Government response
Overview of DE&S progress
- (Recommendation 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)
We are grateful for the Committee's recognition of
the achievements of DE&S in its first year following the merger
of the Defence Procurement Agency and the Defence Logistics Organisation.
We also welcome the recognition for having achieved those successes
in particularly challenging circumstances whilst supporting concurrent
operations in Iraq and Afghanistan.
- (Recommendation 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)
The move to a programme approach for managing the
delivery of capability to the front line is the next step in embedding
the MoD's Through Life Capability Management principles. The new
programme arrangements are being implemented on a phased basis.
The initial rollout was completed by the end of March 2009 with
the formation of Programmes and Programme Boards to run them.
The next phase of implementation covers the period up to March
2010 when the programme approach and underpinning ways of working
will need to be sufficiently embedded across the MoD acquisition
community. This is a major change to how MoD manages capability
delivery and the implementation timescale represents a challenging
target.
The next 12 months will see further development of
how Programmes operate with the aim of achieving balance in the
through life delivery of capability across projects and Defence
Lines of Development by managing risk within programmes.
Performance in supporting current operations
- (Recommendation 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)
We note the Committee's conclusions regarding delays
to the A400M programme. Airbus Military has announced a series
of delays in the development and production of the A400M programme,
and has more recently indicated that first deliveries to customer
nations will be three years after the achievement of first flight
of the A400M prototype.
Airbus Military has indicated that first flight will
occur no later than February 2010 and has also announced a slowdown
in its production plans. Early A400M production aircraft will
be delivered to some of our partner nations and therefore the
first UK delivery would occur at least six months after Airbus
delivers the first A400M. This suggests that initial UK deliveries
could not start before 2013 and therefore the earliest in-service
date of the A400M (defined as acceptance into service of the seventh
UK aircraft) would be 2014.
When a new schedule is received from Airbus Military
it will be evaluated by a joint Nations and OCCAR team and the
information used to inform the way ahead for the programme.
- (Recommendation 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)
The UK remains committed to A400M but not at any
cost. We are currently considering all potential outcomes and
are supporting actions within OCCAR and with Partner Nations that
help inform our position.
We are considering a number of options as a contingency
to mitigate any capability gap as a result of delays to or termination
of the A400M programme. These include an extension to the life
of the C-130K fleet and leasing or procuring additional C-17 and
C-130J capacity.
The costs, benefits and timescales of each of the
potential options form part of wider analysis work being undertaken
to support decisions on the way forward. This work is ongoing
and is being conducted with wide stakeholder involvement, including
the C-17 and Hercules Integrated Project Teams and the military
capability customer.
- (Recommendation 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)
Our intention is to fit the A400M fleet with a Portable
Removable On-Board Inert Gas Generating System (PROBIGGS). The
one exception is an early development aircraft, already under
construction, that cannot be fitted with the necessary pipework.
A retrofit to this aircraft in order to introduce PROBIGGS may
be possible in due course, but if this is not possible, the aircraft
would be used only in benign environments. The remaining 24 aircraft
for the UK will all be equipped for FTI. The FTI system on A400M
will use an on-board inert gas generation system; this is an alternative
technical solution to explosion suppressant foam (ESF) which does
not therefore need to be fitted to A400M.
The currently planned fitment of Defensive Aids Suites
(DAS) for A400M covers a sub-set of the overall UK fleet but the
numbers being procured are expected to be sufficient to cover
the use of these aircraft in operational theatres. All of the
UK fleet will be capable of being fitted with DAS equipment, ensuring
operational flexibility and allowing optimal fleet management
and asset utilisation.
The MoD's experts confirm that that the risk of catastrophic
fire on Chinook helicopters with pannier fuel tanks remains As
Low As Reasonably Practicable (ALARP) the remaining level of risk
is Tolerable, and that appropriate mitigation action has been
undertaken. As with all risks of this nature, they can rarely
be removed entirely and we continue to explore mechanisms that
might further improve the safety of operation of the aircraft.
Risks are considered in a detailed and methodical
process as defined in the Chinook Safety and Environmental Management
Plan which is fully compliant with existing Departmental guidance.
The identification and assessment of all risks associated with
the Chinook helicopter is conducted by subject matter experts
(including industry) in conjunction with other key stakeholders
including an external independent safety advisor. The assessments
are carried out in accordance with guidance derived from the Health
and Safety Executive's best practice principles.
An over-arching Airworthiness Review is conducted
annually by the senior officer who has airworthiness responsibility
for helicopters. This process was, and continues to be followed
in the assessment of the risks associated with the use of the
Chinook pannier fuel tanks.
- (Recommendation 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)
We are grateful for the Committee's recognition of
our achievements in rapidly delivering battle winning equipment
to troops on operations through the Urgent Operational Requirements
(UOR) process.
- (Recommendation 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)
We note the Committee's conclusion regarding the
high priority of protecting service personnel on operations. The
Secretary of State's announcement on 29 October 2008, which covered
the procurement of a number of vehicles including a Protected
Mobility package for Afghanistan, is evidence of our continued
commitment in this area. The Protected Mobility package includes
measures which will enable us to field Panther; upgrade Snatch;
procure further Jackal vehicles; and deliver new well-protected
logistics vehicles, to be called Tactical Support Vehicles (TSVs):
Light (Coyote), Medium (Husky) and Heavy (Wolfhound). In the longer
term, but as part of the same package, we are replacing the successful
Viking vehicle with a better protected alternative (Warthog).
Outside the package, but announced on the same day, is the procurement
of Cougar training vehicles, and the development of a route proving
and clearing capability known as Talisman. The latter capabilities
are being fully funded from the Reserve as UORs. For the Protected
Mobility package HM Treasury is providing £500M funding,
with MoD contributing the remainder. The package was approved
at £628M:
Costs of the package of Protected Mobility vehicles
are:
| Equipment
| Original Estimate (Rounded)
| Current Estimate
(Rounded)
|
| Additional Jackal
| £75M | £75M
|
| Warthog
| £140M | £185M
|
| Panther Theatre Entry Standard modifications
| £20M | £20M
|
| Snatch Vixen upgrade
| £30M | £30M
|
| Coyote |
£65M | £65M
|
| Husky |
£170M | £180M
|
| Wolfhound
| £120M | £125M
|
| TOTAL
| £620M |
£680M |
Current estimated costs are based on signed contracts and current
negotiations. Increases in estimated costs are principally due
to changes in foreign exchange rates.
The MoD's financial contribution acknowledges the
potential for long term benefit to defence of these vehicles beyond
the immediate operation. Elements of the TSV fleet, for instance,
are likely to offer a credible capability in a number of scenarios
once operations in Afghanistan have ceased.
In terms of procurement progress, we are already
on contract for Cougar Training Vehicles, Talisman, Jackal, Warthog,
Coyote, Husky and the Panther modifications. Cougar is due to
be fielded imminently, production of Jackal has started and the
first tranche of Panther is currently in transit to Afghanistan.
It is planned that Snatch Vixen and some of the TSVs will be delivered
to training in Autumn 2009 with the majority of the TSVs to be
delivered in time for the Spring 2010 deployment to take place.
- (Recommendation 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)
The arrangements outlined in the report reflect the
agreement for Financial Year 2008/09. Expenditure in Financial
Year 2008/09 has been contained within the estimate and therefore
there is no excess to be repaid in 2009/10.
- (Recommendation 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)
We do not accept that the level of investment in
UORs represents a failure by the MoD to equip its forces for expeditionary
operations. The Equipment Programme is designed to deliver long-term
core capabilities that can be employed globally, to meet a range
of potential future threats. MoD continues to invest heavily in
equipment for expeditionary operations and significant quantities
of new equipment will enter service in the next few years.
The UOR process, on the other hand, is designed to
adapt and respond quickly to unforeseen requirements specific
to particular operational environments and emerging threats, for
example as a result of developing techniques, tactics and procedures
of the enemy forces.
A requirement that aimed to equip our forces for
generic expeditionary operations would not meet the UOR criteria
and would not qualify for Reserve funding. Moreover, where UORs
prove highly successful and have broader utility, the option exists
for them to become part of the core equipment programme.
- (Recommendation 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)
We do not accept this conclusion. The MoD is aware
of a variety of costs of recuperation where rolling recuperation
has taken place (such as re-provision of munitions) or where equipment
has returned from operations for recovery to stock or training
use. For equipment not yet recovered, full costs can only be truly
known once the equipment has been properly assessed. Since the
Committee received evidence, MoD has now submitted a full assessment
of recovery from Op TELIC to HM Treasury and the Committee has
been briefed on the key findings of this work.
Equipment procurement performance
- (Recommendation 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)
We understand the Committee's concern that the Nimrod
MRA4 project has experienced further cost growth and delay to
the forecast in service date, although it is worthy of note that
the current In Service Date of late 2010 has remained largely
unchanged since May 2006. Nimrod MRA4 is a complex and demanding
project, where additional slippage and cost growth has principally
been due to technical factors. Time and cost variations from the
original project approval were largely caused by resourcing and
technical problems at BAE SYSTEMS associated with the original
fixed price contract that was let in 1996; these problems were
exacerbated by the design and development, and production programmes
being conducted concurrently. The agreement reached with BAE SYSTEMS
in February 2003 placed a stop on MRA4 series production work
until the design had reached adequate maturity and acceptable
production costs were forecast. These criteria had been met when
the contract for full production was placed in July 2006.
The cost increase of £102M and a slip to the
in service date of 3 months reported in Major Projects Report
2008 largely result from a further extension to the flight trials
programme, the effect of corrosion on the donor components from
the Nimrod MR2 and a re-evaluation of the required financial risk
provision. Means of mitigating these cost increases are being
developed with BAE SYSTEMS based on a thorough re-examination
of the content of the flight trials programme and remaining programme
risk. A revised and robust flight trials programme has been produced
and progress will be closely monitored until its planned completion
towards the end of 2009. Despite these additional cost pressures
for the extended flight trials programme, aircraft production
at the Woodford plant is progressing ahead of schedule with the
first production standard aircraft expected in October 2009 and
the in service date remains unchanged at December 2010.
- (Recommendation 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)
The MoD notes the Committee's concerns about the
cost growth and slippage reported in Major Projects Report 2008.
The cost growth was confined to two projects, NIMROD MRA4 and
the BEYOND VISUAL RANGE AIR TO AIR MISSILE, both of which were
initiated (passed Initial Gate) before reforms to acquisition
were introduced. Similarly around two thirds of the slippage reported
was focused on three projects, TERRIER (27 months), NEST (19 months)
and SOOTHSAYER (16 months). Of the projects reporting slippage
only one (NEST) was initiated after the introduction of reforms
to acquisition.
- (Recommendation 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)
Based on most recent forecasts of exchange rates
over coming years, the MoD anticipates some £234M of additional
future cost for the Departmental Strategic Objectives projects.
While specific projects have recorded cost growth because of the
exchange rate variance the overall impact on the Department, including
during the course of 2008/09, has been mitigated by our forward
purchase programme for euros and US dollars. Where the future
impact is not fully mitigated, the pressures will be addressed
as part of the annual planning cycle.
- (Recommendation 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)
A number of factors influence the time taken for
Demonstration and Manufacture; these include industrial capacity,
the level of available funding and the risk remaining at the Main
Gate decision point.
The time taken for the Demonstration and Manufacture
Phase has traditionally been measured from the Main Gate decision
to the declaration of the In Service Date; often associated with
initial deliveries.
The changes introduced as part of the reforms to
Defence Acquisition were aimed, inter-alia, at providing greater
certainty to Demonstration and Manufacture timescales. A key component
is ensuring that adequate time and investment is made during the
Assessment Phase to ensure delivery of the Demonstration &
Manufacture phase following Main Gate to plan. Results from projects
initiated since the introduction of acquisition reforms suggest
improvement. There are, however, other factors that influence
acquisition cycle times; the profile of available defence funds,
the relative priorities that must be applied to these to deliver
all defence outputs and the capacity available within industry;
which can be subject to broader industry investment decisions.
When committing to a Demonstration and Manufacture
phase of a project the MoD does so on the basis of best value
for money and what can be afforded in the context of the delivery
of overall defence capability. Such decisions will also take account
of industrial capability and capacity as well as the wider defence
industrial strategy for example is it reasonable for industry
to invest in additional capacity for a short term faster production
run and for MoD to pay for this if there is limited utility in
the future.
- (Recommendation 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)
The MoD notes the Committee's conclusion. We currently
have some 750 personnel re-deployed to deliver Urgent Operational
Requirements and continue to monitor numbers to protect delivery
of Urgent Operational Requirements. This has caused significant
pressures in some core project teams. The introduction of Flexible
Resourcing, which is a key enabler of the PACE (Performance, Agility,
Confidence and Efficiency) Programme, will provide DE&S with
a system to manage the deployment of staff more effectively according
to the highest priority and their skills. This should help us
track more clearly the impact that moving resources to higher
priority tasks has on the delivery of others.
- (Recommendation 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)
Of the 41 Category A-C projects that had passed Main
Gate and had not declared an In Service Date at 1 April 2008;
four are classified as Off the Shelf purchases and had no formal
Assessment Phase (155mm Ballistic sensor Fuzed Munition, Non Signature
Rotary Wing for Helicopters and two C17s). Of the remaining projects,
nine (22%) have spent more than 10% of the total estimated project
cost during the Assessment Phase. These are:
| PROJECT
| COST OF ASSESSMENT PHASE AS % OF FORECAST PROJECT BUDGET
|
| Land Environment Air Picture Provision (LEAPP)
| 43% |
| Anti-Structures Munition
| 36% |
| Artillery Fuzing System (AFS)
| 30% |
| Chinook Mk.3 Reversion Programme
| 23% |
| HILDING | 20%
|
| Advanced Jet Trainer |
14% |
| Seawolf MLU | 12%
|
| SOOTHSAYER | 11%
|
| FALCON | 10%
|
- (Recommendation 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)
We welcome the Committee's acknowledgement regarding
the good progress being made in improving the skills of those
involved in acquisition and can confirm that the MoD remains committed
to continuing to build on the achievements to date.
The funded DE&S Upskilling programme is being
taken forward into Financial Year 2009/10 to continue the development
and acquisition of required future skills. The Skills Directors
have produced their skills plans which have translated into 71
separate skills interventions across the Commercial, Finance,
Logistics, Engineering, Programme and Project Management, Information,
Corporate Support and HR job families.
- (Recommendation 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)
Within MoD, the Commercial Function is currently
benchmarking the competences and skills of its commercial staff,
taking fully into account the likely skills needs of the future.
Based on the outcome of this exercise, a People and Workforce
Plan will be developed, including the resulting training needs
analysis which will enable the design of a comprehensive training
programme aimed at closing identified skills gaps. It is anticipated
that the training to be delivered by this plan will address time/value
issues.
- (Recommendation 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)
We note the Committee's comments regarding the need
to monitor the impact on staff morale of the restructuring programme.
Changes within DE&S are being taken forward within a single
framework; the Performance, Agility Confidence and Efficiency
(PACE) Change Programme. We launched this programme not least
to enable staff to understand our overall plans and the timescales
for their implementation. In January 2008 we set out these plans
in a "blueprint" for the future of DE&S and have
since been undertaking a sustained communications campaign, including
web-based and published material as well as face-face briefings
for staff. Managing the necessary changes as a coherent programme
enables us to explain how individual changes within the programme
link together to deliver the single aim of PACE: the improved
effectiveness of DE&S.
PACE includes specific efforts to improve leadership
and skills across the organisation, to improve our ability to
deploy the right staff to priority activities and to improve the
means by which the MoD delivers capability to the Front Line,
through-life. Each of these elements has been collectively and
individually explained to staff, not least with the intent to
reduce uncertainty to the maximum extent possible, though we accept
that in any change activity of this nature, some uncertainty amongst
staff is inevitable.
With the implementation of these changes, and taking
into account the staffing implications of a number of planned
individual future projects, our assessment of the number of staff
needed in DE&S by 2012 is 20,000. With the necessary internal
rebalancing to take into account, for example, the level of Urgent
Operational Requirement activity being undertaken in some areas
within DE&S , we expect this to be sufficient to meet the
highest priority tasks, though this will be kept under close review.
We need, for example, to continue to recruit staff both to refresh
our talent pool and ensure that we retain overall staff numbers
at the right levels whilst the PACE changes are put in place.
Numbers of staff in DE&S is not the only driver of Departmental
procurement performance as the Committee is well aware. A range
of factors contribute, including but not limited to, skills levels
in DE&S, elsewhere in the MoD and in industry.
In order to help the MoD restructure both in Head
Office and DE&S a Departmental Early Release Scheme was announced
on 23 October 2007. In DE&S, the process was used as a component
of skills rebalancing in an organisation that was reducing in
size and collocating its staff resources in the Bristol area.
Accordingly, DE&S held skills panels to assess all potential
releases against skills criteria for the future organisation.
Only those with the lowest skills weightings had their applications
supported. 185 have been released in financial year 2008/09 and
236 will be released in financial year 2009/10. The exercise is
running in parallel with an upskilling programme for the remaining
staff and recruitment is in progress where skills gaps arise.
Sustaining and improving our acquisition capability is the DE&S
priority. The total cost of the Early Release Scheme for the MoD,
taken over a 10 year period, including redundancy and early retirement
is £23.5M.
It is only in exceptional circumstances, and usually
only as a short term measure, that consultants are employed to
undertake work previously carried out by DE&S staff who have
left under such arrangements. Under the current scheme there have
been no instances of staff being released and then being replaced
by consultants. Of DE&S staff released in previous schemes
only a small number of these posts have been filled by Manpower
Substitutes. The estimated total cost is in the order of £32K
per month.
- (Recommendation 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)
The MoD will provide a copy of the independent report
to the Committee and will set out how the findings and recommendations
will be taken forward.
Progress with the short examination
- (Recommendation 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)
We do not accept this conclusion. The Future Rapid
Effect System (FRES) programme continues to reflect Defence's
commitment to support current operations. Upon entry into service,
the Specialist Vehicle Reconnaissance variant shall replace immediately
the 37 year old Combat Vehicle Reconnaissance (Tracked) fleet
employed on operations.
Defence has invested significantly in Protected Mobility
(PM) in the recent past, however the PM package has never been
designed as a substitute for the Utility Vehicle (UV) programme;
indeed, it has been designed to cater for the specific operational
requirements of Iraq and Afghanistan, and the capability delivered
falls significantly short of the stated UV requirement to deliver
the medium component of the Balanced Force through the FRES programme.
In May 2008 we announced the provisional selection
of Piranha V, offered by General Dynamics (UK) Ltd, as the preferred
design for the FRES UV. Following a period of intensive negotiations
with General Dynamics to address a number of commercial issues,
it became clear to both parties that it would not be possible
to reach agreement on the commercial conditions required to enable
further progress on the basis of the current procurement strategy.
It was therefore decided that we should withdraw General Dynamics
(UK)'s provisional preferred bidder status.
Our examination of the Equipment Programme, in 2008,
separately considered the balance of investment and priority in
the Army's armoured vehicle programme. We have concluded that,
in the context of current operations, and bearing in mind the
considerable recent investment in Protected Mobility, the highest
priority should now be accorded to delivering the Warrior Capability
Sustainment Programme and the FRES Scout vehicle as quickly as
possible. Against that background, we have decided to restructure
the FRES programme, giving priority to FRES Scout. We are now
considering how best to take forward the procurement of the Utility
Vehicle, but General Dynamics (UK) will have an opportunity to
compete in any future Utility Vehicle competition.
The cost of the FRES UV programme until the end of
February 2009 was £133m. This investment in the UV programme
will serve to progress and de-risk the early stages of the SV
programme. The Department can confirm that we have identified
lessons that will be applied to all elements of the FRES programme
as it moves forward. We are now considering how and when to reset
the competition.
- (Recommendation 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)
We note that the announcement in December 2008 has
been well received by the Committee and that they intend to continue
to monitor progress in taking our plans forward which we anticipate
will be covered in detail in the forthcoming inquiry into Helicopter
capability.
- (Recommendation 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)
We can confirm that the Future Lynx programme (now
called the Lynx Wildcat programme) has passed its main investment
decision and that the contract with AgustaWestland has been signed.
The current forecast cost for the Demonstration & Manufacture
phase of the project is £1668M.
The planned in service dates remain 2014 for the
Battlefield Reconnaissance Helicopter and 2015 for the Surface
Combatant Maritime Rotorcraft.
Based on current planning assumptions, the Lynx Wildcat
programme will deliver 34 helicopters in the Battlefield Reconnaissance
role and 28 Surface Combatant Maritime Rotorcraft. This represents
a reduction in total Lynx Wildcat numbers from an original figure
of 70 to a total of 62. The reduction in aircraft numbers is a
result of a review of our Light Helicopter requirement and of
our working with AgustaWestland to establish increased commonality
between the Army and Royal Navy variants of Lynx Wildcat and their
training and support arrangements. This will give the fleet as
a whole greater versatility and flexibility, able to satisfy both
the battlefield and maritime requirements.
- (Recommendation 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)
We note the Committee's comments but we believe that
this was the right decision and makes sense from the defence point
of view and from the point of view of the best management of resources.
We can confirm that the decision to delay the In
Service Dates will not create a gap in our Carrier Strike capability.
Our ship programmes are kept under continuous review to ensure
that the in-service dates for the HMS QUEEN ELIZABETH and HMS
PRINCE OF WALES will remain coherent with the Out of Service dates
for HMS ARK ROYAL and HMS ILLUSTRIOUS.
The Queen Elizabeth Class Carrier programme is currently
seeking re-approval through the MoD's Investment Approvals Board.
As is normal practice, we will only set and announce revised in-service
dates once this re-approvals process has been completed.
- (Recommendation 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)
The ongoing Carrier Strike requirement is to have
one vessel in a state of operational readiness at any one time.
HMS ILLUSTRIOUS and HMS ARK ROYAL take turns as the high readiness
carrier. The naval programme is kept under continuous review to
ensure that the required level of capability is maintained throughout
the transition from the Invincible to the Queen Elizabeth Class
carriers.
- (Recommendation 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)
In making our decision to re-profile expenditure
in the early years of the manufacture of HMS QUEEN ELIZABETH and
HMS PRINCE OF WALES, we recognised that this would result in an
increase in the overall project cost but not in a loss to the
nation's defence capability. We estimated the costs in close consultation
with the Aircraft Carrier Alliance (ACA) and other stakeholders.
As the Minister of State for Defence Equipment and Support confirmed
during the Defence Procurement debate on 20 April 2009, the exact
amount of money depends on contractual negotiations, which are
currently proceeding and it is not in the national interest to
give precise figures at the moment.[1]
Once the figures are confirmed we will inform the Committee and
expect those figures to be reflected in due course in the MoD
Annual Report and Accounts and Major Projects Report.
- (Recommendation 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)
We note the Committee's reservations about the security
of jobs and specialist skills that they believe could be at risk
as a result of the decision to delay the Carriers. We would reiterate
that these changes were developed to minimise the impact on employment
and we do not, at this stage, anticipate job losses resulting
from this.
The decision to extend delivery of the Carriers was
made as a result of the MoD's Equipment Examination, the objective
of which was to reprioritise investment to ensure that we deliver
those capabilities of the highest immediate urgency, while continuing
to invest in capabilities needed to respond to future threats.
That is what it achieved.
On 2 March 2009, the ACA announced that the build
strategy for the manufacture of HMS QUEEN ELIZABETH and HMS PRINCE
OF WALES had been adjusted in order to meet the MoD's budget requirements,
reduce risk and protect core capability in the main UK shipyards.
The adjustment is in keeping with the outcome of the Equipment
Examination and the decision to re-schedule delivery of the two
carriers.
In the case of the decision to extend the carrier
programme, the extension also smoothed the industrial workload,
as well as bringing the programme more closely into line with
the planned timescales for the Joint Combat Aircraft.
- (Recommendation 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)
We welcome the recognition by the Committee of the
good progress being made on the Joint Strike Fighter programme.
Plans to participate in the Operational Test and Evaluation of
Joint Strike Fighter along with the US services were confirmed
on 18 March 2009 when the Secretary of State for Defence announced
that approval had been given to purchase 3 Short Take Off and
Vertical Landing Joint Strike Fighters.
The Joint Strike Fighter programme continues to progress
well with three Development Test aircraft now flying, including
the second Short Take Off and Vertical Landing Joint Strike Fighter
(BF-2) development aircraft making its maiden flight in March
2009.
The UK has all the assurances necessary from the
USA with regards to Operational Sovereignty requirements at this
stage of the programme. We see participation in the Operational
Test and Evaluation Phase of the programme as a key element in
ensuring that we develop the full operational knowledge of the
aircraft we need.
- (Recommendation 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)
On reconsideration we no longer considered that the
high bespoke specification for the new naval tankers was essential
or justifiable as a priority and we have decided to consider alternative
approaches to meeting this requirement. Accordingly, the current
competition for the MARS Fleet Tankers (FTs) has been cancelled.
We do not expect this activity to create a gap in
defence capability - the Royal Fleet Auxiliary will continue to
operate the two Wave class double hulled tankers and four single
hulled tankers and two multi-commodity ships in support of Royal
Naval operations.
The International Maritime Organisation and EU legislation
bans the operation of non-exempt single hulled tankers of any
age from 2010 onwards. Government ships are exempt from this legislation,
but the MoD is nonetheless continuing to work with the
relevant bodies to achieve full compliance in the longer term.
Royal Fleet Auxiliary (RFA) vessels are merchant
registered and British Flagged ships and are legally mandated
to be certified by the Flag State (eg Maritime Coastguard Agency
and maintained by standards set by a Classification Society (Lloyds
Register).
- (Recommendation 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)
The Equipment Examination provided more support for
current operations but also recognised the importance of continuing
to invest in capabilities needed to respond to future threats.
The Minister for Defence Equipment and Support confirmed in his
evidence to the Committee that we remained committed to a range
of key future capability programmes, including the Astute submarine,
the Future Carrier and the Joint Combat Aircraft. The Secretary
of State for Defence has subsequently confirmed our decision to
buy three Joint Strike Fighter test and evaluation aircraft. The
MoD will continue to ensure that the Equipment Programme remains
flexible to changing priorities but in so doing will continue
to recognise the importance of investing in longer term capability
requirements.
Status of Equipment Programme
- (Recommendation 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)
We do not accept that Equipment Programme has been
paralysed. Positive decisions to invest in new equipment are regularly
being taken and high value contracts are still being awarded to
industry. This is reflected in the level of capital expenditure
on defence equipment projects. Figures for financial year 2008/09
have yet to be finalised but we expect to spend £6.9 Billion,
compared with £6.7 Billion in 2007/08 and £6.5 Billion
in 2006/07.
In announcing the outcome of the Equipment Examination
in December 2008, we re-stated quite clearly our continuing commitment
to invest in new equipment programmes, both in the short term,
for those capabilities required on current operations and also
to in the longer term to provide our forces with the capabilities
needed to respond to future threats.
Even during the short examination of the equipment
programme, when inevitably there were some decisions that needed
to be put on hold, where the direction of future policy was clear,
important decisions were not delayed. Only in very isolated instances
have investment decisions been put on hold as a result of measures
to control in year expenditure. These factors have affected only
a very small number of investment decisions and should not overshadow
the overall picture.
- 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)
The MoD will announce any significant decisions to
Parliament as soon as we are in a position to do so.
Funding of Equipment Plan
- (Recommendation 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)
The Defence Budget continues to grow in real terms
year on year and by 2011 it will be 10% higher in real terms than
it was in 1997. A major element of that investment has been, and
continues to be, providing the capabilities our Armed Forces require.
As with any organisation or business, however, we must sensibly
prioritise the use of available resources to deliver those capabilities
of highest immediate urgency while ensuring we continue to invest
in the capabilities needed in the longer term. That was the aim
of the Equipment Examination, which brought the equipment programme
more closely into balance.
More widely, our planning round process is designed
to ensure we utilise the significant resources allocated to best
meet the requirements of Defence. Inevitably as priorities alter,
we must adjust our resource planning too, which is the purpose
of the planning round process. Work continues to finalise Planning
Round 2009 and this will be implemented as normal business within
the MoD.
Pre-budget statement
- (Recommendation 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)
The defence industry was not selected to receive
an injection of cash as part of the stimulus package announced
in the pre-budget statement because it did not meet the criteria
for inclusion. The nature of the defence industry is such that
it cannot efficiently and rapidly generate fiscal stimulation.
That is why other areas of industry were selected. We stand by
this decision. The Budget Statement did, however, include the
announcement that £50M of additional military spending will
be brought forward in this financial year.
Defence continues to invest heavily in the core equipment
programme as well as in UORs. We fully recognise the important
part that Small and Medium Enterprises (SMEs) can play in delivering
capability to our front line forces as part of the supply chain
and we anticipate will continue to benefit from our current and
planned investment.
We are always looking to encourage entry by SMEs
into a broader range of UK defence opportunities. We have developed
this theme considerably since the publication of the Defence Industrial
Strategy (DIS) in 2005. MoD's Supply Network policy aims to promote
a fair and healthy supply network which is robust, consistently
delivers to time, cost and quality, is responsive to rapidly changing
requirements and is customer focussed. It is our intention to
set out this policy within the updated DIS.
Noteworthy recent developments include:
- MoD signature of SC21 (Supply
Chain for the 21st Century) at Farnborough 08;
- The establishment of the pilot
Centre for Defence Enterprise which acts as an incentive for companies
including SMEs to engage with MoD and aims to introduce a new
business model which faster and more responsive in addressing
the needs of small business;
- The lowering of the threshold
for the advertisement of tender and contract opportunities in
the MoD Defence Contracts Bulletin for 'warlike' and 'non-warlike'
goods and services to £40K.
Defence research spending
- (Recommendation 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)
The MoD has the challenge of balancing immediate
objectives, like support to operations, whilst also preparing
for the security challenges of the future. We recognise that research
is essential in delivering battle-winning military capability
now and in the future but have to spend within our means. There
have been major changes to the availability of high quality science
and technology to which defence is adapting, and which have helped
facilitate the adjustments the Department has had to make to research
spending as it seeks to balance priorities across the Defence
programme as a whole. MoD has been developing its approach to
better access and exploit sources of innovation both in-house
(or former in-house) and an increasingly wide range of other research
providers - small business, academia and traditional defence industry,
which was previously at a distance from early research. Expenditure
by the MoD on Research and Development in financial year 2008/09
will be published in the MoD Annual Report and Accounts in Summer
2009.
In February 2009, MoD was the first Department to
publish its Innovation Procurement Plan. This highlights the range
of important strategies and initiatives that seek the extensive
civilian technology innovation available in that part of the UK
science and technology supplier base that has yet to fully engage
with the defence sector. The Grand Challenge, which completed
in August 2008 and has seen its winner receive a development contract
of over £1M, and the opening of the Centre for Defence Enterprise
are particularly noteworthy, and have been widely applauded. Through
such activities the MoD is encouraging more joint work and investment
between industry, academia and small and medium size enterprises.
The Defence Technology Plan, published with the Innovation
Plan, gives clear research requirements for suppliers to enable
them to understand our detailed requirements and align their activities
accordingly. This dynamic and open web-based plan is allowing
the MoD to achieve closer alignment of work with potential suppliers.
Defence research is now better focussed on areas that make a real
difference to the Armed Forces; better equipment, better ways
of fighting and better development of our people. We believe that
this overall effort will maintain and improve our capability going
into the future. MoD remains committed to delivering the best
equipment for our Armed Forces.
Measures to limit DE&S spending
- (Recommendation 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)
The purpose of the Commitment Control Regime (CCR)
is not to reduce spending on equipment programmes but to match
the available resources to the highest priorities thus ensuring
resources are targeted to current operations whilst managing within
budget.
In autumn 2008, CDM formalised the CCR involving
external stakeholders in the process. A type of CCR process has
been in use within DE&S for the last two years and previously
similar versions were in place within the DPA and DLO dating back
to Financial Year 2003/04. The difference between this year and
previous years was the definitive central guidance published,
reflecting the implementation of Defence Acquisition Change Programme
and the change in funding 'ownership' in future years.
Defence Inflation
- (Recommendation 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)
Developing a robust new measure of defence inflation
is inevitably complex and time-consuming as the MoD explained
in its response to Recommendation 28 of the Committee's Fifth
Report and in the evidence from the Permanent Secretary and Finance
Director on 4 November 2008 in response to the Committee's letter
of 11 November. The resources allocated to this work reflect the
competing demands for scarce resource within the MoD. Additional
resource is unlikely to accelerate the programme of work significantly
due to the complex nature of the work and the considerable learning
that would be required. The MoD will consider the suggestion to
consult the Defence Industries Council.
Responsibility for implementing the Defence Industrial
Strategy
- (Recommendation 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)
The Minister for Defence Equipment and Support is
the minister responsible within the MoD for the Defence Industrial
Strategy (DIS) although the Secretary of State for Defence maintains
oversight. The Director General Defence Commercial is the Senior
Responsible Owner for the DIS, charged with overseeing its implementation
and execution, and for seeing that it is refreshed, current and
relevant to the business needs of MoD and of industry.
The Chief of Defence Materiel (CDM) is responsible
within DE&S for ensuring that the sector strategies of the
DIS are implemented.
Progress in implementing the Defence Industrial
Strategy
- (Recommendation 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)
There has been much progress in implementing the
DIS since its publication. We have not suggested or envisaged
that all elements of the DIS would be implemented in parallel
and at the same pace. Of course, the ongoing work on the annual
Planning Round means that we have not reached the degree of certainty
we need to fully share our planning assumptions and data. We have,
however, consistently sought to conduct our business with industry
on as open and transparent a basis as possible. For example, the
Director General Defence Commercial has discussed aspects of our
equipment planning with individual companies; we have been developing
DIS with industry and have shared our thinking and drafting in
a series of structured workshops; and we are developing our Business
Ethics policies and processes with industry. Furthermore, in line
with the DIS commitment to involve industry at an early stage
in the acquisition processes the MoD holds 'Industry Days' and
briefings in order to give information to potential suppliers
about possible future purchases, contract opportunities, and to
share understanding of our future requirements. We believe industry
recognises the progress there has been in implementing the DIS,
and the openness with which we have conducted our discussions
with it. Of course, we recognise that industry would like the
MoD to be even more transparent. The MoD remains fully committed
to greater openness and sharing information, with the emphasis
on releasing data that helps us to achieve our mutual objectives.
- (Recommendation 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)
The negotiation of a Long Term Partnering Agreement
with BAE SYSTEMS has been put on hold because the MoD has decided
to take a broader perspective of the sector in recognition of
the changing industrial and economic climate. A sector wide strategy
and implementation plan is being developed to set the context
for any future long term arrangements. The aim is to deliver this
strategy later this year.
- (Recommendation 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)
Enabling more effective through life capability management
was a central goal of the Defence Acquisition Change Programme,
established in 2006 to implement the recommendations of the Enabling
Acquisition Change review. Under the programme, wide ranging changes
have been made to the MoD's acquisition system. These include:
- the merger of the DPA and the
DLO to create DE&S, an integrated procurement and support
organisation responsible for equipment through life;
- a major investment in improving
acquisition critical skills;
- new arrangements for the planning
and management of military capability through life, that properly
join up the different parts of MoD, including the front line user,
to create a "MoD unified customer";
- the piloting of early engagement
of industry in capability planning and requirements setting to
promote greater realism at the outset;
- a new departmental financial
planning process, that brings together previously separate plans
for equipment and equipment support across a 10 year timeframe;
- revised, streamlined arrangements
for scrutiny and approval of investment decisions;
- the implementation of a new
intranet-based Acquisition Operating Framework, superseding the
previous Acquisition Management System, which provides a single
and widely accessible source of acquisition guidance at the strategic,
operational and tactical levels.
These changes have been progressively "mainstreamed"
into business as usual over the past couple of years. Thus, for
example, the new arrangements for capability planning have been
used in Planning Rounds 08 and 09. But it is too early for change
of this significance to be "fully embedded". Moreover,
the MoD continues to push the boundaries of the changes already
made. There are currently three main areas of focus: around extending
TLCM more fully into capability delivery, further developing the
DE&S and strengthening the commercial function. Bernard Gray
has been asked by the Secretary of State for Defence to carry
out an independent review of progress with all the reforms and
to make any further recommendations to secure better value for
money in the delivery of major acquisition programmes.
Updated version of the Defence Industrial Strategy
- (Recommendation 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)
See response to conclusion 43 below.
- (Recommendation 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 MoD remains firmly committed to the Defence Industrial
Strategy (DIS) and has engaged closely with industry to develop
it further. The time, however, is not yet right to publish DISv2,
a position which Industry at the highest level agrees with. We
continue to review the timetable for the publication of the planned
update but a date has yet to be determined. It is likely to be
when work to examine the medium and long term equipment issues
has been completed with sufficient resolution to allow meaningful
updates to inform the industrial sector strategies; and when we
feel we need to communicate some substantial change to our defence
industrial strategy. Working jointly with industry, we have made
a sustained effort to develop the sector strategies. There are
five sector strategies (maritime, fixed wing, rotary wing, weapons,
and land) and these strategies have already delivered, and continue
to deliver direct benefits to the defence programme across procurement
and support. Many lessons have been learned and are being applied
from the implementation of this family of complex industry sector
strategies
We do not believe that the lack of an updated
version is having a significant impact on the achievement of the
original DIS objectives, where we continue to make good progress.
Nor does the MoD accept that the absence of DISv2 significantly
increases the risk that the UK defence industrial base will be
unable to meet the future requirements of our Armed Forces. The
guiding principles set out in the original DIS remain valid and
thus still underpin all MoD's acquisition activity and are driving
transformation that will deliver equipment to the front line at
value for money for the taxpayer.
The Defence Industrial Base
- (Recommendation 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)
The DIS recognised that there were challenges ahead
for the UK industrial base and set out the changes that were required
to maintain a sustainable and competitive UK defence industrial
base.
The health of the UK defence industry in general
and more specifically those sectors where we wish to retain a
UK capability are considered regularly via individual discussions
with industry by Ministers and senior staff (including the National
Defence Industries Council) as well as assessments by the MoD
DIS sector teams. MoD also takes part in cross-government activity
to monitor and address the health of UK industry in general.
- (Recommendation 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)
Since joining the Supply Chain (SC21) programme at
the Farnborough Air Show in July 2008, the MoD has been fully
engaged with SBAC at all levels of the SC21 programme. MoD officials
with appropriate skills have been deployed to support major prime
contractors in activities to identify and promote improvements
in their respective supply chain companies. MoD officials also
participate as members of the three SC21 'Special Interest Groups'
(addressing the topics of 'certification & quality improvement',
'development & performance' and 'relationships'). In addition,
MoD has provided representatives at SBAC-led 'SC21 Task Force'
and 'Implementation Working Group' meetings. We have also supported
a number of events led by regional trade bodies aimed at communicating
and promoting the SC21 programme across the UK aerospace and defence
industry. MoD plans to continue contributing to all of these strands
of the SC21 programme.
The MoD concurs with the observation made by Ian
Godden during the hearing of 18 November 2008 that "the programme
is alive, well and kicking and doing a good job, but it could
be faster, it could be better and it needs to be pushed hard from
all angles.....". Since the launch of SC21 in 2006, the number
of suppliers signed up to the programme had reached 452 by mid-March
2009, and of these, more than 100 suppliers had been subject to
at least an initial diagnostic review to indicate areas for business
improvement. The benefits of SC21 have also been recognised by
regional authorities who have secured funding in excess of £2.5M
aimed at helping SMEs with implementation of the programme. This
all represents encouraging progress which should result in real
benefit to performance and competitiveness. We recognise, however,
that progress is dependent on the continuing commitment of resources
by all parties to maintain the necessary momentum.
The benefits to both MoD and Industry in taking forward
SC21 are potentially considerable and, for MoD, should feed through
to improvements in project timeliness, costs and performance.
More effective supply chain interaction and communication through
better relationships and standardised accreditation and business
processes should ultimately lead to more timely responses to MoD
requirements by a more effective and cohesive supply chain. Reducing
the overhead of duplicative accreditation should also reduce effort
and thus costs, whilst better relationships, interactions and
communication throughout the supply chain are expected to help
in pulling through innovative proposals from lower tier companies.
1 Hansard Official Report 20 Apr 2009, Column 54. Back
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