Government response
This is the Government's response to the House of
Commons Defence Committee's report on Defence Equipment 2010 (Sixth
Report of Session 2009-10 (HC 99)), published on 4 March 2010.
The Committee's conclusions and recommendations are set out in
bold.
Overall performance
1. (Recommendation 1) The ability of DE&S
to deliver the equipment programme is overshadowed by the existence
of a funding gap which the NAO estimates could be as much as £36
billion over the next ten years. The management of this funding
gap, in particular the practice of delaying projects already underway,
is a major factor in the slippage of time and costs, and makes
it difficult objectively to assess the performance of DE&S.
It has been suspected for some time that this situation existed.
We welcome the public acknowledgement of the issue and the provision
of data about the extent of the problem. We accept the NAO's analysis
and wish to record our disappointment that it has taken the MoD
so long to admit to the problem. The evidence we have received
indicates that the MoD's responses to our questions about the
funding gap in our Defence Equipment 2009 inquiry were at best
confused and unhelpful and at worst deliberately obstructive.
(Paragraph 10)
The MoD does not accept that its responses to the
Committee's questions during the 2009 Defence Equipment inquiry
were confused, unhelpful or obstructive. At the beginning of that
inquiry the Equipment Examination was ongoing and it would have
been inappropriate to speculate on its progress or outcome. At
the conclusion of the Equipment Examination on 11 December 2008,
the then Secretary of State announced a series of measures which
helped bring the MoD's equipment programme more closely into balance
and also stated that further work would be taken forward into
the Planning Round. The Minister for Defence Equipment and Support
then discussed the Equipment Examination at length at his evidence
session with the Committee on 16 December 2008.
While we did not at the time provide details of the
financial implications, this was consistent with our policy not
to comment on internal planning assumptions unless it was appropriate
to do so. Some costs were also subject to commercial negotiation
with industry.
The Department's estimate at the end of the 2009
Planning Round of a £6 billion shortfall over 10 years assumed
that the budget would remain constant in real terms i.e. would
include an annual increase for inflation. The £36 billion
figure in the NAO report assumed that it remained constant in
cash terms. Defence spending from 2011/12 onwards has yet to be
settled, and any estimate of the shortfall between budget and
the estimated cost of the programme is therefore somewhat speculative.
This will be an issue to be addressed in the forthcoming Defence
Review.
Progress on key programmes
2. (Recommendation 2) There has clearly been
a change of direction with the armoured vehicle strategy, although
it is not evident whether this is just a change of priorities
and programme name, or whether there has also been a more fundamental
shift in strategy. It is also unclear whether the change in direction
is purely a result of the funding gap, or whether it is because
of a considered analysis that the original concept is no longer
appropriate. We have tried on many occasions in the past to elicit
details about FRES from the MoD without ever receiving clear answers.
We conclude, with regret, that the MoD has none to give. The MoD
must provide us with a written statement of its armoured vehicles
strategy, together with a schedule of the key events and decisions
to be taken in the next year and an indication of the required
delivery dates of each part of the programme. (Paragraph 20)
The FRES concept was to deliver a medium-weight armoured
vehicle fleet with higher levels of deployability and protection
than the current in-service fleet, and with potential to accommodate
future advances in technology. We also incorporated lessons from
operations in Iraq and Afghanistan that underlined the requirement
for vehicles that are both manoeuvrable and well protected. Under
the original FRES construct, our aim was to have integration and
coherence across the entire FRES fleet. This was a response to
the present situation where we have a very large range of vehicles,
lacking commonality and so each requiring a separate set of spares,
separate maintenance regimes and separate training for users and
maintainers. The Department now accepts that this was too ambitious
an approach.
We are now pursuing a recast armoured vehicles programme
in which, instead of a single programme with a complex procurement
strategy, we have a coherent set of constituent projects, namely:
the Specialist Vehicles; the Utility Vehicles; and the Manoeuvre
Support Vehicles. These projects will still deliver medium-weight
armoured vehicles with higher levels of deployability and protection
than the current in-service fleet, and will have the potential
to accommodate new advances in technology. They will also provide
the high degree of integration and interoperability essential
on the modern battlefield, with commonality within each vehicle
family. The cost of this strategy will be less commonality between
the different vehicle families, but it will still be a vast improvement
on the current situation. DE&S will ensure a whole systems
approach across all Land systems through its Systems Engineering
and Architecture Design function.
The Specialist Vehicle programme will incrementally
deliver a medium-weight armoured fleet to the UK Armed Forces
in blocks of vehicles. There are two families of Specialist Vehicles;
Reconnaissance and Medium Armour. The first increment to be delivered
will be Reconnaissance Block 1, this includes the Scout vehicle,
the replacement for Combat Vehicle Reconnaissance (Tracked) Scimitar
and the cornerstone of the Reconnaissance family.
The procurement strategies for the individual vehicle
projects will be more straightforward than the original FRES procurement
strategy, as they will focus on existing armoured fighting vehicles
that are considered the best in their class. This approach will
deliver the highly capable armoured fighting vehicle fleet that
the Army needs. The new approach has already had significant success
in the Specialist Vehicle project and we expect to select a Specialist
Vehicle Provider in the near future and sign a contract for Scout
and its initial support vehicles, and for a Common Base Platform
on which the other Specialist Vehicle variants will be based.
The key event during the next year will be the Main
Gate 1 approval for the Specialist Vehicle project to enter into
a Demonstration Phase with a down-selected prime contractor. When
considering the Committee's request for an indication of the required
delivery dates of each part of the programme, the Committee will
be aware of the MoD's policy of not releasing this information
until the main investment decisions are taken.
3. (Recommendation 3) With regard to the FRES
programme, we received no evidence of any systematic attempt by
the MoD to understand the reasons for past mistakes or to consider
how they could be avoided in the future. We call upon the MoD
to ensure that the lessons of the FRES programme are fully identified,
understood and set out in response to this Report, and ask the
MoD to provide an explanation as to how it will take heed of these
lessons. (Paragraph 21)
The main lessons to be learned are about risk to
delivery where a project is over-specified (in this case because
a perfectly integrated solution was sought when a less ambitious
approach would have been more effective) and when over-elaborate
procurement approaches are adopted. These are not new issues,
but the learning from the FRES project will be reflected in future
procurement practice and in implementing the recently published
Strategy for Acquisition Reform.
As regards the armoured capabilities programme itself,
we have focussed clearly on the delivery of capable vehicles as
the priority, rather than pursuing perfect fleet integration.
The new approach will deliver blocks of capability to our armed
forces as soon as possible.
In addition, the Acquisition Strategy has been simplified
from a complex alliance structure with multiple competitions.
The Specialist Vehicle competition is looking to appoint one prime
contractor to act as a single point of accountability for the
complete capability. This approach has enabled industry to form
their own team to develop and deliver the solution.
4. (Recommendation 4) The delivery schedule
of the A400M has been delayed by at least three years because
of technical problems and ensuing contract renegotiations. The
MoD told us that planning is in place to address the capability
gap. While the announcement of an additional C17 is welcome, and
will ease the airbridge fragility, it does not answer the question
of how the capability gap arising from the delay of 25 A400Ms
to replace the remaining C130Ks, which were procured in the 1960s
and are already incrementally being withdrawn from service, will
be addressed. The MoD should give us sight of its contingency
plans, as soon as the way ahead for the A400M programme is decided.
(Paragraph 26)
The MoD keeps its current and future airlift requirements
under constant review. The main effort is to ensure that the Armed
Forces have the best equipment to sustain current operations.
We have studied the impact of the delay to the A400M programme.
We have concluded that, after completion of the second runway
at Bastion in 2010, by investing in a package of enhancement measures
to maximise the use of the existing fleet of 24 Hercules C-130J,
(such as enhanced contractor support and an additional hangar
at RAF Brize Norton), we can sustain anticipated intra-theatre
airlift tasking on current operations until A400M enters service.
We fully recognise that beyond the support to current operations,
we will be constrained in the ability to undertake tactical airlift
taskings until A400M enters service. Although the small fleet
size means that using the full tactical capabilities of the C-17
would lead to significant growth in support costs, it can be employed
intra-theatre on paved runways. As well as boosting the UK's
strategic airlift capability, procurement of the seventh C-17
aircraft will therefore also contribute to reducing the risk to
the delivery of tactical airlift operations when it enters service
in March 2011.
5. (Recommendation 5) It is encouraging that
the first A400M flights have taken place, although it remains
to be seen whether the project can be put back on course. Negotiations
are difficult because of the need to accommodate the demands and
different governance arrangements of all seven partner nations.
The A400M submission for Main Gate approval did not appear to
incorporate the lessons of earlier multi-national projects and
we ask the MoD to explain why not. The MoD should provide to us
by the end of September 2010 a written evaluation of the lessons
learned from the A400M experience which will establish the most
effective basis for future collaborative projects. (Paragraph
27)
Although the A400M Main Gate submission did not explicitly
incorporate the lessons of earlier collaborative programmes, it
did recognise a number of collaborative risks and included risk
mitigation for key collaborative challenges. It identified in
generic terms that all risks were further compounded by the large
number of nations involved in the programme and the contracting
route through OCCAR. It also recognised what it referred to as
"collaborative drag" which indicated that decision-making
in a collaborative environment may be slower than a national programme
and included an adjustment to the target In Service Date to allow
for this. The programme was also launched as a single phase (i.e.
development and production under one contract), avoiding the risk
of national approval delays at critical programme phases that
had caused delays on previous collaborative programmes.
Risks associated with workshare were also considered.
The A400M proposal was based on a Global Balance approach, which
aimed to allocate workshare on the basis of capability, expertise
and value for money. Global Balance is not a rigid workshare arrangement
of the type employed on other programmes such as Tornado or Typhoon.
It should be noted that the problems that have hit
A400M in recent months fall into two main categories, primarily
the company's lack of awareness of technical risk and their lack
of adequate programme governance and financial control. Neither
of these has been materially exacerbated by the programme's collaborative
arrangements. In fact nations have collectively sought to influence
Airbus Military to raise their game. Partner nations have worked
well together in negotiations, admittedly with occasional differences
but ultimately converged on a solution which was acceptable to
all.
We will provide an evaluation of the lessons identified
from the collaboration, including the renegotiation, by the end
of September 2010.
6. (Recommendation 6) The delay to the Future
Carrier schedule has achieved short term savings but bigger long
term cost increases. The £674 million cost of delay, which
itself omits substantial elements of the true amount, represents
over ten per cent of the current estimated total cost of £5.2
billion for the carriers. Such cost increases in order to reschedule
the equipment programme are unsustainable in the context of a
tightening budget situation and illustrate precisely the reasons
why the equipment programme has become out of balance with the
budget. (Paragraph 34)
The decision to delay the project was taken to help
address issues of affordability in the programme and to prioritise
investment for equipment which was essential to support current
operations. The Government accepted that this decision would increase
the overall cost of the project and add to cost pressures in later
years but is committed, with the Aircraft Carrier Alliance, to
seeking and taking opportunities to drive out cost from the programme
as it proceeds.
7. (Recommendation 7) The original announcement
indicated that the carrier schedule had been delayed in order
to bring it into line with the schedule for the Joint Strike Fighters.
The Minister for Defence Equipment and Support has now confirmed
that the decision was also driven by a need to make short term
savings in the equipment programme. We also note that there still
appear to be outstanding issues concerning technology transfer
for the JSF, which are of key importance to the success of the
programme. The MoD should provide us with details of its carrier
transition programme when it is complete, highlighting any areas
where there is a risk of a capability gap. (Paragraph 35)
The objective of the Equipment Examination was to
reprioritise investment to ensure that we delivered those capabilities
of the highest immediate urgency, while continuing to invest in
capabilities needed to respond to future threats. That was what
it achieved. In the case of the decision to delay the Carrier
programme, the delay also smoothed the industrial workload, as
well as bringing the programme more closely into line with the
planned timescales for the Joint Combat Aircraft/Joint Strike
Fighter.
On the issue of technology transfer for the Joint
Strike Fighter (JSF), the UK has all the information it requires
at this stage of the programme. The Department continues to work
closely with the US to secure the commitments required on operational
sovereignty - that is to say the ability to operate, repair and
maintain UK assets at a time of its choosing and through life.
Progress is being made in this area by the UK's inclusion in the
JSF Operational Test and Evaluation development planning, continued
presence and increased access of UK expert personnel within the
JSF programme in the USA, and proposals to increase the level
of access to JSF information for UK industry. The Department is
fully aware of the interdependence of Joint Combat Aircraft to
the new carriers and other equipment capability. We are of course
content to share transition information with the Committee and
envisage that the time to do this would be following our main
investment decision on JSF.
8. (Recommendation 8) Although the MARS programme
is in danger of overtaking FRES as the longest running programme
failing to deliver any equipment, we consider that the MoD is
right to take advantage of the current availability on the market
of double hulled tankers. The new procurement competition is seeking
a less highly specified tanker. We look to the MoD for an assurance
that it has assessed any possible loss of capability arising from
this reduced specification and has made any necessary alternative
provision. The MoD should provide us with a clear programme for
the MARS fleet tankers against which we can monitor progress.
(Paragraph 38)
The original competition for the fleet tanker element
of the Military Afloat Reach and Sustainability (MARS) programme
was launched in 2007 but was cancelled in 2009. The procurement
strategy was reviewed and it was concluded that a more open approach
which considered a broader range of possible solutions was likely
to provide the best value for money. Pre-Qualification Questionnaires
have been received and are being evaluated. The process is nearly
complete and once it has been finalised invitations to submit
outline proposals will be issued. The aim is to award the contract
to the successful bidder in 2012.
Until the successful bidder has been identified and
the contract placed it is not possible to provide a clear programme
for delivery with any degree of confidence without prejudicing
the competition. The MoD will ensure the successful bidder's proposal
provides the essential capability required to support the Royal
Navy and is delivered in an appropriate timeframe, and that any
capability trade-offs are appropriately assessed and managed.
9. (Recommendation 9) We expect the MoD in
its response to this Report to tell us exactly when HMS Daring
will have full PAAMS capability, following all appropriate tests
and trials, and to set out the extent to which the lack of this
full capability is a liability in terms of the defensive capability
of the vessel. (Paragraph 42)
The MoD is not yet able to confirm when HMS DARING
will have full Principal Anti Aircraft Missile System (PAAMS)
capability. Technical investigations into issues observed during
PAAMS test firings from the Longbow barge last year are progressing
well, but they have not yet reached a conclusion. The PAAMS weapon
system is complex and conducting a necessarily comprehensive investigation
and developing a robust solution is therefore taking time. Depending
on the outcome of the investigation, time will also need to be
factored in for any re-work required to elements of the weapon
system that have already been delivered. The Department continues
to plan, however, on the basis that the issues can be resolved
and the subsequent PAAMS test firings completed in time to enable
the first firing from a Type 45 Destroyer to go ahead, as previously
planned in late 2010, from HMS DAUNTLESS.
Lack of an operational PAAMS capability would prevent
HMS DARING from being tasked in its primary area air defence role.
HMS DARING will retain a self defence capability and, should the
threat environment allow, could be tasked to support a number
of other operational requirements including Command and Control,
support to an embarked military force and Maritime ISTAR (Intelligence,
Surveillance, Target Acquisition and Reconnaissance).
10. (Recommendation 10) We are not convinced
by the MoD's explanation that the reduction in the required number
of Type 45s from twelve to eight and then eight to six was due
to a better understanding of the capabilities of the ship. Any
one ship can only be in one place at a time. Whilst new technology
may well have provided some better than expected capabilities,
the spiralling costs of the ship and the pressure on the equipment
programme budget suggest that the reduction in numbers was in
fact primarily down to affordability. The misleading explanations
provided by the MoD in this case are another example of the unhelpful
nature of MoD responses to our questions. We expect that our successor
Committee will in the next Parliament continue to monitor the
Type 45 programme until the associated air defence missile system
is successfully delivered. (Paragraph 43)
The Type 45 is an Air Defence Destroyer providing
protection from air attack for a task group in addition to other
roles. The Type 45, with its Principal Anti Aircraft Missile System,
Sea Viper, and the Samson Radar is arguably the most effective
Anti Air Warfare platform in the world. The large flight deck
allows the ship to carry a Lynx, Merlin or Chinook helicopter
which means that the ships can also be used in a number of other
roles such as anti-ship or anti-submarine operations.
The original planning assumption for Type 45 was
for twelve ships but in 2004 the "Future Capabilities"
White Paper stated that the assessment of the nature of the threats
facing the UK had changed and that eight Type 45s were sufficient
to meet the UK's strategic objectives.
Since then knowledge of the capabilities of the Class
has improved as the design and build of the ships have progressed
and the programme to fit the Co-operative Engagement Capability
system took shape. The Department therefore revisited the requirement
for eight ships and concluded that six vessels were sufficient
to meet the most likely operational scenarios. As was made clear
at the time, this decision was a difficult one, but it allowed
resources to be invested in higher priorities while still delivering
leading edge capability to the Royal Navy.
11. (Recommendation 11) The MoD did not send
us a copy of its Future Rotary Wing Strategy Statement until after
the start of our oral evidence session with the Minister for Defence
Equipment and Support, despite having previously briefed the press
and circulated the announcement in public. It is unacceptable
for a Departmental Select Committee to be the last to receive
a Department's announcement. (Paragraph 49)
It is our practice to email Written Ministerial Statements
to the Committee at the same time as they are sent to Parliament
for release. This practice was followed in this case, but the
Department greatly regrets that the Written Ministerial Statement
was not sent until after the Committee's evidence session on 15
December 2009 had started.
12. (Recommendation 12) The Merlin upgrade
is a complex programme involving changes of use and transfer of
aircraft between Services. The success of the programme is dependent
on the satisfactory completion and coordination of all of the
Defence Lines of Development, not just the technical upgrade of
the aircraft. The failure of any part of the programme impacts
the capability delivery, as has been shown in the case of shortages
of spare parts for Merlins currently in theatre. (Paragraph 50)
We agree that the success of the life-extension and
ship-optimisation of the Merlin Mk3/3a aircraft is dependent on
the satisfactory completion and coordination of all the Defence
Lines of Development (DLOD). This requirement to coordinate and
ensure coherence in DLOD delivery is a key tenet of the Department's
"Capability Delivery" agenda. We have therefore established
a Merlin Project Board, with empowered representatives from each
DLOD, to ensure the change and transfer of use of the Merlin aircraft
is delivered successfully.
The number of Merlin Mk3 operational days lost awaiting
delivery of spares has reduced year-on-year since the Integrated
Merlin Operational Support Contract started. Work is ongoing to
maintain this positive trend, to reduce the level of scheduled
and unscheduled maintenance and further improve the serviceability
of this platform. Over the last 3 months in theatre Merlin Mk3
aircraft have met their operational targets and exceeded their
allocated flying hours.
13. (Recommendation 13) We remain unconvinced
of the financial or operational merits of the Puma Life Extension
Programme. We believe that the MoD has underestimated the technical
and operational challenges of the Puma programme, and that there
is insufficient evidence to support the MoD's assurances of the
crashworthiness and the likely delivery dates of the updated aircraft.
We ask the MoD to provide further evidence to demonstrate that
a full risk assessment has been carried out on the survivability
characteristic of the Life Extended Pumas. (Paragraph 51)
We do not agree that we have underestimated the technical
and operational challenges of the Puma Life Extension Project.
It has been constructed to minimise the technical risks including
measures such as all major new systems already being successfully
implemented by Eurocopter on Puma aircraft for other customers.
Furthermore, in line with our schedule, we have recently conducted
a Critical Design Review on the air vehicle and avionics systems
that has successfully demonstrated a high level of design maturity
thus enabling the start of the manufacturing phase.
The first aircraft is now with Eurocopter and has
been stripped down ready for conversion. The level of emergent
work to the aircraft structure during this process has been substantially
less than anticipated and is testament to the very high standard
to which these aircraft have been maintained by the RAF. The project
remains on track to commence ground test on the Trial Installation
aircraft later this year; to deliver 14 aircraft by the end of
2012 and all aircraft by June 2014.
The Puma HC Mk2 Safety Strategy was independently
assured as part of the project approval and remains under regular
review. A key component of this strategy is a safety analysis
to assess the risk of technical failures resulting in accidents.
This will provide evidence of the level of compliance of Puma
HC Mk 2 to the UK aircraft safety target and confirm that all
identified risks have been reduced to a level which is As Low
As Reasonably Practicable (ALARP) and tolerable.
The Puma project is a key component of the Rotary
Wing strategy delivering vital lift capability in time to sustain
the necessary helicopter support to operations as the other elements
of the strategy are delivered (in particular the modification
of the Merlin Mk3/3a fleet, draw down of Sea King and the delivery
of new Chinook). As the Committee has previously been informed,
the Minister for Defence Equipment and Support requested a review
of the MoD's planning assumptions last summer to assess whether
there was a way to deliver the required capability without recourse
to the Puma LEP. It was concluded that not proceeding with the
LEP would involve an unacceptable risk to operational commitments.
In endorsing the Puma project, we concluded that
within the available funding and required timescales it represented
the lowest risk to sustaining the necessary helicopter support
on operations. Furthermore, its new engines and avionics systems
will mean that it will be suitable for the operating conditions
currently experienced in Afghanistan.
14. (Recommendation 14) The cancellation of
the Future Medium Helicopter programme will release a significant
number of MoD staff and we ask the MoD to provide details of its
plans for re-deploying this workforce. In the context of the cancellation
of the Future Medium Helicopter and the MoD's decision to purchase
Chinooks from the USA, we ask the MoD to explain what steps it
plans to take to maintain a UK capability to support and upgrade
helicopters, in accordance with the Defence Industrial Strategy.
(Paragraph 52)
The small number of staff that were working on the
assessment phase activity for the Future Medium Helicopter project
have principally been redeployed to work on the Puma Life Extension
Project and the new-buy Chinook project.
The Defence Industrial Strategy (DIS) clearly stated
that we would look to the global market place to satisfy our future
helicopter requirements and there was therefore never any guarantee
of UK work content based on the Future Medium Helicopter.
Our analysis, conducted jointly with AgustaWestland
under the Strategic Partnering Arrangement, has demonstrated that
the volume of work on Lynx Wildcat and long-term support contracts
will sustain key skills at Yeovil in the near-term. Work on Urgent
Operational Requirements and the planned upgrades and modification
of our Merlin helicopters under the Rotary Wing Strategy will
also help sustain both engineering and manufacturing skills at
AgustaWestland. In the longer term we continue to work closely
with the company to bring about business transformation to reduce
their reliance on orders for new MoD helicopters to sustain the
design engineering skill base. In this regard we are delighted
that AgustaWestland have successfully secured export orders and
are exploring other means to sustain skills.
Turning specifically to the UK Chinook fleet, the
depth maintenance of this fleet is performed by Vector Aerospace
based in Gosport under the successful Chinook Through Life Contractor
Support (TLCS) Prime Contract with Boeing. Boeing has also established
an on-shore engineering capability to enable them to design modifications
to UK Chinook aircraft and capability modifications have also
been performed on-shore both by AgustaWestland and Vector Aerospace.
While industrial factors were considered in taking
the decision to buy new Chinook, it was made principally for cost,
capability and operational reasons given the aircraft's outstanding
all-round performance. For the reasons set out above we are confident
that this decision does not undermine the UK skills base required
to support and upgrade our UK designed aircraft.
15. (Recommendation 15) During our Helicopter
Capability inquiry we expressed concern that commanders in the
field were hampered by a lack of helicopters but the MoD would
not accept that its helicopter fleet size was too small. Whilst
we now welcome the greater clarity provided on the future helicopter
fleet strategy and the recent decision to procure an additional
22 Chinooks, we note that this additional operational capability
will be funded from the MoD's core budget and so has necessitated
cuts from other parts of the equipment programme. Adding numbers
to the fleet is only one aspect of delivering additional capability
which also requires adequate manpower, training and support. We
understand that having more Chinooks in theatre will require more
support helicopters in the fleet and we have not yet seen how
these will be provided. It will also stretch an already tight
system where there are insufficient pilots and ground crew and
a budget for helicopter hours, and we seek assurance from the
MoD that all of the Defence Lines of Development for the Chinooks
have been properly planned. We believe that the estimated delivery
date of 2012 is optimistic and ask the MoD to provide details
of the planned transition arrangements. (Paragraph 53)
We agree with the Committee's comments that adding
numbers to the fleet is only one aspect of delivering additional
capability, which also requires adequate manpower, training and
support. To this end, the Rotary Wing Strategy not only increases
the Chinook airframe numbers by 22 but also includes the provision
for 36 additional Chinook aircrews and will make sufficient enhancements
to the support package to deliver over 8000 additional flying
hours per annum. However, the number of crews across Defence will
not increase as there will be comparable reductions in the Sea
King force in a similar timeframe; the size of the Merlin Mk3/3a
force (albeit transitioning to the Royal Navy) is not forecast
to change.
The additional 22 Chinook are funded from the core
MoD budget. Among other things, funding is provided via the early
retirement of the Sea King fleet and the cancellation of the Future
Medium Helicopter project. This approach has enabled us to deliver
significantly greater capability from the same capital investment,
while also delivering significant through life cost reductions.
The purchase of the 22 Chinook is a Departmental
priority and we firmly agree with the Committee's view that the
military effect cannot be delivered by just the equipment, the
other DLODs are critical too. The establishment of a Rotary Wing
Programme Board, as part of the "Capability Delivery"
agenda demonstrates the importance we place on Through Life Capability
Management across DLODs. We are developing the pan-DLOD plans
for the acquisition of the new Chinook and the cost and time for
delivery will be agreed later this year as part of our normal
approval process.
The funding gap
16. (Recommendation 16) The evidence suggests
that at the time that MoD witnesses gave evidence to our Defence
Equipment 2009 inquiry, the MoD was in the process of taking steps
to manage a funding gap of £21 billion. Witness denials at
that time of the existence of such a gap now appear disingenuous.
The Minister for Defence Equipment and Support told us he could
not provide any information about how the gap was reduced to £6
billion, nor the proportion of expenditure which was merely postponed
beyond the planning period. When we pressed in writing for further
details, the MoD provided little extra information. We reject
the MoD's arguments for refusing to disclose the measures it took
in order to reduce the funding gap to £6 billion. We cannot
fulfil our scrutiny role if the MoD refuses to provide such information
about its activities. We note that the Gray report made recommendations
about public scrutiny of the equipment programme and we return
to this issue in paragraph 87. (Paragraph 58)
In providing further information on how the defence
budget shortfall was reduced in the 2009 Planning Round, the Department
provided a significantly greater level of detail than had hitherto
been made public, recognising the importance of the Committee's
scrutiny role. However, it also needs to take into account that
the disclosure of internal planning assumptions can preclude the
full and frank discussion of planning options and the provision
of advice that is essential for Ministers to make fully informed
decisions, as well as affecting our commercial negotiations with
industry. Following the forthcoming Strategic Defence Review and
to help further improve transparency, as also highlighted by the
Bernard Gray report, we expect to publish an assessment to Parliament
each year of the affordability of our equipment plans against
10-year funding assumptions agreed with the Treasury, with the
NAO auditing the methodology used.
Cost of delays
17. (Recommendation 17) According to the NAO,
in recent planning rounds the MoD's strategy for managing its
unaffordable equipment plan has been to re-profile expenditure
by delaying projects so as to reduce costs in the early years
of the plan. However this practice increases overall procurement
costs and represents poor value for money. It is clear from NAO
data that the 2008-09 re-profiling exercise added £733million
to the future costs of the core equipment programme. (Paragraph
64)
While the NAO reported that decisions to delay certain
projects had added £733 million to future costs of the equipment
programme, they also reported that the Equipment Examination and
other 2009 Planning Round measures reduced the defence budget's
overall forecast overspend by £15 billion. The Department
accepts that decisions to delay projects can add to through life
costs, but in this case the measures taken were seen as the best
available to improve the affordability of the programme and enable
more resources to be directed at higher or more immediate priorities,
in particular those relevant to support for current operations.
The Department is determined to bring the equipment programme
into better balance, and sees the forthcoming Strategic Defence
Review as an opportunity to do so.
18. (Recommendation 18) The Gray report estimates
that the 'frictional costs' of delays within the equipment programme
are in the range £900m to £2.2 billion a year. Although
some of the DE&S witnesses did not accept these estimates,
they were unable to provide alternative figures. The MoD is spending
hundreds of millions of pounds a year on unproductive activities
because it has commissioned more work than it can afford to pay
for. It is shocking that the MoD has apparently made no attempt
to calculate the extent of such costs and that it has therefore
taken decisions to delay projects without understanding the full
financial implications. The MoD must develop a system for calculating
the full extent of the cost of delays and that such costs are
explicitly documented in all future revisions of the equipment
plan. The MoD should confirm that the full extent of the cost
of delays will be explicitly documented in its annual reports
to Parliament of the cost and affordability of the equipment and
support programmes against the ten year planning horizon agreed
with HM Treasury. (Paragraph 65)
The Department accepts the over-arching conclusion
of the Gray report that delay can add to costs and that delaying
major projects for reasons of short-term affordability should
be avoided as far as possible. The Strategy for Acquisition Reform
is founded on the recognition that the Defence equipment programme
needs to be brought into better balance.
We will, however, continue to face tough choices
in managing the programme. Delay may sometimes be a sensible option,
if for example we need to focus more of our resources on higher
or more immediate priorities, such as support to current operations.
Decisions of this kind have always been made taking full account
of the direct financial consequences. The Gray report, however,
sought to go beyond these direct costs by postulating and seeking
to quantify a wider range of indirect and, necessarily, more subjective
financial consequences of delay. In doing so, however, it recognised
(page 38) that:
….there are a variety of different judgements
which might legitimately be made in forming a view about [frictional]
costs'; and: '…this is not a precise science. Further work
might refine these numbers, but even with perfect management information,
it would not be possible to ascribe a single value to these costs.
Acknowledging these limitations, however, as part
of our efforts to improve the fidelity of costing information,
we will be seeking to enhance further our understanding of the
indirect costs of any future changes to project timescales.
Defence research spending
19. (Recommendation 19) The research budget
appears to be another casualty of the MoD's short term efforts
to manage its equipment programme funding gap. We were told that
cuts had been made to balance the budget and that such difficult
sacrifices were necessary in order to continue to deliver the
highest priority defence capabilities. We believe that spending
less on research and technology will make the UK Defence Industrial
Base progressively less competitive and will make the Defence
Industrial Strategy inoperable. To compromise the future development
of defence technology, in order to make proportionately small
short term contributions to the management of the equipment programme
funding gap, is ill-judged. The research programme cannot be turned
on and off at short notice and the benefits can only be realised
with a consistent and long term commitment of resources. We are
sceptical about the implication that the MoD can balance cuts
in its own research budget by making greater use of civil research
and ask the MoD to explain its proposals for doing this. (Paragraph
69)
The MoD regularly re-examines the budgetary allocations
made to different activities and adjusts them to reflect the need
to ensure funds are spent on those activities which are of the
highest priority. The research budget was adjusted as part of
this process, with the Department making a judgement that a re-allocation
of this sort provided the best outcome for the defence programme
as a whole.
We spend the bulk of our around £2 billion a
year investment in applied R&D with industry. We work closely
with the National Defence Industry Council (NDIC) and in particular
the NDIC R&D sub-group. Following the split of DERA into Dstl
and QinetiQ in 2001, the Department's research programme has been
progressively opened to competition. Only research activity which,
by its sensitive, operationally critical or international nature,
is carried out by government and not put out to tender with industry
or academia.
In May 2008, MoD launched the Centre for Defence
Enterprise (CDE) to overcome traditional barriers to innovation
within the defence environment and for the rapid delivery of cutting
edge research and development in support of the front line. By
encouraging anyone with a good idea to step forward, the CDE provides
a unique and innovative entry point into the defence market. The
CDE portal provides a 'competition of ideas' approach to solving
MoD's capability problems innovatively.
MoD was the first Department to publish its Innovation
Procurement Plan, which draws on the Defence Industrial Strategy,
the Defence Technology Strategy and the Department's Innovation
Strategy. Innovation is pursued through initiatives such as the
Grand Challenge and is at the forefront of the Government's Small
Business Research Initiative (SBRI). The Department also addresses
crosscutting areas of S&T, where it is applicable for the
Department to be involved.
Background to the Gray review
20. (Recommendation 20) We commend the Government
for commissioning, and then publishing, the Gray report. In doing
so the Government was being refreshingly open. We hope that the
MoD will follow this approach on other occasions. (Paragraph 71)
We note and appreciate the Committee's conclusion.
We remain committed to being as open as possible in the future.
DE&S response to the Gray report
21. (Recommendation 21) The Gray team attempted
to establish a basis of agreed facts with the MoD, but, despite
the fact that MoD staff provided the data to the review team and
were given the opportunity to review early drafts of the report,
some key senior individuals in DE&S told us that they did
not accept the data presented in the report. Whilst we welcome
the willingness of DE&S openly to consider the qualitative
recommendations of the Gray report, we are concerned that the
lack of agreement within MoD on the extent of the problem forms
a poor basis on which to build effective reform. We return to
the issue of implementation of Gray's recommendations in paragraph
113. (Paragraph 76)
We accept Mr Gray's overall analysis of the problems
we face. His report makes two major points: we need to bring the
equipment programme into balance with available resources and
we need to improve our management of that programme. The whole
ministerial team and senior Head Office and DE&S officials
accept this analysis.
22. (Recommendation 22) The Gray report concluded
that the MoD's budget is insufficient to deliver its planned procurement
programme, and that there is an accelerating issue of the problems
of prior years compounding to produce an increasing rate of delay
and cost increase. Witnesses from the MoD and from industry accepted
this analysis and the need for urgent action to rebalance the
equipment programme. (Paragraph 82)
The Department recognises that it needs to bring
the equipment programme into line with resources and to increase
its agility. This is a central theme of the Strategy for Acquisition
Reform, and will be addressed through a number of its actions,
such as the Defence Board Sub-committee on Equipment's role in
overseeing the strategic direction and affordability of the equipment
programme.
23. (Recommendation 23) We welcome the commitment
from MoD ministers to establish regular Strategic Defence Reviews
in order to maintain an up-to-date strategic context for the equipment
programme. There is a risk that more frequent SDRs could undermine
the longer term planning of the equipment programme and the MoD
must establish ways to manage this inevitable tension. We note
the concerns of industry representatives that the next SDR and
the next version of the Defence Industrial Strategy will be focused
too narrowly on procurement reform, and urge the MoD to ensure
that wider capability and industrial issues are also addressed,
so as to ensure that industry can make the necessary long term
commitments to technology, skills and resources. We would welcome
more information on the extent to which the industry partnering
proposals set out in Chapter 6 of the Defence Acquisition Strategy
have already been developed, and the anticipated scope of their
contribution to achieving greater value for money in defence.
We also request an explanation as to how the partnership arrangements
will be reconciled with the commitment given in the Green Paper
for greater transparency. Our successor Committee may wish to
return to this issue and to consider the implications of such
industry partnerships for the future role of Parliamentary scrutiny.
(Paragraph 83)
We accept the importance of avoiding any unnecessary
instability in the equipment programme in respect of Strategic
Defence Reviews. But, as the Committee recognises, we need to
ensure the programme keeps sufficient pace with the evolving strategic
context.
As we set out in the Strategy for Acquisition Reform,
the Defence Industrial Strategy will be updated to reflect the
outcome of the SDR in the light of our future military capability
requirements. We will then be in a position to set out the robust
long term equipment programmes essential for supporting those
capability requirements. This will give industry longer-term certainty
and allow them to invest with confidence.
The various forms of partnering with industry are
valuable business tools that can be used to help customer and
supplier work together for specific purposes, in particular to
deal with complex, partially defined, or uncertain issues over
a period of time. Partnering arrangements can include long-term
agreements that underpin industrial capability and capacity with
an agreed minimum workstream, in return for economies, rationalisation
and transformation benefits. These arrangements can also provide
significant flexibility within the agreed scope, by allowing trading
between what would otherwise have been individually contracted
projects.
Long-term partnering arrangements are a feature of
a number of the industrial sector-level strategies which have
been implemented since the Defence Industrial Strategy was published
in 2005. These have taken a number of different forms: The AgustaWestland
Strategic Partnering Arrangement has delivered a 50% improvement
in the on-time delivery of spares and improvements in rapid insertion
of new capabilities, through a joint modification service, all
underpinned by strong joint working between co-located MoD and
AgustaWestland teams. The BAE Systems Surface Ship Terms of Business
Agreement will sustain the industrial capabilities for the MoD's
surface shipbuilding requirements over the next 15 years, and
it is designed to deliver in excess of £700M benefits to
the MoD over the length of the contract. There are a range of
other partnering arrangements in place with industry across a
number of capabilities, including the Submarine Enterprise Performance
Programme, the Apache Integrated Operational Support arrangements
and various projects based on Contracting for Availability or
Private Finance Initiative.
Partnering arrangements have the potential for greater
transparency and openness in respect of business objectives by
increasing confidence between the parties, thus allowing them
to plan more effectively and incentivise pricing arrangements
and performance.
24. (Recommendation 24) We accept that there
are wider constraints which limit the Government's ability to
make a firm ten year commitment with regard to the MoD's budget.
We consider, however, that the fact that other Government departments
would demand the same treatment would be not be a reason for the
Government to resist it. The scale and nature of MoD contracts
is quantitatively and qualitatively different from other Government
procurement. It is clear that greater financial stability could
help to control and reduce the hundreds of millions of pounds
of unproductive costs which are incurred annually to keep the
equipment programme spend within each year's budget. We welcome
the proposal to introduce a ten year planning time-frame for equipment
expenditure but we doubt that the proposed ten year planning horizon
will provide sufficient certainty to stabilise the equipment programme.
We recommend that our successor Committee returns to this issue
when further details about HM Treasury's agreement with the MoD
are made available. (Paragraph 86)
We note the Committee's comments on the need for
greater financial stability but are confident that the new planning
horizon will provide significant benefits to the planning and
management of the Defence equipment programme.
25. (Recommendation 25) The MoD told us that
it had asked the NAO to audit its assessment of affordability
of the equipment programme. We welcome this and seek an assurance
from the MoD that the NAO will be given access to all of the relevant
technical and commercial data necessary to do this job properly.
DE&S has accepted that its cost estimating has been poor and
such independent scrutiny will be necessary to provide evidence
that the new iteration of the equipment programme resulting from
the SDR is closely matched to available resources. (Paragraph
89)
We will discuss the detailed arrangements for the
audit with the NAO. However, it is clearly in both the MoD's and
the NAO's interests to ensure they have access to all the relevant
technical and commercial data in order to form a proper judgement.
26. (Recommendation 26) Whilst we also welcome
the commitment by the MoD that it will annually share its assessment
of affordability with us, we note that this falls well short of
the Gray report's recommendation that the annual audited assessment
should be made public. Transparency is not a practice which has
traditionally been embraced by the MoD. Although the MoD has identified
increased transparency as one of the commitments in its strategy
for acquisition reform, it has provided no details of any concrete
steps or milestones for realising that ambition. We ask the MoD
to provide us with a description of the specific measures it plans
to take in order to ensure greater transparency. We also ask the
MoD for an undertaking that it will provide our successor Committee
with accurate and complete responses to its requests for information.
(Paragraph 90)
We welcome the support given to the Strategy for
Acquisition Reform by the Committee. However, it is not true to
say that we have not provided details of steps or milestones
to introduce greater transparency. The Strategy for Acquisition
Reform contains an action plan, including a range of firm commitments
and milestones. For example, our action plan identifies that the
commitment to provide Parliament with annual assessments of the
affordability of the equipment and support programme will be underpinned
by an independent assessment by the NAO, the detailed methodology
for which we will be working through with them, and will be implemented
following the Strategic Defence Review.
As part of our update to the successor Committee
later this year, we will provide further detail on how these commitments
are being implemented.
27. (Recommendation 27) The Gray report proposes
that development risk, and hence time and cost overruns, could
be reduced by introducing equipment into service with an initial
operating capability which could then be upgraded. Industry witnesses
agreed that acquisition could be faster, provide better value
for money and greater export potential if this approach were to
be taken, provided that steps were taken to ensure that the engineering
industry skill base was maintained. We recommend that the MoD
provide us with an evaluation of the scope for using an incremental
approach, setting out the steps it will take to overcome the obstacles
to this approach which were outlined in the Gray report. (Paragraph
93)
The Strategy for Acquisition Reform committed to:
Examine the scope for managing technology and innovation
better so that we can provide and update defence equipment more
quickly, and at a price we can afford. This includes using incremental
and modular approaches so that we can keep pace better with evolving
threats.
We will take this forward through our Science &
Technology (S&T) community in particular. We recently announced
changes to the internal arrangements for formulating and delivering
S&T to the UK Armed Forces, which will enable a clearer organisational
structure for Defence S&T. We will provide an update on this,
as part of our brief to the successor Committee later this year.
28. (Recommendation 28) One of the three key
areas of weakness identified by the Gray report was the lack of
clarity and leadership from those in charge of the MoD, which
resulted in poor decision making processes and an inability properly
to keep the equipment programme under control. The Gray report
concluded that, even if the equipment programme were to be brought
back into balance by the next SDR, poor leadership and decision-making
processes would soon cause old problems to return and the programme
again to become unbalanced. We note that the Defence Acquisition
Strategy includes a number of specific actions to improve leadership
and decision-making and the MoD should provide us with a progress
report on these activities. (Paragraph 97)
We note the committee's comments on the need for
improved decision making within the MoD and are taking steps to
address this. For example, we have created a new sub-committee
to the Defence Board which is responsible for overseeing the strategic
direction and affordability of the equipment programme.
We will be providing a progress report on these activities
in our response to the committee later this year.
29. (Recommendation 29) The Gray report recommended
that the MoD's aspirations for Through Life Capability Management
(TLCM) be reappraised. Witnesses from industry and the MoD were
unanimous that TLCM was the right way to proceed, in order to
support the making of sound decisions. However, evidence from
the Gray review and from industry indicates that the MoD's TLCM
approach is incomplete and over-ambitious. We note that both the
Gray report and the NAO identified a lack of financial tools and
data as significant factors affecting the implementation of TLCM.
We ask the MoD to provide a report setting out the progress it
has made in addressing these issues, and in particular the progress
made on the specific activities described in the relevant section
of the Defence Acquisition Strategy. (Paragraph 100)
The MoD is driving forward the simplification of
Through Life Capability Management (TLCM) as detailed in Chapter
5 of the Strategy for Acquisition Reform. Led by a senior Governance
Board, the approach is being applied to the forthcoming Planning
Round and Strategic Defence Review. In particular, we are improving
the financial tools and management information in support of TLCM.
Programme Intranet Sites were rolled out in July
2009 to meet the need for central management of, and broader access
to, key programme documents and information.
We are also developing management information modules
covering critical information requirements. These include a tool
that enables key milestones to be described, target dates recorded
and progress mapped accordingly, and tools looking at dependencies
and assumptions, risks and issues, and spend versus budget.
In addition, a new through-life finance tool set
has 'rolled out' in March 2010 to improve financial information
needed for decision making.
A further update on progress will be provided as
part of our update to the successor Committee later this year.
30. (Recommendation 30) Over the years we
have highlighted the need for key skills in acquisition and procurement,
and have received reassurances from the MoD that appropriate training
programmes were in place. However, we are unconvinced that DE&S
has a properly effective strategy for the training and education
of its staff, and believe that it has failed to prioritise this
issue. Project leaders in DE&S must have an understanding
of all of the military, technological, industrial and political
issues which impact on their projects. What is required is not
only the provision of appropriate training, but also a longer-term
commitment to career management which is organised to suit efficient
acquisition, not just military needs, and a recognition that key
project staff have to be released from time to time to attend
proper education and training. The MoD should provide an update
on the progress it has made with regard to the actions described
in the Defence Acquisition Strategy to achieve the necessary levels
of staff skills. (Paragraph 112)
The Department does not accept the Committee's assertion
that DE&S has failed to prioritise the training and education
of its staff. DE&S has made major and successful efforts to
upskill its personnel, as a key part of the Performance Agility
Confidence Efficiency (PACE) programme. The "6+4" initiative
requires all DE&S staff to undertake a minimum of 6 days training
per year, with a further 4 days required for those staff in designated
professional posts; a group of senior DE&S staff act as Skills
Directors to champion talent within their professional disciplines;
and staff in critical skill areas, including the project and programme
management, finance, commercial and engineering disciplines,
are now required to obtain professional qualifications from external
accreditors. In total, DE&S plans to spend some £10 million
on such professional training each year over the next four years.
These efforts are having an impact - recent independent benchmarking
against 50 leading companies and Government organisations internationally
puts DE&S in the top quartile of major public and private
sector organisations managing high complexity projects.
The Defence Acquisition Reform Programme (DARP) builds
on and seeks to accelerate these existing efforts in DE&S,
especially in relation to cost assurance (comprising cost forecasting,
cost estimation and cost validation). As announced in the Strategy
for Acquisition Reform, the Department plans to invest a further
£45 million over the next four years to improve skills and
capacity in this area, including by working with private sector
partners. Also as part of DARP, DE&S is recruiting additional
senior financial controllers to provide extra financial support
to its most complex areas of business; continuing to improve systems
engineering abilities; increasing the skills of commercial staff
through higher levels of qualification and better business awareness;
and examining how external expertise might assist with further
improvement of programme and project management.
For military staff (less than 25% of DE&S personnel)
the Military Acquisition Stream (MAS) aims to ensure that suitably
qualified and experienced military officers are placed in the
right appointments across acquisition. Under MAS, DE&S
sponsors a series of defence acquisition courses at the Defence
Academy for a mix of military and civilian students. Our
objective is to grow a cadre of military officers with acquisition
knowledge and skills who are more readily employable in acquisition
appointments, complemented by front line service throughout their
careers. The MAS programme is also undertaking a skills audit
of the Capability Sponsor which will ensure that new entrants
and those returning to Capability Management appointments have
the necessary skills and knowledge required for those roles.
31. (Recommendation 31) It is quite clear
that some senior individuals in DE&S do not accept the need
for radical reform, and that they are only reluctantly involved
in the reform process. Whilst it might be possible to write a
good reform strategy in isolation, it would clearly not be possible
to implement it without united commitment from the leadership
within DE&S. With the publication of the Gray report, the
MoD has come clean about the extent of its problems with the equipment
programme, but the Department will have to work hard to persuade
people that it will not return to business as usual. (Paragraph
117)
We do not accept the Committee's suggestion that
the DE&S leadership are not fully committed to implementing
radical reform. The whole senior leadership team - in DE&S
and Head Office—accept Mr Gray's overall analysis and are
united over the need for radical reform. We will work hard to
ensure that the Strategy for Acquisition Reform is implemented
in full.
32. (Recommendation 32) The MoD's Defence
Strategy for Acquisition Reform explicitly accepts Gray's broad
analysis of the difficulties faced by the Department with regard
to defence acquisition, and includes a summary of objectives and
key actions which it intends to take to address those difficulties.
Some of the key actions correspond with recommendations we have
made in this Report, although we await the further details which
we have requested on a number of points. We expect the MoD to
make a statement to the House by summer 2010, updating it on progress
with acquisition reform. We hope that the NAO will report on acquisition
reform progress as part of its Major Projects Report 2010, and
we recommend that our successor Committee returns to this issue
later in 2010. (Paragraph 118)
We are happy to undertake to provide an update to
the House on acquisition reform later this year.
We note the Committee's suggestion that the NAO should
report on acquisition reform as part of its Major Projects Report
2010; this is a matter for the NAO to decide.
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