Defence Equipment 2009: Government response to the Committee's Third Report of Session 2008-09 - Defence Committee Contents

Government response

Overview of DE&S progress

  1. (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.

  1. (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

  1. (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.

  1. (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.

  1. (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.

  1. (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.

  1. (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


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.

  1. (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.

  1. (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.

  1. (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

  1. (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.

  1. (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.

  1. (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.

  1. (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.

  1. (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.

  1. (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:
Land Environment Air Picture Provision (LEAPP) 43%
Anti-Structures Munition 36%
Artillery Fuzing System (AFS) 30%
Chinook Mk.3 Reversion Programme 23%
Advanced Jet Trainer 14%
Seawolf MLU12%

  1. (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.

  1. (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.

  1. (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.

  1. (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

  1. (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.

  1. (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.

  1. (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.

  1. (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.

  1. (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.

  1. (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.

  1. (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.

  1. (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.

  1. (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).

  1. (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

  1. (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.

  1. 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

  1. (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

  1. (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:

  1. MoD signature of SC21 (Supply Chain for the 21st Century) at Farnborough 08;
  2. 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;
  3. 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

  1. (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

  1. (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

  1. (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

  1. (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

  1. (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.

  1. (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.

  1. (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:

  1. the merger of the DPA and the DLO to create DE&S, an integrated procurement and support organisation responsible for equipment through life;
  2. a major investment in improving acquisition critical skills;
  3. 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";
  4. the piloting of early engagement of industry in capability planning and requirements setting to promote greater realism at the outset;
  5. a new departmental financial planning process, that brings together previously separate plans for equipment and equipment support across a 10 year timeframe;
  6. revised, streamlined arrangements for scrutiny and approval of investment decisions;
  7. 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

  1. (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.

  1. (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

  1. (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.

  1. (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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