On the Combat Support Vehicles PFIs, it is remarkable that it took three years of developing proposals and discussions with industry for the difficulties about generating third party income to become apparent to the MoD (paragraph 64).
(l)The MoD is putting a lot of faith (and money) in the PFI, to provide capabilities and services for which it would otherwise buy the necessary equipment outright, including areas that could be regarded as front-line tasks. In assessing the value for money of such PFIs, it is right that 'operational effectiveness' and 'quality of service', criteria cited in the MoD's guidance, should be taken into account. Whether PFI delivers value for money should depend not just on a purely financial balance of costs and benefits, but also on whether risk is managed more efficiently. In the defence field, getting the balance of risks wrong does not just undermine the calculation of the cost-benefit of particular projects; it can have profound consequences for the operational readiness and effectiveness of our Armed Forces, and ultimately for the safety of our Service personnel operating in hostile environments. It is in that context, and despite the Department's guidance, that we remain concerned about the lack of clarity in the use of PFI, particularly its further encroachment into front-line areas. These risks are present in several of the projects that we have examined in this inquiry and are perhaps most glaring in the case of the Future Strategic Tanker Aircraft. In another—for Combat Support Vehicles—we have been able to see the boundary of the potential for PFI, at least on the economic front. In the fundamentally restructured and delayed Ro-Ro ship project, we see the MoD rather than the contractor taking over the risk of the acquisition of some of the vessels—which undermines the supposed advantages and fundamental principles of the PFI (paragraphs 69, 70).
(m)Whatever the rationale for withdrawing the Sea Harriers early, it is regrettable that the MoD was taking delivery of new Sea Harriers only a very few years before making that decision. At the very least, we are presented with a poor impression of long term planning in the MoD (paragraph 72).
(n)Taking a third of the aircraft out of the Joint Force Harrier operating fleet represents a significant diminution of carrier-capable fixed-wing maritime aviation. (paragraph 78).
(o)The aircraft of Joint Force Harrier will be replaced by the Joint Strike Fighter. With some overlap at least in the respective capabilities of the primarily offensive JSF and the primarily air defence Eurofighter, it is right that a holistic approach is taken to balancing our investment in future fighters. Such assessments must also fully recognise, however, that a carrier-based fighter will be an essential component of our expeditionary capability—we cannot assume host nation support for land based operations—even if that means deploying an aircraft not optimised for air defence. Questions of which version of JSF will be affordable for the UK are of secondary importance (paragraph 88).
(p)The case for all 12 of the possible Type-45 anti-air warfare destroyers will be the stronger if our carriers are not to have a dedicated air-defence aircraft. It is our hope that the 'sound case' for 12, identified by the Chief of Defence Procurement, now settles the balance required of Type-45 destroyers and Future Surface Combatants, and that the MoD has accepted that it needs at least 12 destroyers (paragraph 19).
(q)The Type-45 will not fully replicate the capabilities lost with the decommissioning of the Sea Harrier. The Sea Harriers and the anti-air destroyers are not envisaged so much as substitutes, however, but as different layers of air defence for the fleet. The newly appointed head of the MoD's Equipment Capability Customer organisation was clear that he would have preferred to have retained a viable Sea Harrier in service because the MoD will be without one of the layers of air defence. (paragraph 82).
(r)The UK has already decided that in another five years, when the Sea Harrier is withdrawn from service, it will rely on others for air-defence patrols for our naval task forces (paragraph 92).
(s)All current air-defence layers—whether carrier-borne Sea Harriers or destroyer-borne Sea Dart missiles—have weaknesses in tackling sea-skimming missiles (paragraph 83).
(t)We recognise that there is a rationale for not upgrading the Sea Harrier, and withdrawing it early from service. It presumes that our future maritime operations will be conducted almost exclusively in littoral environments, where other air-defence weapons systems are likely to be more effective, and other aircraft of greater utility for supporting forces ashore. But it must come with caveats. The MoD must ensure that the air-defence capability improvements planned for the Type-42 destroyer and its Sea Dart missile are now delivered without further delays. The Type-45 and its next generation of anti-air missiles must also be delivered to time and to specification, and a sufficiently large fleet of these destroyers procured to give the required defensive cover for our naval forces. The rationale also depends critically on other navies and air forces providing air-defence cover for our forces, particularly when open-ocean operations are still required. For it is clear from the evidence we have taken in this inquiry that our ability to deploy and defend UK naval forces in open-ocean scenarios is not effective; or more accurately perhaps, that such a situation has long been the case but has now been addressed head-on. There are, then, a lot of pieces that must all fall into place before the Sea Harrier's demise can be regarded with at least some confidence. The MoD must ensure that none are missing. We will be following this process very closely (paragraph 93).
(u)The decision to withdraw the Sea Harrier early will provide financial savings, but this does not appear to have been the main impetus behind the decision. That has been the practical difficulty in developing the aircraft with the capability improvements it would need. If, as the MoD maintains, this a question of 'balance of investment' we expect the MoD to set out clearly what additional, higher priority, investments it now expects to make with these savings (paragraph 97).
(v)'Information Superiority' equipment programmes are critical areas for the key future capabilities that our forces will need in not only the post-Cold War, but post-11 September, world. We will be looking at how the SDR New Chapter addresses the need for these sorts of rapidly deployable, network-centric capabilities, and we will be monitoring these areas closely in our future procurement inquiries (paragraph 100).
(w)The MoD's bold step in relaunching the Bowman competition two years ago appears to have been vindicated by an end to the previously regular delays. The MoD needs to focus now on introducing this vital component of network-centric warfare capability as quickly as possible (paragraph 104).
(x)We welcome the MoD's long overdue reassessment of its ammunition war stock requirements. We have a concern, however, about the adequacy of future ammunition stock levels because of the basis on which war stock thresholds are to be calculated. The MoD clearly does need to reflect, as it is in its current review, the way operations will be mounted in these post-Cold War times. But in moving away from single-Service ammunition scales, which in the past sought to cater for a wide range of war-fighting contingencies, we detect an opportunity for the MoD to reduce ammunition stock holdings more than sensible caution might suggest (paragraph 109).
(y)Despite our predecessors' hopes that negotiation of a Framework Partnering Agreement would put Royal Ordnance Defence on a sufficiently firm footing to give its other plants a viable future, this now appears unlikely. Instead of improving Royal Ordnance Defence's viability, the Framework Agreement has only served to give the firm the foundation it needed to close further plants (paragraphs 111, 113).
(z)It is imperative that while security of supply agreements with the US and Europe remain without binding force the MoD must continue to monitor more robustly the implications of ammunition plant closures, and indeed other defence industry rationalisation, to be ready to protect resupply routes for such essential support for our Armed Forces (paragraph 114).
(aa)The delay in introducing the ASRAAM missile into service has had no impact on Eurofighter's operational capability", but that is only the case because Eurofighter's operational utility itself is still some way off (paragraph 116).
(bb)In addition to the lessons identified by the MoD from the ASRAAM difficulties, another lesson is about the time needed when programmes depend on co-ordinating the commitments of collaborative partners. (paragraph 119).
(cc)We hope CDP's confidence in meeting the BVRAAM's target in-service date is not misplaced. We will continue to monitor the timeliness of the Meteor programme (paragraph 120).
(dd)In the C-17s leased by the RAF, pending the development of the A400M, the MoD can be assured of an effective, continuing airlift capability. With that lease, and the further arrangements in place to contract for two C-17s, the MoD currently finds itself in an enviable position. But if the A400M continues to struggle the secret will be to know when it would be better to deal with someone else. (paragraph 122).
(ee) It seems to us that at such an opportune juncture, there needs to be a new focus on integrating the perspectives and priorities of all of the key players in the MoD who will have to work closely to make smart acquisition a success—and a success not just on cost and timeliness fronts, but in a way that delivers what the equipment user really needs and "values". To bring that about will require a sharper focus on measuring value in the MoD's procurement programmes. As a first step, the MoD should consider the value of including the central Equipment Capability Customer on the new 'Investment Appraisals Board', which was set up to replace the Equipment Approvals Committee.

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