Further memorandum from the Ministry of
Defence
Further information requested following the
evidence session with Air Chief Marshal Sir Malcolm Pledger KCB,
OBE, AFC, Major General A J Raper CBE and Major M D Wood CBE on
17 November 2004.[11]
A number of questions focused on the announcement
made on 16 September 2004 that the preferred option was to re-locate
support of Tornado G4 aircraft from the Defence Aviation Repair
Agency (DARA) to the Main Operating Base (MOB) at RAE Marham and
That support for rotary aircraft would be concentrated at DARA
Fleetlands. The Committee would like to have copies of the Investment
Appraisal and the Affordability Analysis supporting these two
announcements. The Chief of Defence Logistics (Q441) said that
this work was done under the direction of MoD's Senior Economic
Adviser. The Committee would like to have copies of the papers
produced by the Senior Economic Adviser which summaries the results
of The Investment Appraisal and Affordability Analysis for both
cases (various questions including Q463).
These documents are attached.[12]
As part of the process of assessing affordability, we revisited
the costs associated with all the options developed for the Investment
Appraisal, particularly in respect of service family and single
living accommodation. This further analysis determined that changing
the maintenance arrangements for Tornado F3 would generate net
costs because the aircraft leaves service before long term savings
outweigh up-front costs. In addition, we looked particularly closely
at the extent to which additional efficiencies could be delivered
if Lynx and Sea King were both "rolled back" to DARA
Fleetlands.
The consequence of this analysis is reflected
in the following table, which shows the assessed cost against
the effect of doing nothing of the three options considered in
the Investment appraisal and the two further options considered
(not changing Tornado F3 arrangements and rolling Lynx back to
DARA Fleetlands).
|
| FY
04/05 £M
| FY
05/06 £M |
FY
06/07 £M | FY
07/08 £M
| FY
08/09 £M |
FY
09/10 £M | FY
10/11 £M
| FY
11/12 £M |
FY
12/13 £M | FY
13/14 £M
| Total
£M |
|
| Roll Forward | 7.9
| 40.3 | -1.0
| -21.2 | -26.2
| 7.0 | -32.6
| -33.4 | -34.2
| -34.9 | -128.3
|
| Roll Back | 14.4
| 64.2 | 18.0
| -28.5 | -34.0
| -37.0 | -33.6
| -33.4 | -35.3
| -36.2 | -142.4
|
| "Hybrid" | 7.2
| 37.1 | -4.4
| -26.1 | -33.9
| 60 | -33.7
| -33.5 | -35.3
| 36.2 | -153.8
|
| "Hybrid" minus1 | 0.9
| 21.5 | -11.5
| -21.9 | -16.4
| 9.1 | -34.8
| -35.7 | -36.6
| -37.5 | -162.9
|
| "Hybrid" minus, Lynx Back2 | 4.3
| 18.5 | -21.5
| -33.3 | -22.2
| 3.2 | -40.9
| -41.9 | -43.0
| -44.0 | -220.8
|
|
1 The "Hybrid" option without Tornado F3
2 The "Hybrid" option without Tornado F3 and with Lynx "rolled back" to DARA Fleetlands
|
On the announcement about re-locating support of Tornado
GR4 aircraft from DARA to RAF Marham, The Committee would be grateful
for a note which sets out the grounds for this announcement, particularly
as the announcement appears to be a reversal of policy (Q433).
This note should set out which specific circumstances have changed
which have led to this announcement. The Committee is particularly
interested in the specific circumstances which have changed since
the publication of the Defence Committee's report on DARA in March
2001. The note should also set out: the opportunity cost relating
to the announcement ie how much is planned to be re-invested in
the St Athan area (Qs 416-419); and the percentage of the Tornado
GR4 aircraft work (by value) at RAF Marham which is expected to
be undertaken by the private sector (Qs 426-427).
The Committee are aware of the background to the decision
on Recommendation 40 as laid out in Minister (AF)'s letter to
the Chairman on 16 September. This explained that this work had
been taken forward as a result of the End-to-End Logistics Review
of the Air and Land Environments which took place in 2003. This
review was the first time we had looked end-to-end at the logistic
process and it provided some key insights and proposed new ways
of providing logistic support to the Services more effectively
and efficiently.
In particular, the End-to-End Review concluded that there
was substantial excess capacity in all areas of air systems support—in
industry, the Defence Logistics Organisation and Front Line Commands
alike—and duplication of facilities across the Services
and other parts of the MoD such as DARA. There was both a need
and substantial scope for improvement in all areas. It also reflected
the fact that, with some notable exceptions, the Department and
the Services were not using industry modem best practice to drive
down the cost of supporting military aircraft. The case for significant
change was unarguable.
It was clear then—and demonstration since has amply
proven—that significant improvements can be made to the
productivity of the RAF personnel through the application of lean
techniques, enabling more work to be done at front-line bases,
whereas there would be significant costs and operational penalties
in moving these personnel from the Main Operating Bases (MOBs)
to St Athan. These personnel form part of the "Crisis Manpower
Requirement" for the Royal Air Force, which determines how
many RAF personnel we need to sustain the level of concurrent
operational deployments for which the Department plans. Accordingly,
these personnel must be uniformed personnel and cannot be replaced
by civilians or contractors. Where the total depth support task
exceeds the number of RAF personnel required to support deployments,
the remaining work would be carried out at MOBs by civilians or
contractor personnel.
The original decision to proceed with the modernisation of
the St Athan site was taken on the basis of a sound business case
which centred on the need to reduce DARA costs by rationalising
the antiquated and inefficient infrastructure at St Athan. The
work load projections in the Red Dragon business case indicated
that the case for Red Dragon (in terms of MoD work) was soundly
based in the short to medium term out to 2008-09 but that there
was a need for DARA to find commercial work in the medium to long
term. It was not possible to take into account the effect of the
End to End Logistics Review at the time the Red Dragon business
case was approved, since the Review had not yet then started.
It is the case that the outcome of the E2E Review will change
significantly the level of depth air support work required in
the medium to long term. As Minister (AF) has made clear, sufficient
work will remain at St Athan to maintain a viable operation there
until 2008-09, both continuing work on Tornado GR4 until the new
facilities at RAF Marham are available and on other platforms
(Hawk and VC 10). This is in line with the assumptions on the
payback period made in the Red Dragon business case. However,
currently envisaged work on other Defence platforms will not be
sufficient to sustain St Athan on an economic and viable basis
after 2009. If no alternative work can be won to sustain St Athan,
this would result in closure. Officials from the MoD, along with
DARA senior management, have already had meetings with Welsh Assembly
and Wales Office staff to explore possible options, and have agreed
a strategic approach for taking this forward as a matter of urgency.
The opportunity costs of the Red Dragon project have been
treated in the IA in accordance with the Treasury "Green
Book" and with additional HM Treasury guidance. Cancellation
payments have been treated as a sunk cost as there is no part
of the payment that gives rise to a future economic cost.
Since the way ahead for DARA St Athan is not yet clear, there
are accordingly no firm figures for any MoD re-investment in the
St Athan area.
Currently there is no contract in place and a priced proposal
has yet to be submitted by the private sector for GR4 aircraft
work at RAF Marham. However, the investment Appraisal clearly
demonstrated that the re-location of logistic support for the
Tornado GR4 from DARA St Athan to RAF Marham provided the optimum
solution. It is on this basis that we are proceeding with the
transfer.
There are a range of programmes/initiatives in the DLO
which are expected to deliver efficiency savings. These include
the Defence Logistics Transformation Programme, DLO restructuring
etc. Some of these programmes/initiatives were discussed at the
evidence session. The Committee would be grateful for a note which
sets out the total efficiency savings between the various programmes/initiatives.
The note should indicate how much of the planned efficiency savings
are expected to be reinvested in defence logistics and in what
areas (Q488).
The efficiency savings the Department plans to deliver over
the Spending Review 04 period were laid out in the MoD Efficiency
Technical Note which was published on the MoD Internet website
on 29 October 2004. This document identifies, inter alia,
the contribution of logistics to meeting the efficiency targets,
however the DLO elements are broader than this. The table below
lists the key programmes.
|
| £M | | 2005-06
| 2006-07 | 2007-08
|
|
| DLO collocation | |
| | 5 |
| DLO restructuring | | 25
| 25 | 26
|
| DLO procurement reform | |
47 | 94
| 157 |
DLO elements of Defence Logistic
Transformation Programme1
| DLO element of end-to-end study
| 19 | 53
| 65 |
| DLO change programme
| 374 | 432
| 555 |
|
| 1 The DLO Change programme and end-to-end study were merged to become the Defence logistic Transformation Programme on 1 April 2004.
|
The overall savings from the MoD Efficiency Programme have
been used to balance the Departmental programme as a whole. As
such, the Department would not normally hypothecate the savings
from DLTP towards specific logistic investments, rather seeking
to improve military effect through investment and integration
across a range of capabilities.
However, every change programme requires a level of investment
and DLO elements of DLTP will have some £215 M invested over
the above period to enable change to occur. Furthermore, the MoD
has committed £61 M on investment in asset tracking and improving
the supply chain and is considering, in the current budgeting
round, the level of priority for further investment in these areas.
The Committee sought assurance that the "patching"
approach relating to asset tracking would deliver a proper system.
The Chief of Defence Logistics said he would provide The Committee
with a note on this (Q474).
Following Op Telic, work directed by VCDS concluded that
"the underlying flaw in the process . . . continues to be
the lack of asset and consignment tracking, and insufficient communications
and bearers dedicated to Logistics". To assure a coherent
approach in addressing the capability gaps identified in the Report,
Director General Logistics (Supply Chain) was appointed as the
Senior Responsible Owner for asset tracking capability development
and has brought all asset tracking projects into one programme
to establish coherence, pace and focus.
Director Supply Chain (integration) is the Programme Manager
responsible for delivering the projects within the Programme and
for providing a robust governance framework for all IS enabled
business change in the asset tracking area. The Programme strategy
follows the recommendations from the Tiger Team Report and directs
that projects should drive convergence of single service processes
and exploit best of breed current systems, using integrations
software where possible to accelerate changes to asset tracking
processes. Where there are still gaps, commercial off-the-shelf
applications will be procured. This approach ensures that we fully
exploit existing capabilities through progressive improvement
and growth while, at the same time, introducing new capability
to plug recognised gaps. This will reduce risk and provide the
early delivery of operational capability. This is a robust programme
with a clearly defined forward plan, based on coherent incremental
delivery of capability, and has been specifically designed to
avoid an ad hoc "patching" approach to Logistics
Applications.
A table in The MoD Efficiency Note published on 29 October
2004 sets out the savings expected from procurement reform in
the DLO—almost £300 million in the three years to 2007-08.
What is the total DLO procurement budget against which these savings
are being made? What reforms to the DLO's procurement arrangements
are being introduced to deliver these expected savings and over
what timescale?
The total DLO procurement budget, ie the total DLO spend
with Industry, forecast at the time, for the three years to 2007-08
was some £6,200 million each year.
The DLO's Procurement Reform programme has three elements:
(a) Category Management, which is the strategic engagement
of Industry through a market facing analysis of our total engagement
with our suppliers.
(b) Supplier Performance, the development of a consistent,
objective and analytical information on supplier delivery to inform
procurement decision making.
(c) Key Supplier Management linked to the development
of a close partnership with our strategic partners in Industry.
Procurement Reform is underpinned by the creation of teams
responsible for Category Management and Key Supplier Management
staffed by professional procurement personnel with specialist
knowledge of the requirements and suppliers for particular product
areas. They will be responsible for delivering lower-cost procurement
through development of best practice procurement strategies, better
supplier management and developing the skills of DLO teams. As
well as improved, consistent processes and better skilled staff,
increasing use of procurement tools such as e-auctions, e-catalogues
and e-tendering will also increase competitiveness and secure
better value for money.
The programme is being introduced progressively and will
not be fully implemented until 2009-10.
The Chief of Defence Procurement told the Committee on 12 May
2004, That only one of The seven principles of Smart Acquisition
had been implemented in full. In its Major Project Report 2004,
the National Audit Office referred to the inconsistent application
of the sensible acquisition principles enshrined in Smart Acquisition'.
How fully has The Smart Acquisition initiative and specifically
the seven principles of Smart Acquisition been implemented in
the DLO?
Smart Acquisition is every bit as applicable to DLO as it
is to DPA and there is a vigorous programme to increase commitment
to and enhance the Smart principles. There are fundamental differences
between DLO's business and that of DPA. In sustaining UK military
capability, the DLO is primarily concerned with equipment in its
later life cycle phases and delivering to the end user, principally
the Front Line Commands, as the customer. However, this does not
preclude informing and influencing earlier acquisition life cycle
phases from a through life perspective; this is a key DLO activity.
Furthermore, about half the volume of DLO's business is "Non-equipment"
acquisition of services, support and commodities. A Smart acquisition
maturity survey is undertaken annually to monitor progress. The
situation in respect of the seven principles is:
(a) a whole life approach typified by applying through
life costing techniques
(i) The DLO operates a costed whole life approach
to programme management in association with the DPA. Ensuring
that projects are effectively managed through life is a basic
tenet of Smart Acquisition and is achieved through dual DPA and
DLO joint accountability and assurance policies.
(ii) The cost of ownership includes the procurement,
operation, training, support and maintenance costs associated
with delivering and owning a project (and hence its aggregated
capability) through life.
(iii) The Department has an ongoing change programme
(completing in Dec 2005) that will implement the methodology needed
to ensure optimal cost informed whole life management of its projects
and the capability they aggregate to provide. The change programme
content has been informed by the May 03 NAO report into Departmental
whole life management effectiveness and the NAO continue to monitor
progress in change programme implementation.
(b) Integrated Project Teams (IPT) with clearly identified
customers
(i) In excess of 100 IPTs have been formed within
the DLO. Appendices to the 4* Customer Supplier Agreements define
the relationship that each IPT has with its customer.
(c) a better, more open relationship with industry
(i) The DLO is working in partnership with the DPA
in the implementation of the Department's Key Supplier Management
initiative, with senior officials acting as a single point of
contact for relationships with individual key defence suppliers.
This proactive engagement with industry will lead to an improved
understanding of the most important issues, and should help decision-making
and forward planning on both sides.
(d) more investment during early project phases
(i) In his recent directive, re-affirming commitment
to the tenets of Smart Acquisition, CDL emphasised the need for
scrutiny against Smart approvals criteria to ensure that options
and trade-offs are properly explored, and the project is feasible
at an acceptable risk.
(ii) In addition, the Project Review and Assurance
Process, applied throughout the life cycle increases confidence
in the delivery of successful project outcomes and manages risk
on a transparent basis.
(e) effective trade-offs between system performance through
life costs and time
(i) This is one of the key tests applied when scrutinising
the proposed investment in terms of value for money. The DLO approvals
team look for a robust Investment Appraisal and benefits realisation
plan.
(f) new procurement approaches, including incremental
acquisition
(i) Pathfinder projects, launched under the Defence
Logistics Transformation Programme, are leading on new procurement
approaches as a key enabler to realise the overall aims of the
programme.
(g) a streamlined process for project approvals
(i) As a result of CDL's directive on Smart Acquisition
and Smart Approvals (Aug 04), new scrutiny and approval processes
in the DLO are being introduced. These new processes should be
fully embedded by Jan 05 and they will lead to a more streamlined
overall process.
The current Chief of Defence Procurement commissioned a review
of the performance of The Defence Procurement Agency in implementing
The Smart Acquisition initiative. Has the Chief of Defence Logistics
commissioned such a review? If so, what were the findings of the
review? If not, are there plans to do so?
CDL commissioned the DLO Restructuring Study in 2003 to review
the business process of the DLO in line with the strategic goals
of the organisation. The Study recommended major structural changes
to the DLO, in order to provide a more effective and efficient
service to our customers—the Armed Forces. A Restructuring
Team and a number of Work Streams were established to develop,
test and then implement the detailed processes and new structures
required. The Detailed Design report for the new DLO has now been
published and Trade Union Consultation on the new design began
on 25 October 2004 and is expected to conclude in January 2005.
The key benefits of the new DLO organisation which is due to be
launched in April 2005, are:
(a) A single DLO working to a coherent agenda and in
common ways across the whole organisation;
(b) The new organisation will have a clear focus on the
customer. The Domain 2-stars will provide a single, senior point
of accountability for delivering the totality of outputs to our
customers based on comprehensive Customer Supplier Agreements.
Flexibility and responsiveness to customer requirements will be
the key success criteria for the new DLO.
(c) Common Enabling Services will support integrated
Project Ten (lPTs) in meeting their commitments to customers and
enable the effective management of the DLO business. They will
replace the Higher Level Budget and Top Level Budget headquarters
corporate service functions and provide pan-DLO services using
common processes.
(d) Joint woridng with the DPA will be pursued where
ever possible. There will be joint DPA/DLO Enabling Services where
appropriate; Technical Support will be established as a joint
service at the outset and others will follow. This will have a
coherent and consistent approach to managing projects to ensure
effective through life management of equipments.
(e) Strong governance will be based on clear authority,
responsibility and accountability maximum delegation with further
earned autonomy consistent with maintaining coherence. This will
be accompanied by an effective assurance system that Identifies
non-compliance; Increases confidence In the delivery of successful
project outcomes and manages risk on a consistent and transparent
basis.
January 2005
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