House of Commons - Defence Equipment 2010

Defence Equipment 2010 - Defence Committee Contents

1 DE&S progress and performance

Overall performance

6. In this Chapter, we consider the structure and performance of defence procurement. DE&S was formed on 1 April 2007 following the merger of the Defence Procurement Agency (DPA) and the Defence Logistics Organisation (DLO). The aim of the merger was to create a new integrated procurement and support organisation. DE&S is headed by General Sir Kevin O'Donoghue, Chief of Defence Materiel (CDM), who, together with other senior colleagues, gave oral evidence in this inquiry. A year ago, in our Report Defence Equipment 2009, we concluded that "some 20 months after the merger DE&S appears to have made good progress and is considered to be heading in the right direction".[8] However we also identified concerns that the equipment programme was under-funded and that this was contributing to slippage in time and costs.[9] During last year's inquiry, MoD witnesses were unwilling publicly to agree that this was the case.

7. During 2008-09, the MoD spent some £5.6 billion on its core equipment programme and delivered equipment valued at £3.1 billion.[10] During 2009, information emerged which confirmed the existence of a significant funding gap, and which suggested that the management of this gap was affecting the ability of DE&S to deliver the equipment programme. This conclusion was confirmed in the Major Projects Report 2009, in which the NAO attributed the problems primarily to the MoD's attempts to manage the discrepancy between the costs of its ten year equipment programme and the allocated budget. It reported:

The size of the gap is highly sensitive to the budget growth assumptions used. If the Defence budget remained constant in real terms, and using the Department's forecast for defence inflation of 2.7 per cent, the gap would now be £6 billion over the ten years. If, as is possible given the general economic position, there was no increase in the defence budget in cash terms over the same ten year period, the gap would rise to £36 billion.[11]

The NAO stated that, for 2008-09, "two-thirds of the gross cost increases reported in the Major Projects Report 2009 reflect deliberate decisions to slip projects, taken corporately by the Department as part of a wider package designed to address a gap between estimated funding and the cost of the Defence budget over the next ten years."[12] It also concluded that there were "encouraging signs of improved performance in managing individual projects" and that the cost increases were not an indication of poor performance of MoD staff or industry, but rather that a significant proportion was attributable to the overall management of the programme against the budget available.[13]

8. These comments refer only to the core equipment programme, and not to the MoD's arrangements for supporting operations through the fast-tracked acquisition programme of urgent operational requirements (UORs). UORs were originally funded in total via additional Reserve funds from the Treasury, but changes were announced in November 2007 which meant that the MoD would have to contribute half of any costs which exceeded a total amount agreed with the Treasury to reflect the likelihood that much of the UOR equipment would be incorporated into mainstream planning. We commented on this change, and on the performance of the UOR programme, in our Defence Equipment 2009 Report.[14] Whilst we concluded that we were broadly satisfied with the UOR process, we also expressed concern that "the extent of UORs represents at least a partial failure by the MoD to equip adequately its forces for expeditionary operations which were anticipated by the Strategic Defence Review a decade ago".[15] This view was echoed in the Gray report which stated that:

In the face of actual operations, even the most efficient acquisition planning and procurement would leave gaps that would need to be filled urgently. However, given the longevity of current operations, an agile acquisition process would have absorbed more of the extraordinary requirements as they became self-evidently ordinary.[16]

The demands of current operations have also required savings to be made from the core defence budget. One of the two objectives of the short examination of the equipment programme which was conducted in 2008 was to identify savings in the equipment programme so as to provide more support for current operations, and on 15 December 2009, the Secretary of State announced a number of cutbacks in order to make savings to enhance support to personnel on operations in Afghanistan.[17]

9. We review progress on key programmes in the following paragraphs, and return to the issue of the funding gap in Chapter 3. In Chapter 4 we consider other factors relating to performance progress within DE&S, such as skills improvements and the implementation of through life capability management, within the context of procurement reform proposals.

10. 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.

Progress on key programmes

SHORT EXAMINATION OF THE EQUIPMENT PROGRAMME

11. A key event which took place during our Defence Equipment 2009 inquiry was the MoD's short examination of the equipment programme. During the Defence Procurement debate on 19 June 2008, the Minister for the Armed Forces announced that the MoD was "undertaking a short examination of the equipment programme to look at our planning assumptions over the next ten years".[18] The MoD Annual Report and Accounts 2007-08 set out the objectives of the exercise:

The examination of the equipment programme will focus on two issues above all: bearing down on cost increases to equipment programmes; and rebalancing the equipment programme to better support the frontline. The examination will be focused on identifying potential savings to the equipment programme in order to support the frontline and our people at home better.[19]

12. On 11 December 2008, the then Secretary of State announced the key conclusions from the short examination. These included the allocation of additional resources for UORs, and a number of decisions relating to the equipment programme. The key capabilities referred to in the Statement were the Future Rapid Effect System (FRES); Future Carrier; Military Afloat Reach and Sustainability (MARS); and helicopters. In summary the decisions were:

To restructure the FRES programme, giving priority to the Warrior Capability Sustainment Programme and to the FRES Scout over the FRES Utility Vehicle;

To delay the in-service date of the two new carriers by one and two years respectively;

To consider alternative approaches to the MARS fleet auxiliary programme procurement and to defer the fleet tanker element; and

To spend £70 million from the Reserve to upgrade 12 Lynx Mark 9 helicopters with new engines.

During our Defence Equipment 2009 inquiry, Quentin Davies MP, Minister for Defence Equipment and Support, told us that he considered that the short examination had "achieved its purpose" in relation to both of its objectives.[20] We consider the impact of these decisions in the following paragraphs, together with issues related to other key programmes which have been subject to time or cost overruns.

FUTURE RAPID EFFECT SYSTEM (FRES)

13. The FRES vehicle programme has had a long and difficult history, on which we have commented several times over the years. In 1998 the MoD decided that the Army required a fleet of armoured vehicles to fulfil the expeditionary role envisaged in the Strategic Defence Review, and FRES was established to meet this need. Early 'concept work' was carried out between 2001 and 2003, and in 2004 the MoD announced a two year Initial Assessment Phase. At this stage the FRES programme was expected to deliver 3,000 vehicles in 16 battlefield roles and would comprise three families of vehicles: Utility, Heavy and Reconnaissance. The MoD planned to deliver the Utility vehicle (FRES UV) first, but the requirement was challenging and the programme was subject to delays. In February 2007 we published our Report The Army's requirement for armoured vehicles: the FRES programme, in which we noted that the expected In-Service Date for the FRES UV had slipped from 2009 to the early part of the next decade and concluded that the MoD's attempts to meet its medium-weight vehicle requirement had been "a sorry story of indecision, changing requirements and delay".[21]

14. We continued to monitor FRES progress in our Defence Equipment 2008 and Defence Equipment 2009 inquiries. In October 2008 the MoD announced that 700 new armoured vehicles were to be procured to meet urgent operational need, but CDM assured us in November 2008 that there would still be a requirement for FRES and that the MoD "was pretty clear we know what it is".[22] In December 2008 the MoD announced that despite having awarded provisional preferred bidder status for the FRES UV vehicle to General Dynamics UK only seven months previously, it had been unable to reach agreement with General Dynamics UK on commercial considerations, and, as a consequence of the short examination of the equipment programme, it had decided to withdraw that preferred bidder status, restructure the FRES programme and give priority to the Warrior Capability Sustainment Programme and to FRES Scout over FRES UV. In February 2009, in our Defence Equipment 2009 Report, we concluded that "the FRES programme has been a fiasco" and that "the FRES Utility Vehicle programme was, from the outset, poorly conceived and managed".[23] The MoD did not accept our conclusion.[24]

15. By October 2009, the Minister for Defence Equipment and Support was describing the FRES UV programme as "a perfect disaster" and said that "I have now stopped the FRES programme".[25] The MoD's written submission to us in November 2009 appeared to contradict this, as it included an account of the next steps to be taken in the FRES Specialist Vehicle programme, a statement that the MoD was now considering the best way to take the FRES Utility Vehicle procurement forward and a restatement of the objectives of the overall FRES programme.[26] In oral evidence we received different explanations from the MoD as to the current status of FRES. CDM told us that "it is really good news"[27] and that:

What [the Minister] stopped was the FRES Utility Vehicle programme; and he stopped it because the priority changed to FRES Scout. The competition is ongoing. There is a selection process going on at the moment. I would be very disappointed if we do not get FRES Scout out on contract February/March next year.[28]

He explained that the two contenders for the Scout Vehicle competition were vehicles that were in existence and that the MoD was not "designing them from nothing".[29] He added that "we will need to come back" to FRES UV.[30] CDM strongly refuted the suggestion that FRES was still a fiasco, and stated that "We have turned a corner, as we have in a number of projects".[31] However, when giving oral evidence two weeks later alongside the Minister, he accepted that FRES was "buried".[32]

16. The explanation given by Dr Andrew Tyler, Chief Operating Officer, DE&S, was that:

We have stopped the FRES programme as it was previously conceived. We have restructured, we have recast it now into a set of individual vehicle projects, the first one of which is the Scout project; and it is still bearing the tag "FRES" because that is its provenance in terms of its requirement; and we are still sustaining this crucial factor that the vehicles need to be able to operate with each other and indeed operate with the other legacy vehicles, and indeed operate with dismounted soldiers. That system (the "S" of FRES) remains a very important thing. We need all of our assets on the battlefield to be able to talk to each other and work together. In that sense the system part of FRES lives on.[33]

With regard to lessons learned, Dr Tyler said that:

When we look back in the rear view mirror now and think about why it was that FRES was not successful in getting to where it needed to be in the time, is because we were overemphasising the nature of this sort of system, of trying to bring all these vehicles together. What we have done subsequently is said "We must not lose sight of that but we must also recognise that what we are trying to do is to deliver individual families of vehicles to meet particular needs of the Army".[34]

17. The explanation of the Minister for Defence Equipment and Support was that "the FRES programme is dead".[35] He said that the original programme was "too idealised a vision" which had taken "a very long time to agree on specification" and that it "was very difficult to procure anything".[36] He accepted that there had been mistakes, saying that "I think [FRES] was a sad and sorry story and we have changed, and I take full responsibility for that. We have changed the strategy entirely in this matter".[37] He explained the strategy which he now intended to adopt:

So what I want to do, and what we are doing in this particular case, is not to go in for these idealised solutions but, wherever possible, to try to find something that is in this world which either can be obtained and has been tried and tested or can be modified slightly in a clearly defined way and will meet a large proportion of our requirements. Whether it is 70% or 80% or 95% you can always argue about, but I prefer to go with something that is concrete and actually exists than some sort of image of something which might be totally ideal.[38]

The Minister told us that he intended to ask the Army Board to propose another name for the programme, since FRES related to a concept which no longer existed.[39] He said that "the degree of commonality is not practical because we will be procuring quite different vehicles from different manufacturers and so that concept is not valid, it is dead".[40] He added that the MoD would still be procuring a Utility Vehicle and that his objective was to have it in service in 2018.[41] He summarised the main elements of the new vehicle programme as follows:

We have three major core armoured vehicle programmes at the moment apart from the vehicles procured to Afghanistan, and they are the Warrior upgrade [and] the reconnaissance vehicle … I hope contracts for both of those will be signed within the next two or three months … and then there will be the Utility Vehicle which we will be procuring over a longer timescale. We will find some name to encompass and encapsulate those three vehicles.[42]

18. Dr Sandy Wilson, President and Managing Director, General Dynamics UK Ltd, suggested that such an approach would have been better from the outset, saying that:

I think if FRES had been procured earlier with either the specification that existed or some lesser specification, then it would have been perfectly possible to get into service a protected manoeuvre vehicle that would have given the Army all of the capability that it currently needs in Afghanistan, plus additional capacity for contingent operations.

The sticking plaster of a solution which was adopted is to procure what are called protected mobility vehicles rather than protected manoeuvre vehicles, which have limited off-road capability, and that then gives you problems in your tactics as to where you can go to avoid some of the threats, such as IEDs, that you are constantly going to find embedded at the tracks and roads and places that these vehicles can go.[43]

19. With regard to the spend to-date on FRES, and the outcomes of this spending, a follow-up written submission from the MoD stated that:

The total spend on the FRES programme to 30 October 2009 was £189m (inclusive of non-recoverable VAT). The total spend on the FRES programme to 30 October 2009 was £189m (inclusive of non-recoverable VAT). None of this money. The knowledge gained has refined our understanding of the requirement; reduced technical risk; and up-skilled the project team with specialist management and integration. This all continues to have a direct or indirect benefit to the FRES programme as it moves forward.[44]

Vice Admiral Lambert, Deputy Chief of Defence Staff (Capability), said that one programme board would deal with all of these vehicles, as well as with vehicles procured under UORs. He explained that "We will have to look at what point another vehicle ought to come in and replace those vehicles important to UORs or whether we can run the UORs and have a replacement vehicle a little bit later. So that is all looked after in the same programme board."[45]

20. 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.

21. 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.

A400M

22. The A400M military transport aeroplane is another programme which has been subject to significant time slippage. The A400M is a collaborative programme involving seven European nations (Germany, France, Turkey, Spain, Belgium, Luxembourg and the UK). The A400M was selected to meet the requirement to lift armoured fighting vehicles and to move large single items such as attack helicopters and some Royal Engineers' equipment and is intended to replace the remaining Hercules C-130K fleet. The programme has been subject to delays because of the complexity of the project and technical problems, which we commented on a year ago in our Defence Equipment 2009 Report, stating that "It is extremely serious that the A400M transport programme, which is to provide much needed new tactical and strategic airlift for our Armed Forces, is now running two years late and further delays cannot be ruled out".[46] CDM told us that he did not think that the time lost could now be made up.[47]

23. The NAO Major Projects Report 2009 commented that:

The contractor, Airbus Military, has already acknowledged that it underestimated the complexity of the project and its technical aspects, and these have caused the programme to slip its introduction into service. The cost escalation related to the slippage is predominately driven by Inflation, Exchange Rates and associated cost of capital changes, although the specific breakdown of these factors is currently commercially sensitive. In July 2009, the seven partner nations re-stated their commitment to establish a satisfactory way ahead for the project, and intensive work is continuing between partner nations and Airbus Military.[48]

The MoD Annual Report and Accounts 2008-09 noted that the MoD was "concerned by delays to the A400M programme" and that "a number of options are being considered as a contingency to mitigate any potential capability gaps that may arise". CDM told us that "The air bridge, which is absolutely vital to Afghanistan, is surviving. I would still describe it as fragile. It is still my highest logistic risk, but it is surviving. What we cannot do is any of the other contingent operations which we should be able to do without using aircraft from that strategic bridge."[49] With regard to the capability gap, he said that the contract for Future Strategic Tanker Aircraft had been signed, and the option of procuring one or possibly two C17s was being considered.[50] CDM added that these would not be suitable long term alternatives to the A400M:

C17s are very expensive; they give you a certain capability. In very simple terms, an A400M carries twice what a C130 will carry and a C17 carries twice what an A400M will carry. The A400M is going to be a good aircraft when it comes into service; it is going to be invaluable. The C130, perhaps, is right at the bottom, tactical end of the market. The C17 is very expensive, very competent, very capable, at the strategic end of the market, and there is a gap in the middle.[51]

On 15 December 2009, the Secretary of State announced that:

There will be an additional C17 aircraft to strengthen the airbridge, and improvements to defensive aids suites and support arrangements for the Hercules C130J fleet so that we can maximise their deployability and use.[52]

24. The A400M made its first flight on 11 December 2009. The Minister for Defence Equipment and Support told us that he had witnessed the flight and had attended a ministerial meeting of the partner nations to discuss the way forward and future negotiations regarding the delivery schedule and contract with the manufacturer, EADS (Airbus Military). He explained that:

I remain committed to trying everything possible to save this particular programme. I think it would be a great aircraft. I think it meets our requirements extraordinarily neatly, and my own instinct … is that the technical problems of this aircraft can be resolved. Whether we can resolve the commercial and financial issues satisfactorily in the timescale required I do not know and I cannot really express a view on that today.[53]

The Minister told us that the partner nations had agreed a joint letter to be sent to EADS, asking for a response by 31 December 2009.[54] With regard to the expected In-Service date of the A400M, the Minister said that there was likely to be about three years' delay compared to the original schedule and that deliveries were likely to start in 2014.[55] He added that "If and when we can renegotiate this contract … there will be a precise delivery schedule in the contract … and there will be liquidated damages if that new delivery schedule is not reached".[56]

25. The MoD Annual Report and Accounts 2008/09 highlights issues relating to collaborative programmes as a factor contributing to shortfalls in procurement performance:

Whether it is major US projects where the UK is a minor partner, or European projects where the motives for collaboration can vary considerably, the UK is less able to influence outcomes compared with projects entirely within our control.[57]

CDM told us that "The lesson I draw from [the A400M project] is collective projects are essential. If you do not collaborate with partners, then you will not get the kit you want because the production numbers are so small. … if you have got seven or eight partners, they have all got a view … It is very difficult to cope with that. My preference would be a bilateral product which others could join. That would be my lesson."[58] He added that he would be able to provide further details about that conclusion in "about six months", after the completion of current commercial discussions.[59]

26. 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.

27. 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.

FUTURE CARRIER AND JOINT STRIKE FIGHTER

28. We examined the progress of the Future Carrier programme in our Report Future Carrier and Joint Combat Aircraft Programmes which was published in December 2005,[60] and in our Defence Equipment 2008 and Defence Equipment 2009 Reports. During the Defence Equipment 2009 inquiry, we heard that, only six months after awarding contracts to build the carriers and announcing in-service dates in May 2008, the MoD decided to delay the entry into service of the first carrier by one year and the second by two years. In our Report we called on the MoD to provide a more robust estimate of the cost of this delay and noted that whilst the delay might achieve some short-term savings, the longer-term costs were likely to be substantially increased. We also questioned how the delays would be managed, and how the existing capability would be extended.[61]

29. The Written Ministerial Statement of 11 December 2008 which announced the delays stated that "We have concluded that there is scope for bringing more closely into line the introduction of the joint combat aircraft and the aircraft carrier. This is likely to mean delaying the in-service date of the new carriers by one to two years."[62] In oral evidence to us in December 2008, the Minister for Defence Equipment and Support appeared to suggest that in fact the key reason for the delay was the need to make short-term savings, stating that "…this was an opportunity … to re-profile our spending plans in a way which involved no defence costs, but simply made the delivery date of the carriers rather more rational".[63] He said that there would be no loss to the defence capability and described the delay as "a kind of free hit".[64] The Minister confirmed this reasoning in his oral evidence to us in December 2009:

We needed to make some savings in the future—we needed to find some money, we needed to find some room—and looking at the defence capability costs of any of the alternatives which were before me, they all had costs, they all had unforeseen features. It occurred to me immediately … that we could delay the carriers without a loss of capability because the aircraft that we were going to use on the carriers would not be available.[65]

30. The NAO Major Projects Report 2009 provided the following information about the costs of the Future Carrier delay:

The Queen Elizabeth Class aircraft carriers were subject to an Equipment Examination decision which has increased the overall forecast cost of the project by £674 million…. The primary aim was to constrain expenditure on the project during the four years commencing 2009-10 by slowing the rate of production. The Department expects this slowdown to yield a total reduction in spending of £450 million in the years 2013-14. After this time costs are forecast to increase by £1,124 million. The net increase in costs of £674 million comprises £300 million of direct costs (for example, extending the design and engineering team by two years) and £374 million additional inflation due to the extended programme.[66]

The Minister for Defence Equipment and Support confirmed these figures, saying that:

When you push things forward it always involves a cost and I do not dispute that and do not deny that. It is a substantial cost, £674 million is over ten per cent of the cost of the two carriers, which is about £5.2 billion.[67]

31. CDM confirmed to us that the figure of £674 million did not include the cost of running on the existing carrier capability.[68] According to NAO data, it also did not include the £234 million cost of additional capital charges.[69] We were told that there was an offsetting saving of not operating the new carriers during those years, although the older carriers were more expensive to operate in efficiency terms in some respects[70] and that the cost of refitting HMS Illustrious was not included because it would anyway have been refitted on the original timetable.[71] The MoD written submission stated that "Although costs have increased on the programme as a result of the Equipment Examination decision and other economic factors, these additional costs will be managed by the Department. In conjunction with the ACA [Aircraft Carrier Alliance] we continue to work hard to drive down costs in order to agree the Final Target Cost for the Carriers in 2010."[72] MoD witnesses were unable to provide further explanation as to how they would manage these costs, other than to say that "That is one of the pressures we have to take into account in our planning process, along with all the other fluctuations in the programme."[73]

32. CDM gave us an assurance that the Future Carrier and the Joint Strike Fighter (JSF) programmes were now aligned in terms of timing.[74] He said that three OT&E (Operational Test and Evaluation) JSFs had been ordered and would be delivered into the test programme in 2012, at which stage UK pilots would participate with US pilots in an integrated test programme in the USA.[75] CDM told us that "up to 150" JSFs would be procured, but that a decision on the exact number would not have to be made until 2015[76] and that after that "they will come off quickly".[77] A further issue affecting the JSF programme is technology transfer, which would provide the UK with operational sovereignty. In our Defence Equipment 2009 Report we noted that the MoD considered that the technology relating to the programme was being transferred on schedule. However, recent newspaper reports have suggested that US officials have ruled out the technology transfer of source codes on the JSF, even to close allies such as the UK.[78]

33. When asked whether the MoD was confident that the existing carriers and aircraft would be capable of operating until the new carriers were available, Vice Admiral Lambert told us that "The aircraft are capable of flying, operating until at least the end of the next decade".[79] However he was unable to provide the same degree of assurance for the carriers, stating that "The carrier programme: we are still looking at the fine detail of that"[80] and that "At the moment I cannot say whether there is a gap or not; it is still part of work we are undertaking".[81] He explained that:

It is the first time we have looked at all the lines of development for both the current carrier programme and the future carrier programme, and within that there is a complicated programme of transition between different aircraft, different ships, and until we have completed that work I would not like to say that I can guarantee there would be no gap.[82]

The Minister wrote to us later in the day after Admiral Lambert had given this evidence and stated that:

At this morning's session of the Committee, Admiral Lambert surprised the Committee—and indeed myself—by suggesting that there might be a gap in our Carrier Strike capability before the entry into service of HMS Queen Elizabeth.

I am now formally writing to you to let you know that Admiral Lambert has discovered that there was an error in the paper that he saw yesterday and which prompted his remark, which was made in good faith and conscientiously in order to ensure that he concealed nothing from the Committee.

In fact studies have revealed that there could be an insufficient number of all-weather pilots training to fly the JSF at the moment of transition, but having identified this risk we shall be taking steps to mitigate it.

34. 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.

35. 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.

MILITARY AFLOAT REACH AND SUSTAINABILITY (MARS)

36. The MARS system is intended to provide afloat logistic support to UK and allied maritime task groups at sea and their amphibious components operating ashore. The initial focus was on the double-hulled Fleet Tankers which were urgently required to comply with International Maritime Organisation environmental standards. However, this was one of the programmes which was delayed as a result of the short examination of the equipment programme.[83] The Minister for Defence Equipment and Support advised us in October 2009 that he had decided to cancel the previous competition in March 2009, and "to look for a less highly specified solution".[84] The MoD's written submission explained that a new competition had recently been approved to deliver the fleet tankers (now known as MARS Tankers) and that the closing date for expressions of interest from industry was 4 December 2009. The Minister for Defence Equipment and Support told us that the approach being taken was to ask industry what it could offer and that he was therefore unable, in advance of commercial discussions, to advise us what the in-service date would be.[85]

37. The International Maritime Organisation and EU legislation ban the operation of single-hulled tankers from 2010 onwards. Although naval auxiliary ships operated and manned by the Royal Fleet Auxiliary are exempt, restrictions imposed for example by individual nations or ports could restrict the movements of single hulled tankers. The MoD explained that it was working closely with Lloyd's Register and the Maritime Coastguard Agency "to ensure that operation of our single hulled tankers is not impaired whilst working towards achieving full compliance as soon as is practicable". It also stated that "The risk of continuing to operate single hulled tankers is mitigated by careful programming, operating outside sensitive geographical areas and additional training for the crews."[86] In oral evidence sessions, we sought further clarification of these risks and the mitigating actions planned by the MoD. CDM told us that "There are some geographic restrictions and some nations do not allow single hulled tankers into their waters, but it is not restricting naval operations."[87] He added that "What we need to be careful of is what do we do if something does go wrong. … What happens if a single hulled tanker from some other nation gets holed and internationally there is a block on? …We have … a fall-back plan … we do have two Wave Class double hulled tankers, so they can operate, they can replenish at sea, and we would need to hire in commercially some double hulled tankers."[88] The Minister for Defence Equipment and Support confirmed this approach.[89]

38. 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.

TYPE 45

39. The first Type 45 Destroyer, HMS Daring, was accepted into service during 2009. The NAO has commented that:

The Type 45 Destroyer will provide a much greater capability compared to the Type 42 it is planned to replace, but has experienced considerable delays of over two years and cost increases of £1.5 billion because of over-optimism about what could be achieved, inappropriate commercial arrangements and poor project management in the early stages.[90]

When the Type 45 project was approved, the MoD planned to buy twelve ships. The MoD explained the rationale for this:

The requirement for 12 Type 45 Destroyers was first set out in the 1998 Strategic Defence Review. The SDR confirmed the need to maintain plans to modernise the destroyer and frigate force, but reduced its size from 35 to 32. The need to meet a broad range of operational demands required a balanced fleet of Destroyers and Frigates, and it was judged that 12 Destroyers would be sufficient to meet this requirement with acceptable military risk against the planning assumptions and policy baseline at that time.[91]

However, the requirement was reduced to eight ships in 2004, and in January 2008, during our Defence Equipment 2008 inquiry, the MoD told us that six Type 45s had been ordered and that "anything beyond that is subject to the review process now going on."[92] Guy Lester, Director Capability Resources and Scrutiny, explained the MoD's reasoning for the reduction from 12 to six ships:

The successive reductions we have had from 12 to eight and then eight to six reflected partly priorities in the programme and partly an understanding of the capabilities of the ship, especially when we fit them with the Co-operative Engagement Capability, the improved networking compared with what was originally envisaged, but the judgement is that with a fleet of six we can protect a medium-scale operation, which is two task groups, and that is what we need to do.[93]

The Gray report suggested that the reduction in numbers was at least partly because of the soaring costs of each ship:

HMS Daring and her sisters will cost £1 billion each, a price so high the UK can only afford 6 ships. This level of expenditure is well beyond any other current navy in the world, barring the US and France. As a result, the export potential is, to say the least, limited. The continued delivery of these ships at this cost may seem bizarre, but it is entirely consistent with each of the single Services' rational desires to retain as much of the available funding as possible.[94]

40. The Department's policy requirement to have five ships available for tasking remains unchanged. The NAO suggested that "it will be challenging to meet this requirement with the reduction in the number of destroyers being procured, although the Department judges that the benefits of new technology, improved efficiency, and optimising the way it supports the destroyers to maximise time 'at sea' will mean it will be able to deliver the necessary capabilities with fewer ships".[95] In response to a question about the implications of one ship being put out of action, Dr Andrew Tyler answered that:

If we are managing to generate five from six, then at any point in time we have got one spare. Clearly if we lost one, then that would leave us only just enough to protect two task groups on that basis but frankly that goes for all of our defence capability. We have to size it to a particular assumption set and if you stress that assumption far enough then we end up with not enough equipment.[96]

He added that he did not believe that this represented "the farthest end of the risk" and that "we have taken a carefully calculated risk and believe that we can live with that perfectly adequately".[97]

41. The MoD told us that the first of class, HMS Daring, will enter service with the Principal Anti-Air Missile System (PAAMS) Sea Viper performance having been tested but before the missile has been fired from a destroyer. The Department plans to fit a number of equipments incrementally on ships after they have come into service, meaning that the full capability of the ship will not be available until the middle of the decade.[98] Dr Tyler explained that there had been some recent set-backs in the programme:

HMS Daring has got PAAMS capability today. The process of generating what we would call full operating capability, trialled, verified and tested, is going to take … a couple of years longer to generate. You might have read reports recently about our final trials firing which was not successful. It is too early for us to come up with the diagnosis for that, but that has been a set back in terms of the generation of the full capability and we are working extremely hard with the other two partner nations in the company to resolve what the problems were with that firing.[99]

42. 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.

43. 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.

HELICOPTERS

44. Helicopters are key assets for all of the Armed Forces. In our Helicopter Capability Report, published in July 2009, we noted the vital contribution made by helicopters to operational capability and the fact that it was "essential that the fleet should be 'fit for purpose', both in terms of quality and quantity".[100] We concluded that:

The MoD should seize the opportunity to recognise the importance of helicopters to current and contingent operations, and work towards strengthening all aspects of capability: the number of helicopters in the fleet, the support structure that underpins their operation, manning, both in the air and on the ground, and finally, the training for the full spectrum of capabilities described by the review itself.[101]

We had a number of concerns about the information provided in the Government response to our Helicopter Capability Report,[102] and followed these up in writing with the MoD.[103] We discussed a number of these issues with CDM in the oral evidence session on 1 December 2009, and the MoD provided a written response to some additional questions which were mainly about the Puma Life Extension Programme.[104]

45. On 15 December 2009, the Secretary of State announced the Future Rotary Wing Strategy, the aim of which was to increase levels of helicopter capability, with priority given to support of operations.[105] Key aspects of this strategy were the procurement of an additional 22 Chinooks; confirmation of the Puma Life Extension Programme; and a reduction in the number of fleet types through cancellation of the Future Medium Helicopter programme and removal of the Sea King fleet by 2016. Vice Admiral Lambert described the objectives of reducing the number of types of helicopters:

The strategy that was announced earlier this morning drives out a class of helicopter, it reduces the number of types of helicopters and it brings us into an era where we can see four main helicopter types going forward with the Chinooks doing the heavy lift, two types of Merlin, one which will be the anti-submarine helicopter and the Mk3 doing the amphibious lift, the Lynx helicopters with the Wildcat and the attack helicopters. As an addition we are moving forward with the Puma to fill a particular niche capability but it reduces helicopter types and we are trying to drive out fleets within fleets.[106]

46. As a result of the short examination of the equipment programme in 2008, the number of Lynx Wildcat helicopters to be procured was reduced from 80 to 62 and the upgrade of the Merlin Mk 1 helicopters to Mk 2 standard was restricted to 30 out of the fleet of 38. The NAO noted that the MoD expected the reduction in Lynx Wildcat numbers to deliver an overall saving of £194 million in equipment costs over the next ten years, plus an additional reduction in the cost of capital and associated savings from the decrease in the required number of crews and in support costs. It commented that "Although the decision saved 12 per cent of the Lynx Wildcat costs, it represented a 23 per cent reduction in helicopter numbers" and that "the planned number of Lynx Wildcat flying hours has also been reduced by a third". It has been MoD policy for many years that submissions for budgetary approval should be supported by both military judgement and operational analysis. However, the NAO commented that in this case "The Department did not undertake formal operational analysis on the impact of the reduction; rather it based its assessment on military judgement that the reduced numbers would be sufficient to meet military tasks."[107] In oral evidence, the Minister for Defence Equipment and Support confirmed that the MoD remained committed to buying 62 Lynx Wildcat, stating that "There is no change in that at all. The Wildcat is on target, on schedule and doing well."[108]

47. With regard to the reduced scope of the upgrade of the Merlin Mk 1 helicopters, the NAO commented that:

The Equipment Examination resulted in the Department not proceeding with the plan to upgrade the entire fleet of 38 Merlin Mk 1 helicopters. Instead, only 30 will be upgraded. This reduction will avoid £64.7 million of costs.

As a result, the Merlin force will be unable to provide simultaneous anti-submarine protection to more than one naval task force, such as an aircraft carrier or amphibious group, unless supplemented by Merlin helicopters used for training.[109]

The Minister for Defence Equipment and Support said that this assessment by the NAO "sounds correct", adding that "If we had an anti-submarine threat against two task groups simultaneously I think we would pull out all the stops to get all the helicopters we could out there".[110] CDM did not believe that there was a risk of creating a fleet within a fleet in order to save up-front costs in the Merlin fleet, saying that:

We have 38 Merlin Mk1s of which we are going to convert 30. We will not then use the other eight for anti-submarine warfare. We have 28 Merlin Mk3s currently flown by the RAF for land use. We will need to modify those so they can operate off amphibious shipping. We will probably need to convert the tail rotors so they fold, certainly the main rotors will need to fold, so we will in effect have one fleet of 58 Merlins, 30 of which will be optimised for anti-submarine warfare and 28 of which will be optimised for amphibious lift. Actually, the helicopters are the same.[111]

In its Support to High Intensity Operations Report, the Public Accounts Committee highlighted the issue of shortages of spare parts for Merlin and Apache helicopters.[112] It stated that "The initial procurements of spares are still being delivered from industry and as a consequence there are some key components in short supply" and that spares shortages had led to short-term cannibalisation of helicopters both in theatre and in the UK.[113]

48. The Puma Life Extension Programme is intended to provide battlefield lift capability for operations alongside Chinook until at least 2022.[114] In our Helicopter Capability Report we discussed concerns about this programme, in particular the crashworthiness of the aircraft, and concluded that, given the age and the poor survivability of the Puma, extending its life was not the best option, either operationally or in terms of the use of public money.[115] We discussed these issues further in written correspondence with the MoD.[116] In oral evidence, Dr Tyler told us that the programme was proceeding very well[117] and that it was of low technical risk.[118] CDM said that there was nothing wrong with the Puma aircraft[119] and that the Life Extension Programme was a way of getting helicopters into operation more quickly than buying new ones.[120]

49. 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.

50. 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.

51. 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.

52. 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.

53. 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.

8 HC (2008-09) 107, para 10 Back

9 ibid., para 150 Back

10 National Audit Office, Performance of the Ministry of Defence 2008-09: Briefing for the House of Commons Defence Committee, October 2009, www.nao.org.uk Back

11 NAO, The Major Projects Report 2009, p 4 Back

12 ibid., p 4 Back

13 NAO, The Major Projects Report 2009, p 7 Back

14 HC (2008-09) 107, paras 27-37 Back

15 ibid., para 37 Back

16 The Gray report, p 22 Back

17 HC Deb, 15 December 2009, col 801 Back

18 HC Deb, 19 June 2008, col 1122 Back

19 Ministry of Defence, Annual Report and Accounts 2007-08, HC 850-I, p 135 Back