Conclusions and recommendations
Overview of DE&S progress
1. DE&S
was created on 1 April 2007 following the merger of the Defence
Procurement Agency and Defence Logistics Organisation. Some 20
months after the merger, DE&S appears to have made good progress
and is considered to be "heading in the right direction".
The progress made has been achieved against a backdrop of supporting
current operations in Afghanistan and Iraq. We commend the Chief
of Defence Materiel and DE&S staff for their achievements
to date. (Paragraph 10)
2. While industry
has generally welcomed the progress made to date by DE&S,
it has also called for this progress to be accelerated and considers
that the establishment of programme boards will be particularly
beneficial. In its response to our Report, we expect the MoD to
set out its plans for accelerating the progress achieved to date,
the key changes it expects to see implemented in 2009, its plans
relating to the establishment of programme boards, including the
benefits expected from such boards. (Paragraph 11)
Performance in supporting current operations
3. It
is extremely serious that the A400M transport aircraft programme,
which is to provide much needed new tactical and strategic airlift
for our Armed Forces, is now running two years late and further
delays cannot be ruled out. We expect the MoD to press the contractor
for a new delivery schedule for the programme and examine closely
the assumptions and estimates in the schedule to ensure they are
robust. Once the new delivery schedule is confirmed, the MoD needs
to act swiftly to take the decisions which will prevent any capability
gap emerging in the future relating to air transport. We expect
the MoD, in its response to our Report, to provide us with an
update on the forecast in-service date for the A400M programme
and to update us on the action it is proposing to take once the
new delivery schedule has been received from the contractor. (Paragraph
20)
4. We consider that
the Government has no choice but to consider the options referred
to by the Chief of Defence Materiel. We call on the Government
to set out its most up-to-date thinking on these options and to
say whether it considers that there is a real risk that the entire
A400M project might be so delayed that abandonment would be preferable.
The costs and benefits attributable to any such decision should
be clearly explained. (Paragraph 21)
5. The Minister for
Defence Equipment and Support has assured us that all the A400M
transport aircraft which will be deployed into theatre will be
fitted with a full Defensive Aids Suite, a fuel inertion system
and explosive suppressant foam. Given that risks to aircraft are
not restricted to operational theatres, we consider it surprising
that a decision has yet to be made on whether the A400M aircraft
not earmarked to be used in operational theatres will be fitted
with all three systems. The safeguarding of our Service personnel
should be paramount and the equipment they operate should have
the maximum protection available. We note that the MoD considers
that the risk of catastrophic fire on Chinook helicopters with
pannier fuel tanks is low. We look to the MoD to ensure that its
assessment about such risks is robust and is re-examined on a
regular basis. (Paragraph 26)
6. We note that the
Urgent Operational Requirement process has continued to prove
highly effective in enabling vital equipment to be provided in
quick time to our Armed Forces in Afghanistan and Iraq. (Paragraph
29)
7. We welcome the
announcement on 29 October 2008 that a substantial number of protected
vehicles are to be procured as Urgent Operational Requirements.
The protection of our Service Personnel against continuously evolving
threats must be the top priority. In its response to our Report,
we expect the MoD to provide us with an update on its progress
in acquiring these new vehicles and a breakdown of the procurement
costs, including details of how much is to be funded from the
MoD's budget. We also expect the MoD to provide us with details
of which of the vehicles are expected to provide "longer-term
benefit" beyond the current operations in Afghanistan and
Iraq. (Paragraph 31)
8. In November 2007
new arrangements for the funding of Urgent Operational Requirements
(UORs) were announced. These new arrangements mean that,
once the cost of UORs in a year have exceeded an agreed
total with the Treasury, the MoD will have to contribute
to half of the costs exceeding the agreed total and repay this
two years later to the Treasury. In its response to our Report
we expect the MoD to provide us with details of how the new arrangements
have operated in practice, including its estimate of how much
of the spend on UORs in 2008-09 will be funded from the MoD budget.
We also expect the MoD to set out which of its programmes or activities
will need to be re-prioritised in order to fund the cost
of the UORs in 2008-09 which fall to the MoD's core budget. (Paragraph
36)
9. While we are satisfied
with UOR process, we remain concerned that the extent of UORs
represents at least a partial failure by the MoD to equip adequately
its forces for expeditionary operations which were anticipated
by the Strategic Defence Review a decade ago. (Paragraph 37)
10. We are concerned
that the MoD appears to have made little progress with regard
to its examination of the impact of current operations on equipment.
While the MoD appears to have robust data on the cost of equipment
procured through the Urgent Operational Requirement process, it
does not have information on the cost of recuperating equipment
returning from current operations nor on the impact of those costs
on other areas of its budget. Such costs must be substantial given
the length of time that UK Armed Forces have been involved in
current operations in Afghanistan and Iraq. The MoD must identify
accurately the costs to date of recuperating equipment and the
likely future costs of recuperation. Without such information,
there is a real risk that these costs will fall on the Defence
Budget, which is already under pressure, rather than on the Reserve
as they rightly should be. (Paragraph 44)
Equipment procurement performance
11. We
are concerned to learn that, once again, the Nimrod MRA4 programme
has experienced further cost growth and in-service date slippage.
In its response to our Report, we expect the MoD to set out the
findings from its examination of the extent of further cost increases,
to provide us with the latest position on the current forecast
in-service date, and to outline the "mitigation measures"
it has identified and what it expects these to deliver. We have
not been satisfied by the explanations for these delays given
by the MoD to date, nor by the Department's assurances as to how
performance would be improved. We will return to this matter in
the future. (Paragraph 48)
12. In its first year
of operation, DE&S failed to meet its Public Service Agreement
target to "Deliver the equipment programme to cost and time".
We note that the National Audit Office examined the procurement
performance relating to the 20 largest projects and found that
the aggregate forecast cost for these projects increased by £205
million and the aggregate in-service date slippage increased by
eight years in 2007-08. We are concerned that DE&S has failed
to control delays on equipment projects with almost half of the
20 largest projects experiencing in-service date slippage in 2007-08.
We have not been satisfied with the explanations given by the
MoD as to what it intends to do to rectify this decline in performance,
and we will be returning to this matter in the near future. (Paragraph
50)
13. Financial Year
2008-09 saw the introduction of new Departmental Strategic Objectives
(DSOs) which include a Performance Indicator under DSO 3 covering
"Procuring and Supporting military equipment capability through
life". The MoD's performance, six months into 2008-09, has
been disappointing with average in-year forecast in-service date
slippage and average in-year forecast cost increases both exceeding
the targets set. The MoD considers that exchange rate changes
account for most of the forecast cost increases reported in 2008-09.
In its response to our Report, we expect the MoD to set out its
estimate of how much it anticipates exchange rate changes will
add to the cost of equipment programmes in 2008-09 and what action
it is taking to minimise the risk of such cost increases. (Paragraph
55)
14. In its response
to our Report, we expect the MoD to set out what specific action
it is taking to reduce the Demonstration and Manufacture timescales
of equipment projects by 50% from 2009 onwards, a target set out
in the DE&S Business Strategy 2008-12 and how such reductions
will be measured and reported. (Paragraph 56)
15. The MoD does not
consider it possible to assess how, if at all, support to current
operations has impacted on performance against its procurement
targets. We consider that, while it would appear that only a small
proportion of DE&S staff have been involved on Urgent Operational
Requirement projects, support to current operations has had an
adverse impact on its procurement performance, although we doubt
that this factor alone is responsible for the state of parts of
the equipment programme. DE&S staff involved in UOR projects
have had to be transferred from longer-term equipment projects
and, given the importance of UOR projects, more experienced project
staff are likely to have been transferred. We would hope that
as work supporting current operations begins to reduce, and staff
are transferred back to the longer-term projects, that this will
have a positive impact on procurement performance. (Paragraph
58)
16. We note that the
MoD considers that a key contributor to cost increases or delays
on equipment projects is "the realisation of unplanned or
low level / high impact risk". The MoD states that it was
placing greater emphasis on investment prior to Main Gate to address
this risk. In its response to our Report, we expect the MoD to
set out, for the current projects which have passed Main Gate,
the proportion of such projects where 10-15 per cent or more of
the forecast project budget was spent in the Assessment Phase.
(Paragraph 61)
17. We note that DE&S
has made good progress in improving the skills of its staff across
a range of key acquisition disciplines. We note also that the
Defence Commercial Director has recently been announced as the
new Comptroller and Auditor General, but we consider it essential
that the MoD build upon the progress he and the Chief of Defence
Materiel have achieved to date. (Paragraph 66)
18. Equipment programmes
have often experienced delays at various points in their life
cycle. We note that the MoD is looking at training programmes
which focus on the "value of time". In its response
to our Report, we expect the MoD to set out what consideration
it has given to such programmes and its future plans in this area.
(Paragraph 68)
19. By 2012, DE&S
plans to have reduced its staff by 25% compared to the number
in post at the start of April 2007. At the end of September 2008
the number of staff had been reduced by some 15%. Given that procurement
performance declined in 2007-08 and that DE&S is supporting
two operations, we find it surprising that DE&S is pushing
ahead with its streamlining programme. DE&S must monitor closely
the morale of its staff and recognise the uncertainty that such
programmes create. In its response to our Report, we expect the
MoD to provide us with its rationale for reducing staff at a time
when procurement performance has declined and when DE&S remains
busy supporting two overseas operations. We also expect the MoD
to provide us with details of the costs incurred to date, including
redundancy and early retirement costs, as a result of the streamlining
programme. The response should also set out how many consultants
have been employed to undertake work previously undertaken by
DE&S staff who have left under the streamlining programme,
and the costs of these consultants. (Paragraph 71)
20. We note that the
Secretary of State has instituted a review to examine the progress
in implementing acquisition reform and make recommendations for
securing better value for money in the acquisition of major equipment
programmes. There have been several such reviews over the last
decade, yet major equipment programmes continue to experience
cost increases and delays. It will be vital that the recommendations
are implemented quickly and fully so that the expected benefits
are delivered. We expect the MoD to provide us with a copy of
the review once completed and to set out how the findings and
recommendations in the review are to be taken forward. (Paragraph
73)
Progress with the short examination
21. The
FRES programme has been a fiasco. In February 2007 we concluded
that the MoD's attempts to meet its medium-weight vehicle requirement
had been a sorry story of indecision, changing requirements and
delay. Two years later the story is, incredibly, even worse. We
find it extraordinary that, some seven months after announcing
General Dynamics UK as the provisional preferred bidder for the
FRES Utility Vehicle, the MoD has announced that priority is now
to be given to the FRES Scout Vehicle. Whilst we recognise that
the MoD's equipment requirements need to reflect changing threats,
that is no excuse for the MoD's behaviour in this programme; they
have wasted their and industry's time and money. The FRES Utility
Vehicle programme was, from the outset, poorly conceived and managed.
The MoD must work out what its requirements are for medium-weight
armoured vehicles and identify lessons from the saga of the FRES
Utility Vehicle programme. In its response to our Report, we expect
the MoD to set out the cost to date of the FRES Utility Vehicle
programme and how it plans to take forward this programme in the
future. (Paragraph 95)
22. We welcome the
announcement made on 11 December 2008 that the MoD will be further
increasing helicopter capacity in Afghanistan over the next two
years. Given our continuing interest in helicopter support for
current operations, we plan to monitor closely the progress in
delivering the commitments set out in the announcement. (Paragraph
97)
23. The MoD's confirmation
that some 60 Future Lynx helicopters are to be procured is to
be welcomed. However, in his evidence to the Committee, the Minister
for Defence Equipment and Support was unsure as to whether the
programme had passed the main investment decision or whether the
contract had been signed. This may have been what caused him to
say that the programme had been brought forward. We recognise
that the Minister had taken up post only two months before the
evidence session, but we do note that this was one of the programmes
referred to in the Written Ministerial Statement of 11 December
2008. In its response to our report, we expect the MoD to provide
us with the latest forecast cost and in-service date for the Future
Lynx programme. It is also difficult to judge on the evidence
currently available whether these numbers are sufficient to meet
all battlefield and maritime needs. (Paragraph 104)
24. We find it very
strange that, only six months after awarding the contracts to
build the carriers and announcing the in-service dates, the MoD
has decided to delay the entry into service of the two new aircraft
carriers, the first by one year and the second by two years. We
do not share the view of the Minister for Defence Equipment and
Support that the delays to the in-service dates will result in
"no loss to the defence capability of the nation at all".
In its response to our Report, we expect the MoD to set out its
latest forecast of when the two carriers are expected to enter
service. (Paragraph 112)
25. We were surprised
to hear that HMS Ark Royal was due to be paid off earlier, despite
it being the newest of the three Invincible Class Carriers. The
Minister's evidence would seem to indicate that for a period prior
to the introduction of the new Carriers only one Invincible Class
Carrier will be in service, which represents a significant reduction
in capability. (Paragraph 113)
26. We are concerned
that the MoD could not provide us with an estimate of how much
the decision to delay the in-service dates for the Future Carriers
will cost, as the estimates that the MoD has been given were not
considered robust. We would expect DE&S to have the ability
to produce robust estimates, given that one of its key roles is
to be an intelligent customer. There will also be a cost in extending
the life of either one or both of the existing Carriers, but the
Minister for Defence Equipment and Support did not apparently
consider this a matter of any importance. We consider that, while
the delay to the entry into service of the two carriers may provide
some short-term savings, the Future Carrier programme is likely
to cost substantially more in the long-term. In its response to
our Report, we expect the MoD to provide us with details of the
additional cost of delaying the entry into service of the two
carriers—both the additional contractual costs relating
to the Demonstration and Manufacture phase and the costs of extending
the life of either one or both of the existing Carriers currently
in service. (Paragraph 114)
27. The Minister for
Defence Equipment and Support has assured us that the decision
to delay the in-service dates of the carriers will not result
in any job losses or loss of specialist skills. We remain to be
convinced and will be monitoring the programme closely, in particular,
the industrial implications of the decision to delay the entry
into service of the two carriers. We are also puzzled as to why
this decision was made so soon after Main Gate. The timing suggests
that the decision had nothing to do with the carrier programme
itself but with easing problems with other programmes identified
in the short examination of the equipment programme. We expect
from the MoD clarification of this change to plans so soon after
Main Gate in response to this Report. (Paragraph 117)
28. We note that the
MoD considers that the Joint Strike Fighter STOVL programme is
progressing well and that it plans to procure three aircraft for
Operational Test and Evaluation. We also note that the MoD considers
that technology relating to the programme was being transferred
to the timescale originally agreed. We plan to continue to monitor
the progress of this key programme. (Paragraph 124)
29. We note that the
MoD is considering alternative procurement approaches to the Military
Afloat Reach and Sustainability (MARS) programme and that this
is likely to result in the deferral of the fleet tanker element
of the programme. In its response to our Report, we expect the
MoD to set out what impact the expected delays on the MARS programme
will have on defence capabilities such as Carrier Strike. We also
expect the MoD to set out how the delay to the MARS programme
will affect its ability to comply with International Maritime
Organisation environmental standards which require the phasing
out of single hull tankers by 2010. (Paragraph 127)
30. The second objective
of the short examination of the equipment programme was "rebalancing
the equipment programme to better support the frontline".
We note that the Minister for Defence Equipment and Support considers
that this objective has been achieved. We consider that, while
supporting current operations must be the priority, it is absolutely
vital that the MoD continues to give sufficient attention to the
longer-term equipment programme. We note that the Minister has
set up a Committee to look at the longer-term priorities. The
issue of keeping the equipment programme balanced is an issue
we plan to monitor closely. (Paragraph 134)
Status of Equipment Programme
31. We
note that industry and the MoD appear to have radically different
views on the status of the equipment programme. Industry refers
to the equipment programme being paralysed, yet the MoD claims
to be spending substantial amounts of money with industry and
denies industry's claims. We doubt that the announcements about
the equipment programme on 11 December 2008 will provide industry
with much clarity about the MoD's future requirements. There is
an impression of another shoe waiting to drop. We plan to monitor
this issue closely in the future. (Paragraph 137)
32. We note that any
further major changes to the equipment programme will be announced
in spring 2009 following the completion of Planning Round 09.
We expect the MoD to keep Parliament informed of such changes
as soon as they are known. (Paragraph 140)
Funding of Equipment Plan
33. Many
commentators have suggested that the defence equipment programme
is under-funded, but the MoD was unable to give us a clear answer
and could not provide us with an estimate of the level of any
such under-funding. We note that, following the completion of
the short examination of the equipment programme, the Minister
for Defence Equipment and Support considers that the equipment
programme is affordable, no significant equipment orders having
been cancelled, although the timetables for some have been slipped.
We are aware that, in the past, slipping programmes has resulted
in increased costs. We plan to monitor the outcome of Planning
Round 2009 which is expected to be completed in spring 2009. (Paragraph
150)
Pre-budget statement
34. We
note that there was no injection of funds for the UK defence industry
in the Pre-Budget Statement of 24 November 2008. We are concerned
to hear from industry that Small and Medium-sized Enterprises
(SMEs) are "suffering" because money is not flowing
down the supply chain. In its response to our Report, we expect
the MoD to set out the extent to which it is aware that SMEs are
experiencing problems and how it is proposing to address these
in order to ensure that the current supply chain is retained.
(Paragraph 154)
Defence research spending
35. The
UK's future military capability depends upon the investment made
today in Research and Development (R&D) and the military advantage
achieved at any one time depends upon the R&D investment made
over the previous 25 years. We are extremely concerned to learn
that defence research spending has been cut which, in our view,
is short-sighted. We agree with the Minister that it is a matter
of priorities and consider that it should be a very high priority.
Sufficient funding for defence research needs to be ring-fenced.
If not, the MoD must acknowledge that the role which our Armed
Forces can play in the future will be substantially reduced. In
its response to our Report, we expect the MoD to provide us with
details of the extent of the recent cuts in defence research spending
and set out the specific areas affected by these cuts. We also
expect the MoD to provide us with its assessment of what impact
the recent cuts in defence research spending will have on the
UK's future military capability. (Paragraph 162)
Measures to limit DE&S spending
36. We
note that the Chief of Defence Materiel (CDM) sent a memorandum
to DE&S staff in autumn 2008 setting out measures to reduce
spending on equipment programmes. CDM calls the measures a "commitment
regime" and considers this to be a routine practice. Whilst
we support the need for robust financial control, it would appear
to us that the measures taken by CDM to reduce spending on equipment
programmes are a clear sign that defence funding issues are more
acute than ever in the current financial year. (Paragraph 165)
Defence Inflation
37. Defence
inflation, and in particular defence equipment inflation, reportedly
runs at a higher rate than the general rate of inflation. A recent
research paper suggests that defence inflation may be running
some 3% higher than the general rate of inflation. If true, this
would seriously undermine the Comprehensive Spending Review 2007
settlement for defence which was reported as being a 1.5% annual
real terms increase in the MoD budget for the period 2008-09 to
2010-11. The MoD is undertaking work, scheduled to be completed
in April 2010, to produce a measure of defence inflation. We find
the lack of urgency given to this project to be regrettable. The
MoD must push forward this work as quickly as possible so that
the results can feed into its negotiations with the Treasury in
future spending reviews. We expect the MoD to work with organisations
such as the Defence Industries Council to examine the issue of
defence inflation and report back to us with its findings. (Paragraph
174)
Responsibility for implementing the Defence Industrial
Strategy
38. We
note that the Minister for Defence Equipment and Support has overall
responsibility for the Defence Industrial Strategy (DIS) and that
the key official within the Department with responsibility for
the DIS is the Defence Commercial Director. However, the Chief
of Defence Materiel (CDM) is also responsible for "driving
forward" the DIS. In its response to our Report, we expect
the MoD to set out the specific responsibilities relating to the
DIS which fall to the Minister for Defence Equipment and Support,
the Defence Commercial Director and CDM. (Paragraph 182)
Progress in implementing the Defence Industrial
Strategy
39. We
have heard mixed messages about the progress made in implementing
the Defence Industrial Strategy (DIS). The MoD reports that good
progress has been made in most of the industrial sectors. However,
we have heard several concerns from industry, including concerns
that the progress has been slower than hoped, that the expected
transparency has not materialised, and that the DIS was "on
hold". In its response to our Report, we expect the MoD to
consider the evidence we have received from industry, and explain
to us why there is a difference of opinion between the MoD and
industry on the progress made in implementing the DIS. We are
particularly concerned to hear from industry that the expected
transparency has not materialised and expect the MoD to set out
how it plans to address this specific issue. (Paragraph 194)
40. We also look to
the MoD to provide us with an update on the progress in negotiating
a Long Term Partnering Arrangement in the fixed wing sector, including
when it expects to have reached agreement on such an arrangement.
(Paragraph 195)
41. A key objective
of the DIS was to move to a Through Life Capability Management
(TLCM) approach to acquiring and managing defence equipment programmes.
However, some industry representatives have raised concerns that
the TLCM approach has not been fully embedded. In its response
to our Report, we expect the MoD to set out its assessment of
the extent to which the TLCM approach has been embedded across
the department. (Paragraph 197)
Updated version of the Defence Industrial Strategy
42. An
updated version of the Defence Industrial Strategy was expected
in December 2007, but the MoD did not meet this deadline, nor
the next deadline of spring 2008. The MoD claimed that the original
deadline was missed because of the need to finalise Planning Round
2008. More recently, the MoD has claimed the delay has been caused
by the need to complete the short examination of the defence equipment
programme. The short examination has been completed and both the
MoD's Permanent Secretary and the Chief of Defence Materiel have
told us they were confident that the updated version of the DIS
would be published in 2009. (Paragraph 206)
43. We find it astonishing
that the new Minister for Defence Equipment and Support was "open-minded"
as to whether it made sense to have an updated version of the
DIS. The DIS is now over three years old and a key aim was to
provide industry with clarity about the MoD's future requirements.
In its response to our Report, we expect the MoD to tell us whether,
or not, it plans to publish an updated version of the DIS. If
it does plan to do so, we expect the MoD to set out when it plans
to do so. If it does not, we expect the MoD to set out how it
plans to keep industry informed of its future requirements and
the industrial capabilities which the UK needs to retain. We condemn
the failure to date to publish an updated version of the DIS and
consider that its continuing absence increases the risk that the
UK Defence Industrial Base will not be able to meet the future
requirements of our Armed Forces. (Paragraph 207)
The Defence Industrial Base
44. We
are worried to hear from some industry representatives that they
are concerned about the future of the UK Defence Industrial Base.
However, the MoD does not appear to share these concerns. In its
response to our Report, we expect the MoD to set out what assessment
it has made of the health of the UK defence industry and, in particular,
those parts of the defence industry where the MoD wishes to retain
industrial capability in the UK. (Paragraph 211)
45. We note that the
MoD has signed up to the Supply Chain 21 programme which aims
to improve the defence supply chain. In its response to our Report,
we expect the MoD to set out the contribution it is making to
this programme, its assessment of the progress of the programme
to date, and what specific benefits if expects the programme to
deliver. (Paragraph 215)
| 
