Defence Equipment 2010 - Defence Committee Contents

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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