Conclusions and recommendations
Overall performance
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)
Progress on key programmes
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
The funding gap
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)
Cost of delays
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)
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)
Defence research spending
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)
Background to the Gray review
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)
DE&S response to the Gray report
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)
Balancing the equipment programme
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)
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)
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)
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)
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)
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)
Clarifying roles and accountabilities
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)
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)
Injecting key skills and tools into DE&S
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 implementation of Gray's recommendations
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)
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)
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