UK Def 06

 

 

Memorandum from Prospect

 

 

UK Defence: commitments and resources

The 2007 Comprehensive Spending Review

 

 

 

1. Prospect is the largest union representing engineers, scientists and other professionals and specialists in the defence sector: both public and private. Our members are engaged in crucial activities including the development of new technologies; the design, construction, refit and repair of major platforms; the supply and support of equipment and the training of military staff. Our oversight of the industry from the research laboratory through the factory gate to the frontline places us in a unique position to assess the impact of the government's spending plans. Our submission draws on this broad range of knowledge across the defence sector.

2. Put simply, we believe that the 2007 Comprehensive Spending Review (CSR) will leave the defence sector unfit for the challenges of today, unprepared for the tasks of tomorrow and with a much reduced capability to build for the future. Our evidence covers the following areas of concern:

i The CSR settlement does not provide sufficient funding for Britain's defence needs. It amounts to a cut in real terms and fails to recognise that the strategic context has changed. It is time for a new Strategic Defence Review (SDR).

ii The imposition of the Treasury's Administration Costs Regime (ACR) is undermining the MOD's capacity to support the armed forces, in part by driving cuts to operational activities done by civilians. It is also undermining the MOD's 'intelligent customer' capability.

iii The Defence Industrial Strategy (DIS) is basically sound. It is being put at risk by the CSR settlement.

iv The skills base in the defence sector is already below optimum level in some disciplines. UK sovereign capability is being put at risk by inadequate analysis of skills requirements and the lack of a strategy to address them.

v The CSR cuts must not be allowed to reduce the R&D budget.

vi The combination of operational pressures, cuts, incessant change programmes, privatisation, threats to terms and conditions, and a general impression that the civilian contribution to defence is not valued, is creating a crisis of morale across the sector. This damages current and future capability.

 

3. Prospect does not support defence spending for its own sake, or simply as a means of creating employment but, where government is reliant on military capability to underpin its foreign policy, that military capability and the associated support infrastructures have to be adequately funded. Military capability depends to a large extent on sovereign industrial capability and we believe that defence policy must take into account the industrial dimension. In our view, the DIS and the Defence Technology Strategy provide a robust framework for decisions on current and future spending in the defence sector. The crucial question for the CSR is whether it provides the security and certainty required to safeguard the vision outlined in the DIS.

The CSR settlement

4. The CSR settlement does not provide sufficient funding for Britain's defence needs. Against the background of existing operational commitments and a couple of huge new equipment programmes (the new carriers and the replacement for Trident), the defence budget faces a cut in real terms. This is the case even if we disregard the arguably higher rate of inflation for defence equipment. The big, so far unanswered, question is this: will this be achieved through further 'salami-slicing' or by the loss of one or two major programmes (and thus capabilities) or, worst of all, a combination of both?

5. Governments of all complexions have cut defence spending as a proportion of GDP since the height of the cold war. But the decline in expenditure has been sharper in the UK - falling faster than in France, the UK's closest comparator in defence capability. As a result of the CSR announcement, the UK's relative defence expenditure will continue to decline to approximately 2.1% of GDP.[1] This is in comparison to around 3.9% in 1990, although this had fallen to around 2.5% by 1998. Put another way, relative funding at the 1990 levels (the point when the peace dividend started to be taken) would mean a defence budget of over 50 billion, rather than the current 32 billion.

6. Even these headline figures do not tell the full story. Significant new spending commitments, such as the replacement of Britain's nuclear deterrent, the CVF programme and others made under the glare of current operations (eg improved accommodation for troops), will reduce the amount of money available in other areas. And, while urgent operational costs are generally met from reserves, the support costs of new equipment for the remainder of its life are not. Funding from the CSR07 settlement will not be sufficient to meet Britain's future strategic needs.

7. The SDR was conceived in a period of contracting defence spending after the end of the cold war, but that context has now changed. The MOD's planning assumption - defined by the 2003 Defence White Paper - is for one enduring medium scale and two small military operations at any one time, with the ability to reconfigure for an additional short-term medium scale operation as necessary. The Committee questioned these assumptions in its Fourth Report of the 2004-05 session, on future capabilities.[2] Recent experience suggests you were correct: the UK has been engaged in two enduring medium-to-large scale operations, with a number of small-scale peace-keeping operations at the same time for a good few years. There is a great deal of uncertainty in the world. Commitments in Afghanistan are likely to increase rather than decrease in the next three years. Recent uncertainty in the Balkans and Africa may require the augmentation of the British military peacekeeping role. On the broader front, increased defence spending by Russia and China will inevitably require a reassessment of Britain's current posture. In our view, a further SDR is called for - one which can take on board the lessons learned from recent military operations and a new assessment of international turbulence.

MOD capability and The ACR

8. In the 2004 CSR, the Treasury dealt with MOD administration costs in a different way to other government departments because of fears that an administration limit could affect the inter-changeability of civilian and military personnel.[3] However, in the latest CSR, cuts of 5% year-on-year are required in the administrative overhead, including a cut of 25% in the MOD's Head Office functions (the 'Streamlining' project). There is a great deal of confusion within the MOD about the definition of its administrative overhead. Senior management has not been able to provide the unions with a clear rationale that identifies 'overhead' activities. It appears that anybody not wearing a uniform is considered to be an overhead. For example, we have been told that all civilian staff in DE&S are subject to the ACR, irrespective of their function. Just one example of the nonsense this creates: there is a relatively small team in DE&S called Salvage and Marine Operations. Many of its staff are specialists - divers, underwater engineers, etc. They support operations by, among other things, recovering platforms lost at sea. Hardly the caricatured civil service 'bureaucrats'!

9. The decision to include the MOD in the ACR is likely to have at least one unwelcome effect: the militarization of civilian posts as the government looks for reduced civilian numbers as an indicator of improved efficiency and points to increased troop numbers as a sign of the government's support for defence. Prospect members work closely with military colleagues and are fully aware of the need to fill certain posts with military staff. However, there are already examples of military staff filling posts in 'support' functions and there is a growing concern over what, in some cases, could be seen as an unjustifiable waste of public money. The use of the ACR will prove to be very short-sighted if the result is lots of expensive, highly trained military staff doing 'desk' jobs.

10. Another unwelcome consequence of the ACR will be the additional incentive to contract work out in order to reduce headcount, or simply to cover gaps in capability. The DE&S spend on 'external assistance' (consultancy fees) in 2006/07 of 64 million - the equivalent of around 2,000 direct employees - will grow.

11. The drive to sell off public sector assets has continued unabated since the mid-1980s. The result is that much of the civilian industrial sector has been privatised, with more to come. Under the Labour government the sale of QinetiQ pushed the boundaries of privatisation further than even the Tories dared to go. One of Prospect's major concerns with logistics transformation and the DIS has been the MOD's ability to act as an 'intelligent customer'. There is a risk, we have argued, that the loss of in-house, practical capability and experience - in, for example, fast jet upgrade and repair - will reduce the MOD's ability to cost and manage equipment programmes. The latest CSR cuts increase this risk dramatically. They will encourage further contracting out, even where there is no value-for-money case, and they are causing the MOD to cut back its in-house expertise well below its critical mass. Within DE&S, the Safety and Engineering directorate (DG S&E) - already reeling under massive cuts to a planned 630 posts - is now, we are told, to face a further 15% reduction. Within DG S&E, the Defence Nuclear Safety Regulator - which is to take a 35% cut to just 15 posts by 2011 - has warned "the potential implication ... is dramatic, would add risk to the delivery of the defence nuclear programmes and is likely to be unacceptable to the Defence Nuclear Board". We understand that the Nuclear Installations Inspectorate has expressed concerns about proposed cuts in nuclear safety on the Clyde. Prospect is starting to see some recognition within MOD of the problems around the intelligent customer issue in the submarine support area, but we are concerned that other parts of the department will not recognise the extent of the problem until it is too late.

12. There has been little justification for the proposed 25% cut in MOD Head Office staff under Streamlining. The proposal appears to have arisen from the recent capability review of the MOD. There has been no clear internal analysis to justify the reduction of staff by a quarter and no serious consideration of the impact that this staff cut will have on delivery. Streamlining also fails to acknowledge that the 'Head Office' encompasses a number of functions that are 'operational' rather than 'support'.

13. Prospect is particularly concerned about the proposed cuts in the Defence Intelligence Service. The London-based part of Defence Intelligence is considered part of Head Office for the purposes of the Streamlining project. There has been no detailed analysis of the current intelligence requirements or the resources needed to achieve them. Instead, the decision to cut Defence Intelligence staff seems to have been based on their occupation of premises in central London which MOD wishes to close. This means that analysis (based in Whitehall) faces a severe cut whereas intelligence collection will not be cut because it is based outside London. As the Butler Report[4] recognised, it does not make sense to stint on the number of experts available to read and interpret the information gathered. Yet it is likely that in future much of this expensively gathered intelligence will no longer be assessed adequately and in some cases it may even not be read. Prospect has written to the Intelligence & Security Committee suggesting it investigates this specific issue.

14. And what about support to the front line? It is inevitable that the cuts will have a direct effect on operations. Logistics transformation, DLO restructuring and collocation and now DE&S's 'PACE' programme have all resulted in dramatic cuts and other major changes in the DE&S empire. DE&S currently employs over 27,000 staff, around 20,000 of whom are civilian. The ACR seeks to drive the total down to just 19,000 by 2011, although we understand that the Chief of Defence Materiel is arguing that his PACE initiative would provide an optimal structure of around 20,000 posts by 2012. Continuing cuts on this scale are having a dramatic effect on the scope and quality of support provided to the armed forces and we have been pressing the MOD to provide 'pain and grief' statements which identify the specific activities that will cease as a consequence of those cuts.

15. A few examples from the maritime environment, where Prospect welcomed the decision of the Naval Base Review to maintain three bases. However, the funding allocated by CSR07 appears to be predicated on there being just two and all three bases have been asked to make significant cuts. The DIS envisaged maintenance of ships being delivered increasingly away from the UK, with crews being exchanged in foreign ports. However this policy has been undermined as a result of underinvestment in the Naval Fuelling facility at Gibraltar which has now been closed because of safety concerns. It is estimated that the cost of restoring the facility is 250 million. As a contingency a tanker is to be put on the station at a cost of 25 million per annum. However, this can be only a temporary solution because of environmental, safety and commercial concerns. Also, as a cost-saving measure, RFA Fort Victoria has been berthed at Portsmouth for most of 2007 and will stay there for 2008. The other two MOD solid support ships - RFA Fort George and RFA Fort Rosalie - are now due for mandatory refits in 2008. This will leave the UK with no deployable solid support ships until late 2008.

whither The Defence industrial strategy?

16. The DIS provided a framework for private sector companies to take commercial decisions based on planned government spending in defence. The DIS took a long-term, strategic view of core defence capabilities. It encouraged a focus on industrial capability and encouraged restructuring. The formation of the BAE Systems/VT Group joint venture in Portsmouth and the purchase of DML by Babcock International are examples of changes that have been driven by the DIS. Alongside this process of consolidation, some defence companies such as VT Group are diversifying away from defence related work in the expectation that opportunities for defence contracts will decline.[5] Even the leading British defence industry prime contractor, BAE Systems, is seeking to be less reliant on Britain for future commercial success: its US arm is poised to overtake its UK business. Any indication that the equipment programme may be altered or reduced could have far reaching repercussions on the future size and shape of the defence sector in Britain. As a union with thousands of members reliant on defence industry work, we are extremely concerned that the CSR07 settlement has sent out a message of uncertainty to the defence industry. This is in direct conflict with a declared aim of the DIS.

17. The process of transformation that is central to the DIS was always going to be painful. The consolidation of the maritime sector is an obvious example. Babcock International has been one of the main winners in this process and, as a result, has placed itself in a key position within the naval sector.[6] But this has been achieved at a price for the skilled and very loyal workforce in Plymouth, Faslane and Rosyth, where there have been substantial job losses in each dockyard since they moved into private hands. While shareholders are clearly seeing good returns, there is little evidence of them investing substantial sums in either training the workforce or in upgrading and modernising the facilities. They will be reluctant to do so until there is guaranteed work agreed into the future. There are also no plans to retrain staff who may be surplus to requirements as submarine work at Devonport reduces from three workstreams to two and eventually to one over the next year or so.

18. The need for transparency and certainty in the years ahead is essential if the anticipated benefits of consolidation are to be realised. And yet, consultation has been conducted with Prospect in a remarkably opaque way prior to the establishment of the, as yet, unnamed Joint Venture (JV) in Portsmouth. At the time of writing the union still awaits confirmation as to who will employ private sector workers transferring in from the various constituent companies that operate in the base. The lack of even the most basic information on the future security of terms and conditions, pay and pensions has done nothing to encourage workers to believe they have a sustainable career with the JV. Indeed, both VT and BAE have widely advertised their claim that the JV will realise 700 million cost-savings over a 15 year period. Whilst this may be good news for share-holders, the workforce is extremely apprehensive about the impact such huge cuts will have on the numbers employed at the Portsmouth Base in the future.

19. Delays in the award of the Future Rapid Effect System (FRES) contract are causing uncertainty and concern for staff working at BAE Land Systems. The company failed to make the shortlist for FRES vehicle designer but is well placed to become the system of systems integrator (SOSI). The company has made it clear that a failure to win the contract as systems integrator will make it difficult for it to sustain a full engineering capacity to support the UK's armoured fleet.[7]

The Skills Gap

20. The DIS provided an outline of future skills requirements, but there has not been a detailed analysis of the specific skills needed to meet future defence needs. The Committee's report on the replacement of Britain's nuclear deterrent highlighted the critical position of Britain's skills base in the submarine sector.[8] This point was accepted by the MOD and it applies equally to many other sub-sectors.

21. There are particular pressures in the shipbuilding and repair industry. According to a survey of Naval Shipyards in 2003 by Rand Europe, 60% of the management and technical workforce are over 40 years old.[9] Without early action to replenish the workforce, skills shortages are likely to emerge. For example, commissioning engineers can take 10 to 20 years working in the industry to become fully proficient.

22. Sustaining the skills base is complicated. The pool of potential talent is diminishing in absolute terms and there are competing pressures from other sectors who want to attract the declining proportion of graduates who have a background in science and engineering. For example, there are a number of pressures building in the nuclear field that beg huge questions for the economy. Employment in the sector has been declining for some time and the workforce is aging. Yet demand is about to increase dramatically to feed the civil decommissioning programme, the probable construction of new nuclear power stations and a new nuclear submarine and nuclear weapons programme.

23. For many highly specialised occupations such as naval shipbuilding, the pool of potential workers is tiny. To compete for and then retain the brightest and the best, in the absence of the sorts of salaries offered by the City, the defence sector has to offer career opportunities and security of employment. One unintended consequence of cuts in the defence budget is that companies will start to question the sustainability of their graduate recruitment programmes. In the absence of a steady order book, companies will not recruit, further eroding the skills base. This will feed a vicious circle: pushing up the costs of procurement projects and causing delays in their delivery.

24. Lord Drayson, the former minister for equipment, clearly understood the need for a steady stream of work to provide the security of employment that industry needs to attract the brightest and best apprentices and graduates into the defence sector. This was one of the key thrusts of the DIS: maintenance of key sovereign capabilities throughout the supply chain.

RESEARCH AND DEVELOPMENT: future capability at risk?

25. Investment in R&D has declined sharply since the height of the cold war, although in relative terms Britain's capability remains on a par with France. However there is great uncertainty about whether there is sufficient funding to maintain this position. Broadly speaking, the government's strategy has been for the MOD to focus on commissioning and doing some cutting edge research while encouraging the private sector to concentrate on applied research, development and demonstration. However this exposes future R&D spending to several risks.

26. By its nature, R&D is a long-term investment. The benefits of research may take up to 20 years to develop into products that start to make a return. And the MOD needs to maintain domestic capability in key areas if it is to maintain its capability to evaluate technologies and advise on their adoption for defence applications. This means there is a need to retain and develop scientists within the public sector.

27. Dstl has a graduate program that aims to encourage young scientists to stay in the public sector. Yet it still experiences what it believes to be worrying levels of 'wastage' among recently trained graduates. It is inevitable that there will be a brain drain if there is not enough investment in public science. And this is not just about pay and conditions, but also the quality of work that young scientists are asked to do (in terms of both breadth and depth, as well as intrinsic interest). Sustainable investment in public science will be needed to maintain a critical core of expertise in the public sector.

28. Dstl's iLab programme - the concentration on four key sites and new laboratory buildings - is already endangering capability because of the certain loss of experienced, 'deep' specialists who will not relocate with the work. But, if the MOD's R&D budget is cut, the whole iLab project will be at risk because the income stream upon which the investment is predicated will not be there. This could bring into question the entire financial basis for the Dstl trading fund.

29. Reliance on the private sector to deliver adequate levels of R&D is already starting to unravel. QinetiQ, the largest specialist R&D company in the UK, is investing heavily in lucrative US businesses spurred on by huge R&D budgets, whereas in the UK the group's turnover actually declined in 2007 from 733.9 million to 729.9 million. Despite an underlying operating profit of 34.5%, the company announced 400 job losses in November to adapt the business for a planned reduction in MOD spending on technology contracts.[10]

30. The Defence Committee has recognised the danger of funding being skewed towards supporting ongoing military operations such as Afghanistan, at the expense of long-term activity. Against a background of efficiency savings and stretched resources there will be a constant pressure on the R&D budget, at the risk of exposing the UK to serious capability gaps in the future. With a greater reliance on technology as a driver of through life capability, cutbacks in R&D will be a false economy.

declining MORALE risks more damage

31. The CSR announcement will have been a disappointment but not a surprise to those working in the defence industry. The pressures on defence spending have building up for several years. The 1993/94 Defence Costs Study recommended changes to the contractual relationships between government and industry to reduce the potential for delays and to limit costs.[11] The 1998 SDR built on these foundations by introducing the concept of 'Smart Procurement'. The SDR represented the start of a new period of reform. The drive to reduce costs and introduce private sector involvement has been relentless. The potential for ever-tighter budgetary constraint to be felt most keenly by people was highlighted by the unions.[12] But these trends provided the framework that underpins the DIS today, with greater emphasis on partnerships and through life capability.

32. Within the MOD, dissatisfaction among civilian staff has become more visible as cuts have been piled upon cuts and change programmes have been rolled out before their predecessors have even finished. In 2006, MOD staff lobbied parliament in January in defence of their jobs and this was followed in September by a vote for industrial action over the DLO's plans for the transfer of huge swathes of work to the South West. But frustration really boiled over following the MOD's pay offer at the end of the year, when specialist staff took unprecedented strike action in February 2007 followed by a work to rule as a result of the imposition of the 2006 pay award. The impact on staff morale has been underlined by an internal staff survey which shows that a majority of staff wish to leave the MOD. This is not a stable basis to plan for the future.

33. Problems with morale are also reflected in the private sector of the industry. Following the imposition of a pay award in 2006 Prospect were overwhelmed by the number of responses to a union sponsored survey of QinetiQ staff. This revealed that 85% of staff thought the company did not value them. Following the takeover of DML by Babcock International, staff at Faslane and Plymouth narrowly avoided industrial action in disputes over pensions and pay respectively. These disputes underline the strong feeling amongst defence workers that they are paying the price of tightening margins and industrial rationalisation as company profits soar.

34. Morale is a key factor in delivering quality support and equipment to frontline troops. The corrosive effect of low staff morale in the defence sector will be felt for many years to come as experienced specialist staff leave and those that are left feel under-valued by those making decisions. Doubts about the equipment plan will undermine efforts to retain and attract skilled workers into the defence industry. The spending review announcement has heightened staff concerns about their future in the industry. What all this tells bright school students and recent graduates evaluating their career options is obvious.

 

7 January 2007

 



[1] UK CVFs finally get green light, Jane's Defence Weekly, 1 August 2007.

[2] Commons Defence Committee, HC 45-I, March 2005

[3] Paul Boateng Chief Secretary to the Treasury, Answer to Written Question, 22 July 2004, Hansard, Column 483W.

[4] Review of Intelligence on Weapons of Mass Destruction, HC898, 14 July 2004

[5] VT Group steps out into Civvy Street, Financial Times, 16 July 2007.

[6] Babcock International Group, Interim Results, 13 November 2007, www.babcock.co.uk

[7] Armed and in danger of more delays, Financial Times, 26 March 2007.

[8] The Future of the UK's Strategic Nuclear Deterrent: the Manufacturing and Skills Base, Fourth Report, Defence Committee, House of Commons, 19 December 2006.

[9] The Supply of Naval Shipyard Labour in the United Kingdom, (2005), Rand Europe.

[10] QinetiQ announces UK lay offs, US sales, 29 November 2007, www.theregister.co.uk

[11] Frontline First: the Defence Costs Study, (1994), Paras 402 -412, cited in Research Paper 98/91.

[12] Still Daft, Damaging and Demoralising, Joint trade union response to the MOD revolution in military support and logistics capability, 2003.