House of Commons - Defence

Select Committee on Defence Tenth Report

2 The first year of DE&S operation

4. The Defence Industrial Strategy[4] (DIS), published in December 2005 acknowledged that changes were required to improve the MoD's acquisition performance. During our inquiry into the MoD Annual Report and Accounts 2004-05, MoD's Permanent Secretary, Bill Jeffrey[5], told the Committee that "there is a project which I instituted myself shortly after I arrived in which we will be looking hard at the way in which the procurement function operates, how it is structured, how the processes work, and looking at ways in which we can generally make it work better".[6]

5. The report of the review commissioned by the Permanent Secretary was published in June 2006—"Enabling Acquisition Change: An examination of the Ministry of Defence's ability to undertake Through Life Capability Management"—usually referred to as the Enabling Acquisition Change (EAC) report. The review examined "how the MoD's current structures, organisation, processes, cultures and behaviours support, encourage, hinder or obstruct its ability to deliver Through Life Capability Management (TLCM)".[7] The report defined TLCM as:

An approach to the acquisition and in-service management of military capability in which every aspect of new and existing military capability is planned and managed coherently across all Defence Lines of Development[8] from cradle to grave.[9]

6. The EAC report made several important recommendations, one of which was that the Defence Procurement Agency (DPA) and the Defence Logistics Organisation (DLO) should be merged to create Defence Equipment and Support (DE&S), an integrated equipment and support organisation.

Defence Committee's examination of the progress of the merger

7. We examined the progress of the merger of the DPA and DLO—to form DE&S—in our Defence Procurement 2006 inquiry. The Chief of Defence Procurement, head of the DPA, told us that the merger was being managed as a project with four phases:

Phase 1 was to define what the organisation would look like and set out in broad principles how it would operate. It was completed at the end of September 2006 on time.

Phase 2 had begun and included defining in outline what "two star board members" would be expected to deliver and the changes needed in their areas to deliver the targets set. The completion date for this Phase was the end of December 2006.

Phase 3 was to commence after Phase 2 had been completed. Phase 3 was the next level of detailed work of engaging with the workforce in a much more detailed way to explain what it meant for them. The completion date for this Phase was 1 April 2007. The new organisation was to vest on 2 April 2007.

Phase 4 was the first year of operation of the new organisation. During this first year "there will then be the first of the post-project evaluations to take a look to see to what extent the organisation is going to be delivering what is needed and then to be prepared to make any further adjustments at the end of the first year".[10]

8. In our Defence Procurement 2006[11] report, published in December 2006, we examined a range of issues relating to the merger including: how the merger was being managed; measuring the performance of the new organisation; training of staff; staff reductions and collocation; efficiency savings; and status and scrutiny of the new organisation. The Government Response[12] to our report was published in February 2006.

9. We also examined the progress of the merger in our The Defence Industrial Strategy: update[13] report, published in February 2007. We focused in particular on the issue of the training of staff in the new organisation. The Government Response[14] to this report was published in April 2007.

Progress made since the merger

OVERALL ASSESSMENT OF PROGRESS

10. In its memorandum to this inquiry the MoD provided an overview of the progress made since we last reported on the merger. The DPA and DLO merged on 2 April 2007, concluding Phase 3 of the project. The memorandum states that DE&S continues to deliver its core outputs, with support to current and future operations remaining its highest priority. The memorandum states that:

Post-launch, DE&S has remained on the 'front foot', driving its key business priorities hard…. Establishing DE&S as a 'fit for purpose' organisation at its launch was a major milestone, but we are now focusing on optimisation (Phase 4) to ensure it is properly sized and shaped.[15]

11. In its memorandum to this inquiry, the Society of British Aerospace Companies (SBAC) provided an overview of the progress of the merger:

Merging the DPA and DLO was intended to eliminate barriers between provision of equipment and in-service support, while creating greater consistency in the interface with industry. While it is too early to assess whether these objectives have been realised, the task of bringing the two sizeable organisations together was effectively handled by MoD. Although industry was apprehensive about the magnitude of internal reorganisation required, the merger did not appear to distract MoD officials from ongoing business.[16]

12. The Chief of Defence Materiel (CDM) considered that progress since the merger had been "remarkably good". He said "bits of the structure are coming together quicker than others", as the elements already at Abbey Wood, Bristol, could come together more quickly than those elements coming from Andover. The through life capability planning process was coming together and was beginning to be adopted throughout the department. There had been good progress in terms of upskilling staffing and pulling together the working practices of the two organisations. CDM noted that the DPA and the DLO were two different organisations which were "steadily coming together".[17]

13. We asked where progress had not been as good as CDM would have liked. He said that he thought the new organisation should have been further ahead with through life management planning. The other area was the upskilling of staff where, because they had been extremely busy, it had not been possible to release staff for training and upskilling to the extent that he would have wished.[18] CDM told us that, because DE&S staff were supporting two major operations, this had "brought us together quicker than it might otherwise have done".[19]

14. The merger of the Defence Procurement Agency and the Defence Logistics Organisation was a major undertaking made more challenging by the need to support two major operations. We commend the Chief of Defence Materiel and his staff for ensuring that the merger was achieved to the timetable set and for the progress achieved in the first year of operation of the Defence Equipment and Support organisation.

DEFENCE ACQUISITION CHANGE PROGRAMME

15. The Defence Acquisition Change Programme (DACP) is a single coherent acquisition reform programme. Established in the summer of 2006, it has been initiated to deliver structural, organisation, process, culture and behavioural change to facilitate good Through Life Capability Management, identified in the DIS and the recommendations from the EAC report. The Defence Acquisition Change Programme has ten workstreams which are set out in Table1.

Table 1: The ten workstreams underpinning the Defence Acquisition Change Programme

1. Acquisition Operating Framework (AOF)—development of structured guidance and instruction of the "what" and the "why" of acquisition doctrine.
2. Approvals & Scrutiny—more focused scrutiny of major projects and understanding the true costs of buying and supporting equipment.
3. Governance—strengthening governance within acquisition.
4. An Integrated Procurement and Support Organisation—merging the DPA and DLO to form a single organisation (Defence Equipment and Support—DE&S) with a mission "to equip and support our Armed Forces for operations now and in the future".
5. People, Skills and Behaviour—finding new and better ways of developing the right people, equipped with the right skills, to key posts at the right time.
6. Planning Process—alignment of the different planning horizons of the Equipment Plan and Short Term Plan by introducing a 10 year view of defence costs. Enabling the Sponsor (Equipment Capability Customer) and Front Line Commands TLBs (User) to programme support costs.
7. Relations with Industry—improving our commercial skills and developing the way we work together with industry.
8. Research & Development—bringing the full benefit of science, innovation and technology to bear as a integral part of Acquisition.
9. Targets and Performance Management—the creation of a set of metrics by which we can judge performance of through life acquisition.
10. Through Life Capability Management—how we generate the Equipment and Support investment plan based on decisions that consider all Lines of Development, Defence Strategic Guidance and the capacity and capability of Industry. Unity of purpose in acquisition.[20]

Source: MoD

16. We asked what progress had been made in implementing the DACP. CDM considered that it was "moving along quite well". He emphasised that the merger of the DPA and the DLO was "a big part" of the DACP, but that the other strands were also important and if not implemented would limit the effectiveness of DE&S. CDM considered that one of the most important strands was:

the budgetary planning process and the whole business of having a 10-year budget with equipment and support for that equipment not yet in service held by the equipment capability community and, as for equipment that is in service, for the first four years to be held by the front line command.

CDM said that this change had put the money where the priorities and decisions needed to be made. CDM did not own the support budget any more "except that I am given money in year and told by the front line commands where their priorities are".[21]

17. We asked if there were any issues delaying the DACP. CDM said that one of the strands was to produce an affordable and balanced budget "and that will be a challenge".[22]

18. One of the workstreams covers Targets and Performance Management, and "the creation of a set of metrics by which we can judge performance of through life acquisition". CDM said that the metrics needed to be in place in April 2008. However, the setting of the metrics was a challenge as the aim of the new metrics was to measure through life capability. The metrics were being trialled to see if it was possible to "develop something that is meaningful in the way of a through life capability measure".[23] We return to the issue of measuring and reporting performance later in our report (paragraphs 99-106).

19. One of the benefits expected to be delivered from the DACP is "capability delivered more quickly".[24] CDM said that Lord Drayson, the former Minister for Defence Equipment and Support, had set a challenge for the MoD to reduce the acquisition time, particularly the Demonstration and Manufacture phase, by 50%. CDM had resisted a cut in the earlier Assessment phase because for very complex highly technical projects "you need a longer Assessment phase….to de-risk before you move to Demonstration and Manufacture". He said that they were looking at ways to reduce the Demonstration and Manufacture phase by 50% and part of that was much quicker decision making within the MoD.[25] We sought an example of a project where the MoD was seeking to reduce the acquisition time. David Gould, DE&S Chief Operating Officer, said that on the FRES programme:

rather than seek to develop an entirely new vehicle from scratch we are taking existing designs and finding out how much further development needs to be done, so the amount of work that needs to be done at the D&M phase is the minimum necessary to get to the initial upgrading capability, not the complete redevelopment of an entirely new design. That is one way of cutting into the time taken up.[26]

We examine the progress on the FRES programme later in our report (paragraphs 137-147).

20. We note that the MoD considers that reasonable progress has been made in implementing the Defence Acquisition Change Programme. A key benefit expected to be delivered from this programme is to deliver defence capability more quickly. The former Minister for Defence Equipment and Support set a challenge of reducing the acquisition time for defence equipment by 50%. In its response to our report, we expect the MoD to set out what specific action it is taking to meet this challenge, how it is measuring its performance in reducing acquisition time, and when its expects to be acquiring equipment in a timescale which meets the challenge. Similarly, we expect the MoD to provide us with details of the progress it has made in producing an affordable and balanced budget and in creating a set of metrics by which through life acquisition performance can be judged.

THROUGH LIFE CAPABILITY MANAGEMENT

21. The National Audit Office (NAO) report Ministry of Defence: Through-Life Management states that:

Historically, the functions of requirement definition, procurement management and through-life support have been organisationally separated…. which makes it difficult to get the right balance between risk, cost, performance and through-life support. [MoD's Strategic Defence Review 1998]

The Strategic Defence Review launched what have become known as the Smart Acquisition reforms, aimed at faster, cheaper and better acquisition and support of equipment. At the heart of Smart Acquisition is a change to integrated management of the delivery of all aspects of capability, from identification of the need for the capability to its disposal. This approach is known as Through-Life Management.[27]

22. In its memorandum to this inquiry the MoD provides the following information on Through Life Capability Management:

We have introduced Through Life Capability Management, which considers a much wider range of options for meeting new capability needs, examining both new and in-service equipment solutions, exploring opportunities and implications across all Defence Lines of Development, while considering capability delivery on a much longer term programme basis. Success in finding the best capability solution demands a greater unity of purpose and collective responsibility from all involved, often beyond their specific areas of financial or programme responsibility. This activity is led by the Sponsor (the Equipment Capability Customer) through an improved capability planning process. A new Capability Management Group and Capability Planning Group regime is in operation, using consistent processes and structures. Each group brings together key MoD stakeholders. Through Life Capability Management was established in April 2007 and has been embedded throughout the year.[28]

23. The DE&S Business Strategy, April 2007, states that:

The DE&S priority within SO3 [Strategic Objective 3] will be Through Life Management. Through Life Management Plans [TLMPs] at programme and project level will lie at the heart of managing our business, implementing the vision of the Defence Industrial Strategy [DIS] and transforming our relationship with industry…. During 2007/08 we will develop improved through life costings using simple models, to support through life decisions.[29]

TLMPs will specifically define the acquisition strategy for the initial purchase, contractual support arrangements, and the mechanisms for delivering technology insertion as and when required.[30]

24. We asked CDM what benefits were expected from Through Life Capability Management. He explained that TLCM brought together all the lines of development: doctrine, manpower and training, not just equipment and equipment support. In the past the MoD had:

bought things, supported them when they have come into service, thought about the manpower needed, the doctrine, and the infrastructure to house whatever it is in a not very coherent way…. by and large it had not been done very coherently. Through life capability planning and management will bring all that together in a plan owned by DCDS(EC)[31] and directors of equipment capability and managed by the IPT [Integrated Project Team].[32]

25. Mr Gould said that "if we also look at training, doctrine use and so forth we shall also make sure that we get the benefit out of the equipment in military terms more quickly".[33] CDM considered that TLCM should not lead to the MoD wasting money "by buying something that is too big for the garages or we do not have soldiers trained for it". He emphasised that it was a "matter of coherence".[34] A lack of coherence on the Apache attack helicopter acquisition resulted in the helicopters being stored in hangars as there were no trained pilots. We asked if this scenario could happen again. Lieutenant General Applegate, Chief of Materiel (Land), considered that the chances of it happening again were greatly reduced. CDM said that it "should not happen by default".[35]

26. Mr Gould considered that another key benefit of Through Life Capability Management and Through Life Management Plans was the ability to invest upfront in equipment that will be cheaper and easier to maintain and "subsequently to modify and improve throughout its life". He said that if there was not a through life approach "you do not have a mechanism for doing that trade which says you should invest early for long-term benefits".[36] Lieutenant General Applegate added that from a user's perspective, "we cannot have confidence that we will be able to grow [the equipment] incrementally if there is no plan in place".[37]

27. We note that Through Life Capability Management should lead to the MoD getting the benefit from defence equipment more quickly by focusing attention on issues such as doctrine and training rather than just equipment and equipment support. We welcome the MoD's assurance that this approach should greatly reduce the chances of the sort of problems seen on the Apache helicopter programme.

28. The DPA and the DLO had tried to implement through life management planning of equipment and its support through life. However, with an Integrated Project Team (IPT) dealing with equipment acquisition in Abbey Wood, Bristol, and a support IPT in another part of the country, this had been a challenge. CDM told us that the merger and "sorting out the budgets" was enabling through life management planning to become embedded.[38] He considered that all programmes needed a Through Life Management Plan, but the level of detail in the plan would vary. A complex programme, such as the Future Carrier, would need a more detailed plan than a small project.[39]

29. We asked what industry's role was in running through life management programmes. CDM did not see industry running the MoD's through life management programmes, as he saw them being done jointly. He told us that once a preferred bidder had been selected for a programme the project teams of the DE&S and the preferred bidder should be co-located and, once the contract was signed, the teams should be merged. The Through Life Management Plan would then be held jointly.[40]

30. We note that the MoD considers that the merger of the Defence Procurement Agency and the Defence Logistics Organisation should improve through life management planning and ensure that it becomes embedded in the new organisation. We agree. In its response to our report, we expect the MoD to set out what proportion of its equipment programmes currently have through life management plans of an acceptable standard and when it expects such plans to be in place for all its programmes.

DE&S STAFF SKILLS

31. In our report The Defence Industrial Strategy: update we concluded that:

Improving the skills of MoD staff, particularly commercial and technical skills, will be crucial to ensuring that the expected benefits from the DIS are delivered. The MoD is seeking to address skills gaps through training or external recruitment. The appointment of the first MoD Commercial Director is welcome, but he must be given the resources needed to develop the commercial skills of MoD staff.[41]

The Government Response to that report states that "a comprehensive programme to enhance commercial skills through training and promote increased professionalism is being implemented. Resources to deliver this are being identified".[42]

32. Strategic Objective 2 in the DE&S Business Strategy, April 2007, covers staff skills:

Develop and sustain a highly professional workforce characterised by strong leadership and a commitment to performance management and personal development in support of business needs".[43]

The Business Strategy provides further details on Strategic Objective 2:

Within SO2 [Strategic Objective 2] we will prioritise development of People, Leadership and Performance Management. DE&S will undergo major change through collocation and will deliver the manpower reduction previously planned for the DPA and DLO. We will manage skills and experience in order to provide improved output with a smaller organisation. We place high priority on achieving a better trained and qualified workforce, with the highest standards of professionalism and diversity, through outstanding performance-centred leadership and focused workforce planning.[44]

We will pursue a programme with specific targets to close gaps in five key skill families—finance, commercial, project management, logistics and engineering.[45]

33. In its memorandum to this inquiry the MoD provided details of the activities to "upskill" DE&S staff. DE&S staff have a target of completing a minimum of six training days in financial year 2007-08. A further target of four training days has been set for staff in the key acquisition disciplines of: Commercial; Finance; Programme and Project Management; Engineering; and Logistics. The memorandum states that while the majority of training will be completed by making better use of existing training opportunities, a dedicated upskilling project budget has been established:

to fund additional specific strategic interventions in the 5 key skill areas. In-year, £6.6 million has been allocated for this requirement. This funding complements the additional investment of some £5.5 million that is being made through the DACP upskilling programme on the development of new training and education for staff across the acquisition community. This gives a total investment of just over £12 million in acquisition skills development.[46]

While the £12 million investment in acquisition skills development is to be welcomed, it is less than £500 for each member of DE&S staff.

34. During our inquiry into the Ministry of Defence Annual Report and Accounts 2006-07, the MoD Permanent Secretary, Bill Jeffrey, told us that DE&S was becoming more capable and that he was optimistic that the MoD would carry on improving in this area. However, he acknowledged that "it turns a great deal on the issue… of skills. We have some very highly skilled staff involved in this but we need to make sure that they are all at that level. It is certainly something we are giving attention to".[47]

35. We asked CDM if the skills audit had been completed and whether any gaps had been identified. He said that the skills audit had not been completed, although they were a long way towards completing it. The audit of financial and commercial skills had been completed and the number of posts needed to be filled with "professional people" and the level those staff need to be at was known and DE&S was "upskilling those people". The target of 50% of DE&S finance staff being qualified accountants would be achieved by the end of 2007-08.[48]

36. For Project Management posts, DE&S would not achieve 50% of posts filled by staff with Project Management licences. As at December 2007, 246 Project Management licences had been issued against a target of 325 by 31 March 2008.[49] CDM thought that by the end of 2007-08, DE&S should have about "320 qualified people". He said that before DE&S was formed the MoD was not training people specifically in project management. Prior to the merger the DPA and DLO boards agreed that a project management programme should be put in place.[50] Mr Gould acknowledged that training and upskilling of staff involved in project management were important. However, he said that:

You can teach people the techniques of project management; you can send them off on courses…. but the fully-fledged manager comes only with a lot of domain experience and scars.[51]

37. The area where less progress had been made was inventory management and logistics where CDM said "we have barely started". Courses had been set up at the Defence Academy in Shrivenham and the first courses had been run. He acknowledged that "people are enthusiastic about them, but we shall not have the skills up to the level needed".[52] CDM assured us that he had ring-fenced the money for these courses.[53]

38. Engineering skills remained an issue, as engineers were in short supply and it took a long time to train a chartered engineer, but DE&S was seeking to make progress in this area. In addition to the five key skill areas DE&S was also seeking to increase skills in three other areas: Integrated Logistics Support; Human Resources and Sustainable Development. DE&S was to start upskilling staff who worked in these areas.[54]

39. CDM told us that while they had made "huge inroads into upskilling" it had not been possible to release staff for training and upskilling to the extent he had wished because they had been very busy.[55] He said that he had ring-fenced funding for upskilling.[56]

40. Many of the skills which DE&S require are very marketable. We asked if DE&S had a reward structure that was flexible enough to retain staff with the right skills and professional qualifications. CDM told us that it did not. The Personnel Director in DE&S was examining this issue, but it was not something that CDM could address within DE&S as it was "either department-wide or perhaps civil service-wide".[57]

41. DE&S expects to spend £110 million on consultancy support in 2007-08 to fill posts where it does not currently have the required skills in house.[58]

42. It is crucial that DE&S has a highly skilled workforce, particularly in areas such as engineering, project management, logistics, finance and commerce. DE&S appears to have made some progress in upskilling staff in a number of these areas. However, its skills audit needs to be completed as soon as possible. We note that training and upskilling had not progressed as quickly as hoped because staff had been too busy to be released. We believe that it is probably the intention within DE&S that, once the current tempo of operations and the need to support them reduces, staff should be given adequate time to undertake the required training and upskilling. We are not satisfied that so important a programme can wait for such an eventuality. We consider that it is inexplicable for the MoD both to be reducing the numbers of staff and to be telling those that remain that there is no time to train them. Every week that passes without staff adequately skilled and equipped to do their vital jobs has the potential of damaging the work that they do and the projects they are running. We call on the MoD in its response to this report to set out what urgent actions it will put in train to overcome the constraints on training and upskilling caused by the high operational tempo. While we note that the Chief of Defence Materiel has ringfenced funding for training and upskilling, this is of little value if staff have insufficient time to take advantage of it.

43. The upskilling and training of DE&S staff in specialist skills, such as project management, will be crucial to the future effectiveness of DE&S. However, it will be some time before these staff will have the broad experience that can only be gained from using their training on a range of programmes. DE&S needs to identify the key posts where good experience in the various specialist skills is required now, and develop a strategy for drawing in such experienced staff from outside DE&S.

44. We were unable to visit DE&S at Abbey Wood, Bristol. We remain concerned about the skills mix made available to DE&S. We will want to explore further the whole question of skills generation and development in DE&S in a future report.

45. It is vitally important that DE&S can recruit and retain staff with the skills that match those in industry. To do so, DE&S has to have a reward structure that makes it an attractive employer to professionals in areas such as project management and systems engineering. In its response to our report, we expect the MoD to set out the progress it is making to introduce a more flexible reward structure and the barriers that are hindering its efforts to do so.

SUPPORTING OPERATIONS AND RECUPERATION

46. The DE&S Business Strategy, April 2007, states that:

Support to current and future operations will remain our highest priority. This includes all aspects of support, from delivery of logistics and Urgent Operational Requirements to current operations through to the management of investment projects supporting future activity.[59]

47. Up until December 2007, 796 Urgent Operational Requirements (UORs) had been approved to a value of £2.4 billion. A total of 219 UORs were approved in 2006-07 (124 for Afghanistan and 95 for Iraq) at a value of £793 million.[60] We have examined the MoD's performance in delivering UORs in several of our inquiries. In our Defence Procurement 2006 we concluded that:

The Defence Procurement Agency is to be congratulated for its performance, to date, in procuring Urgent Operational Requirements for UK Forces deployed on operations. We consider that there are some important lessons which can be learned from the procurement of Urgent Operational Requirements and applied to mainstream equipment procurement, and we expect the MoD to ensure that this is done.[61]

48. Supporting current operations was CDM's main concern because it "is our primary aim and that is where things will go wrong and, if they are to go wrong, they will have the greatest impact".[62] We asked what the feedback had been from the military customer. CDM said that commanders in theatre were very supportive. The feedback from one senior Army officer was that he had never been in a theatre of operations where he had seen so much new and outstanding kit coming through.[63]

49. The UOR process has generally been a success story. However, there have been many reports in the media claiming that our Armed Forces on operations had not always received what they had requested. Lieutenant General Applegate explained the process of articulating the requirement identified in theatre and getting this approved for UOR funding. Once this was done, the MoD had to go into the market to see what was available. He emphasised that the lead time for some of these requirements was significant.[64] He said that:

there is a time lag…. even for things like heavy machine guns and general purpose machine guns which one might think would be common. For a heavy machine gun there is a six-month lag; for a general purpose machine gun there is a 12-month lag in the market place because it is not there.[65]

The MoD had received a lot of support from the US to bring the Mastiff vehicle in on an accelerated timescale.[66]

50. The UOR process has delivered substantial amounts of vital equipment to our Armed Forces operating in Afghanistan and Iraq. We commend DE&S for the speed at which it is getting urgently needed equipment into theatre, the procurement of Mastiff vehicles being a good example of this.

51. We asked about the funding for supporting equipment procured as UORs. Lieutenant General Applegate said that:

At the moment the funding we have is enough to keep them for the period of a UOR; in other words, the UORs last for a year and you must make a decision then as to whether to bring them into the core programme, that is, find new money or get rid of them.[67]

He told us that some of the UORs had been brought into the core programme and that "some of the decisions this year are about what else we should bring into the core programme".[68] Mr Gould added that if UORs were brought back into the core programme, it came out of the Equipment Programme and was "separate from and additional to the £2.4 billion".[69]

52. Following our evidence session the MoD provided us with updated information on UORs. As at January 2008, the total cost of UORs approved for Afghanistan and Iraq was over £3 billion. The MoD explained that equipment procured through the UOR procedure was brought into the core defence programme, usually at the end of an operation, if it was "judged that there is an enduring requirement for the capability and that it is cost-effective to retain it". To date, the MoD had brought into the core equipment programme 44 UORs which originally cost some £230 million. The MoD told us that:

Bringing a UOR into core does not cost anything or require money to be taken from other equipment programmes—the only impact on MoD budgets is the future support and disposal costs for the capabilities. To date, UOR approvals have had no impact on the forward programme of equipment.

The MoD said that there has been no reluctance to approve UORs and the Treasury continued to pay for 100% of "up front UOR costs".[70]

53. We examined support for operations in our UK land operations in Iraq 2007 report. One of the concerns raised in our report was:

that equipment returning from operational theatres—whether it was procured through the routine acquisition process or as UORs—will require substantial expenditure to repair, refurbish, support and store, and it appears that no provision has been made for this in the MoD's budget.[71]

54. The Government Response to this report states that:

In order to maintain equipment capability and avoid degeneration, we may repair and overhaul military vehicles used on operations more often than would routinely have been planned for in through-life costing assumptions. But the precise impact of activity on current operations and the subsequent costs of recuperation to a balanced force are complex issues, which depend on a range of factors. We have therefore initiated a substantial study to provide a detailed assessment of these issues, including the costs relating to operational usage, which will help to inform future equipment and financial planning.[72]

55. We asked whether the recuperation of equipment would be funded as a cost of operation or whether it came out of the core budget. Lieutenant General Applegate said that:

Some of that funding does come out of contingency funding in order to maintain it. I am less sanguine about the cost of recuperation…. in other words, at a time when we do not need that equipment on the operation, or the operation is closing down, or we are trying to reconstitute a reserve, is there sufficient money to prepare for a contingency task in five years' time? That is an issue which the department is looking at in this [Planning] round.[73]

56. We note that the MoD has initiated a study to assess the impact of current operations on equipment, such as vehicles, and the subsequent costs of recuperation. We see the costs of recuperation as a cost of operation to be funded from the Reserve and not from the defence budget which is already under substantial pressure. In its response to our report, we expect the MoD to set out the terms of reference for this study and, once the study is completed, to provide us with a copy of it.

Performance against Key Targets

57. We examined defence procurement issues in our report Ministry of Defence Annual Report and Accounts 2006-07 and we noted that:

the latest Annual Report and Accounts state that for the second year running the MoD "met or exceeded its Public Service Agreement targets for equipment procurement, despite them being more demanding than those for 2005-06", and that the Defence Procurement Agency met all its Key Targets in 2006-07 for the second consecutive year. The Defence Procurement Agency and the Defence Logistics Organisation merged on 1 April 2007 to form Defence Equipment and Support. We hope that the new organisation will maintain this momentum.[74]

58. In the report we examined the MoD's assessment of its expected performance in 2007-08 against PSA Target 6—"to deliver the Equipment Programme to cost and time". The MoD's Autumn Performance Report 2007 assessed PSA Target 6 as "likely to be partly met".[75] In 2007-08, the Nimrod MRA4 aircraft programme was experiencing forecast cost increases and the Type 45 destroyer and A400M transport aircraft programmes had experienced further in-service date slippage.[76]

59. At the evidence session for our Defence Equipment 2008 inquiry, we asked if DE&S would meet the former DPA Key Targets for 2007-08. CDM told us that:

We will meet the cost and performance targets but I do think we will meet the time target.[77]

60. The major project showing cost growth in 2007-08 was Nimrod MRA4.[78] We examine the progress of this programme later in our report (paragraphs 124-130). Another major project where the MoD had some concern about cost growth was the BVRAAM[79] air-to-air missile. Mr Gould explained that:

The risks there are not so much technical—because the missile programme itself is going quite well—as production costs. We are signed up for production but the other nations[80] are not. At the moment they do or do not sign up for production that will have a major effect on the production costs of the missile.

There was also some concern regarding the integration cost of Typhoon and "whether or not the Italians come into that programme will have an effect on that budget".[81]

61. On slippage, CDM confirmed that the position in 2007-08 would be worse than the position in 2006-07. He said there were three reasons for slippage:

"the programme is not going as fast as we thought it would, and that might be for technical reasons or whatever;
the second big factor is that it is an international project over which we really have no control. A very good example is A400M and Typhoon. We do not have control over the time of delivery;
the third matter is those areas where we have chosen for one reason or another not to bring something in when we thought we would. Meteor-BVRAAM is a very good example of that. For operational reasons we do not need to bring that in when we originally said we did."[82]

62. Following our evidence session the MoD provided us with details of the major equipment projects experiencing in-service date slippage in 2007-08. As at the end of January 2008, of the 20 largest equipment projects which featured in the Major Projects Report 2007, seven of the 20 projects had reached their in-service date. The Joint Strike Fighter[83] does not have an approved in-service date.[84] Of the remaining 12 projects, seven were reporting in-year in-service date slippage. Details of the in-service date slippage experienced by these seven projects in 2007-08 are set out in Table 2.

Table 2: In-service date slippage experienced by major equipment projects in 2007-08

Project In-Service Date slippage reported in MPR 2007[85]

Months
In-Service Date slippage experienced in 2007-08

Months

A400M
Transport aircraft
+15 +9

Nimrod MRA4
Maritime patrol aircraft
+89 +3

Soothsayer
Integrated Land Electronic Warfare system
+8 +4

Watchkeeper
Unmanned Air Vehicle
-8 +7

Terrier
Armoured earthmoving vehicle
+9 +27

Next Generation Light Anti-Armour Weapon
Man-portable short-range anti-armour weapon
+12 +15

Precision Guided Bomb -3 +12

Source: MoD[86]

63. The seven major projects in Table 2 experienced a total of 77 months in-service date slippage in 2007-08—some 6.5 years. Total forecast in-service date slippage on the Nimrod MRA4 programme now exceeds 90 months (7.5 years) and the total forecast in-service date slippage for A400M is now two years. The in-service date slippage is not just limited to the older so-called "toxic legacy" projects, but is also being experienced by newer projects. The Terrier armoured earthmoving vehicle experienced forecast in-service date slippage in 2007-08 of over two years and is now forecast to be three years later than the Approved in-service date.

64. We are disappointed to learn that DE&S is unlikely to meet its Key Target relating to programme slippage in 2007-08. Seven of the largest equipment programmes which featured in the Major Projects Report 2007 have experienced in-service date slippage in 2007-08 totalling some 6.5 years. Once again, the MoD has failed to control slippage on key equipment programmes. In its response to our report, we look to the MoD to provide an explanation of the in-service date slippage on each of the major projects in terms of the three reasons for such slippage set out by the Chief of Defence Materiel in evidence to us; and we expect the MoD to set out the specific actions being taken to limit further programme slippage.

65. We are concerned to hear that the MoD has little control over time slippage on international equipment programmes, given that many of the MoD's equipment programmes including Typhoon and the Joint Strike Fighter are international programmes. We call on the MoD to set out in its response to this report what conclusions it draws from this problem about the nature of international programmes, what steps it has taken in the past to limit these disadvantages and the extent to which these steps have been successful.

66. The NAO Major Projects Report 2007 was published on 30 November 2007 and examined "cost, time and performance data for military equipment projects in the year ended 31 March 2007". The NAO's overall conclusion relating to in-year cost increases on the 20 largest defence equipment projects was that:

The Department…. was again pro-active in limiting potential in-year cost increases, with 13 projects showing a fall in their forecast costs, and one reporting no change…. As in the Major Projects Report 2006 the Department has reduced the forecast costs of its projects by reducing quantities of equipments and re-assessing requirements (£81 million; £226 million over two years) and by re-allocating expenditure to other projects or budget lines (£609 million, making a total of over £1 billion over two years). The Department's rationale for continuing to re-allocate budgets and expenditure is to better measure the performance of individual teams in controlling their project costs and to distinguish the costs of maintaining defence-critical industrial capability in accordance with the Defence Industrial Strategy, which are more appropriately overseen at a corporate level. This year, the largest component (£305 million) relates to maintaining industrial capacity and capability in line with the Maritime Industrial Strategy. We would not expect this level of re-allocation in existing projects in future reports.[87]

67. In our Defence Equipment 2006 report we highlighted similar concerns and concluded that:

While cost growth on defence equipment projects in 2005-06 was below the target, we have concerns that the main reason for this was reduction in the quantity of equipment ordered. Trade-offs between cost, time and performance are part of the Smart Acquisition process, but we expect our Armed Forces to receive equipment in the numbers required and with the capability to do the task required of it. Meeting Key Targets should not be given priority over meeting the requirements of our Armed Forces.[88]

68. We note that in 2006-07 the MoD reduced the forecast costs of major equipment programmes by reducing quantities of equipments, reassessing requirements and by re-allocating expenditure to other equipment programmes or budget lines. In its Major Projects Report 2007 the NAO expressed concerns about this approach and did not expect to see "this level of re-allocation in existing projects in future reports". We share the NAO's concern. In reporting its performance against the Key Target relating to cost growth in 2007-08, we do not expect to see the MoD shifting expenditure between different budget lines to give the impression of good cost control on equipment programmes. We plan to follow this up to check that the MoD has not done so.

4 Ministry of Defence, Defence Industrial Strategy, Cm 6697 Back

5 In the 2008 New Years Honours, Mr Jeffrey was appointed Knight Commander of the Order of the Bath (KCB) Back

6 Defence Committee, Sixth Report of Session 2005-06, Ministry of Defence Annual Report and Accounts 2004-05, HC 822, Q 31 Back

7 Enabling Acquisition Change report, para 2.1 Back

8 The Lines of Development are Concepts & Doctrine, Equipment, Force Structure, Manpower, Training, and Sustainability (including Infrastructure). Back

9 Enabling Acquisition Change report, para 2.2 Back

10 HC (2006-07) 56, para 23 Back

11 HC (2006-07) 56 Back

12 HC (2006-07) 318 Back

13 Defence Committee, Sixth Report of Session 2006-07, The Defence Industrial Strategy: update, HC 177 Back

14 Defence Committee, Eighth Special Report of Session 2006-07, The Defence Industrial Strategy: update: Government Response to the Committee's Sixth Report of Session 2006-07, HC 481 Back

15 Ev 27 Back