E2E Recommendation 40 Follow on Work
HARRIER ROLL FORWARD/BACKWARD INVESTMENT
APPRAISAL
References:
A. Streamlining End to End Air and Land
Logistics—Final Report dated 1 July 2003.
B. D/EA/2/15/6 dated 22 October 2003.
C. D/EA/2/15/6 dated 19 December 2003.
D. ES(Air)/Wyt/505315/2/55 dated 31 October
2003.
E. DARA Proposal for Harrier Roll Back of
2nd Line Maintenance—November 2003.
F. JSP 507 MOD Guide to Investment Appraisal.
INTRODUCTION
1. Reference A advocates the concentration
of support facilities at the logistic centre of gravity in line
with UK doctrine, with systems being driven from front to back
to achieve the required effect. In the air environment it recommends
that activity be concentrated principally at Main Operating Bases
and, specifically for Harrier, at RAF Cottesmore.
2. The Defence Aviation Repair Agency (DARA)
provides significant capacity for depth servicing of aircraft,
particularly at its Fixed-Wing Operating unit (FOU) at St Athan
in the Vale of Glamorgan. This facility is currently being rationalised
with the building of a new super hangar, as part of Project RED
DRAGON, which is due to be taken into use in December 2004.
3. RAF Cottesmore currently provides a 2nd
line maintenance facility that has recently seen the introduction
of a pulse line process. It is the intention of the Harrier IPT
to develop RAF Cottesmore as a logistical centre of gravity for
Harrier, subject to ministerial approval.
4. Recommendation 40 of the E2E study recommends
that MoD:
"Put in place a formal, transparent process
to evaluate the options to reconfigure support infrastructure
in Air. DARA should take an active part in this process both providing
alternate options for the provision of Depth support, and competing
to manage work on or adjacent to the MOB."
AIM
5. The aim of this report is to provide
an objective comparison of the incremental costs of:
(a) Rolling forward all Harrier on-aircraft
depth servicing to RAF Cottesmore.
(b) Rolling back all Harrier on-aircraft
depth servicing to DARA St Athan.
6. The report has been produced by MAS(A)
in accordance with the direction given by the E2E Investment Appraisal
Reference Group under the chairmanship of DGMO. MAS(A) has reported
to DGMO, who has overall responsibility for the work, via the
SEA who has directed the assumptions on DGMO's behalf.
METHODOLOGY
7. The methodology adopted was agreed at
the Reference Group meeting of 22 October 2003 and is detailed
at Reference B. The incremental approach was accepted as being
less comprehensive but more appropriate given the complexities
of analysing full cost and overhead absorption.
8. As a result any costs that may be regarded
as common to both the roll back and roll forward options have
been excluded. The net result is a comparison of incremental costs
only, which gives little indication of affordability or overall
cost.
OPTIONS
9. The Reference Group has determined the
two options considered in this IA and MAS(A)'s work has therefore
been restricted to these options alone. No account has been taken,
at this stage, of the impact of any separate decision on other
platforms on this IA.
10. It is likely that the costs included
when examining Harrier in isolation will be different to those
included for Harrier in an IA covering several additional platforms—such
as Tornado. This is particularly true in the areas of redundancy
costs and additional infrastructure requirements at St Athan.
SOURCE MATERIAL
11. A large amount of information has been
analysed, provided by several organisations, most notably DARA,
Harrier IPT and RAF Cottesmore. All information has been tested
for robustness where practicable. Where material has been provided
by several sources and is contradictory, we have applied our judgement
to arrive at a most likely value.
ASSUMPTIONS
12. The key assumptions are listed at Annex
A. Where possible a reliable source has been used to inform assumptions
and very few have been made with no external input.
EXCLUSIONS
13. A number of issues were identified as
possibly impacting on this IA which, when balanced against the
timeframe for its completion, have necessarily been excluded.
Several of these issues were discussed in detail at a workshop
held at RAF Wyton on 10 December 2003, where the following was
broadly agreed;
(a) Supply Chain Savings. It was not
possible to quantify these savings in the time available and therefore
to understand their magnitude. A less fragmented supply chain
is desirable in order to reduce buffer stocks but the major cost
driver in terms of spares is their failure rate. This would not
change under any scenario.
(b) Aircraft Availability. DARA are
capable of contracting to provide the level of aircraft availability
required by Harrier IPT. There is an additional cost in manpower
and time of preparing and delivering jets to St Athan on a regular
basis and these costs have been included. There is also a consequential
reduction in aircraft availability for this time which has not
been quantified in financial terms.
FINDINGS
14. The principal findings in the form of
an IA are attached at Annexes B and C and are expanded upon below.
The overall result, using our initial set of assumptions, is that
roll forward offers better value for money. However, the difference
in NPVs of £4.416 million may be considered relatively small
given the additional non-financial considerations.
15. It should also be noted that the IA
deals only with incremental costs, therefore the relative difference
between the two options is exaggerated by the figures shown. Had
the IA been carried out on a full cost basis the differential
would represent a much smaller percentage of the respective NPVs.
16. Several figures have been highlighted
as being key cost drivers and the assumptions associated with
them are shown below:
(a) CMR. A figure of 237 has been
used for CMR with a further 12 support staff, bringing the total
to 249. This figure includes off-aircraft personnel who are not
within the scope of the IA, however STC have asserted that the
splitting of the on and off aircraft work cannot be justified
as it would generate diseconomies.
(b) Task Hours (Manpower). There are
significant differences in the number of hours forecast to achieve
the same outputs, no doubt due in part to different processes
being employed at each location. After lengthy consideration it
has been decided to use a common set of hours and this decision
is explained more fully at Reference C.
(c) Build of New Quarters. The figures
used for the new quarters at St Athan are based on a traditional
capital build. It is accepted that there may be a more innovative
solution that may alter the cost profile but there is insufficient
robust data to support an alternative assumption at this stage.
SENSITIVITY ANALYSIS
17. In testing the sensitivity of the NPV
to the key variables shown above it has been necessary to identify
realistic alternative values. The results are as follows:
(a) CMR—On and Off Aircraft Split.
If the off-aircraft personnel are excluded from the CMR figure
the number of CMR required to move reduces to 189, 180 CMR plus
nine support staff. This is calculated by applying the same ratio
of on to off aircraft personnel to the depth environment as is
consistent across the entire fleet. This does not however change
the ranking of the two options but merely closes the gap by £1.502
million to £2.914 million.
(b) CMR—Harmony Ratio. It is
accepted that presently the harmony ratio for CMR is five providing
20 months home service followed by four months deployment. If
this were assumed to be four it would have a significant impact
on this IA changing the decision in favour of roll back, as it
would reduce the CMR requirement to 109, generating NPVs (costs)
of £4.493 million and £6.336 million for roll back and
roll forward respectively.
(c) Task Hours. An alternative assumption
on the number of task hours, based on the highest adjusted forecasts
for both 2nd and 3rd Line, produces a total number of task hours
of 2.3 million. Under this scenario the result is not altered
but the cost of roll forward increases by £0.843 million
to give an NPV of £4.295 million compared to the £7.868
million for roll back. Several other scenarios were modelled,
including the highest unadjusted forecast for task hours, and
the decision was not affected, although all scenarios assumed
that each organisation would take the same number of hours.
(d) Build of New Quarters. See below.
RISK AND
OPTIMISM BIAS
18. Harrier IPT and DARA have detailed their
risk management proposals at References D and E respectively.
No risk premium has been added to either NPV.
19. Optimism bias has been applied to the
major capital works in accordance with Reference F. Both the new
quarters and the paint/strip facility have been considered standard
buildings and an optimism bias of 24% applied to the original
figures.
SUMMARY
20. This report deals specifically with
the options for the concentration of depth support for Harrier,
following on from Recommendation 40 of E2E (paras 1-4). It aims
to provide an objective comparison of the incremental costs of
rolling forward all Harrier on-aircraft depth support to RAF Cottesmore,
or rolling the same work back to DARA St Athan (para 5). It has
been produced by MAS(A) under the direction of DGMO and the SEA
(para 6).
21. The methodology adopted considers only
incremental costs (para 7), the result therefore gives little
guidance on affordability (para 8). Only 2 options have been considered
and the costs included may well be different if used in an IA
covering other platforms as well as Harrier (paras 9-10).
22. The best available source material has
been used and all assumptions are listed (paras 11-12). Certain
potential costs have been identified but excluded due to the constraints
of time and the difficulty in quantifying them (para13). The roll
forward of the Harrier work presents the best value for money
using the base assumptions (para 14). The relatively small figures
are a result of using incremental costs only (para 15). Key cost
drivers have been identified and the respective assumptions expanded
upon (para 16).
23. Sensitivity analysis suggests that the
decision is only altered by a reduction in the CMR harmony ratio
from five to four (para 17). No risk premium has been applied
to either scenario but optimism bias has been applied to capital
works (paras 18-19).
Annexes:
A. Key Assumptions
B. Investment Appraisal—Roll Forward
Harrier Option.
C. Investment Appraisal—Roll Back
Harrier Option.
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