1.Building two aircraft carriers is a significant achievement and it is vital the Department applies the lessons learned from this project across its wider defence programme. This was a large, complex project, with a forecast cost of £6.4 billion. The Department did well to build the two carriers in line with its timetable and keep within 3% of the revised budget of £6.2 billion set in 2013. It created the Aircraft Carrier Alliance—a partnering relationship with its contractors—which was a shift away from the ‘open market’ contractor model that it previously employed. This enabled the Department to ensure accountabilities were clear, focus on programme risks, and better align incentives for completing the work. It also introduced a ‘pain-share’ agreement on cost increases above the target price and rigorously reviewed the contract specification and expenditure. The Department has established a similar partnering agreement on its Dreadnought submarine programme. There is scope for it to consider the benefits of such arrangements on new contracts as it seeks to achieve value for money on projects while contributing to the UK’s industrial strategy and providing greater certainty for its contractors.
Recommendation: The Department should review fully the lessons learned on the Carriers project and assess whether other future contracts would benefit from similar contractual models. The Department should also write to the Committee within one month of publication of this report setting out how it is working to improve its relationships with contractors.
2.There remains considerable uncertainty over the Department’s future ambitions for Carrier Strike. The government is re-assessing its defence priorities in the Integrated Review of Security, Defence, Development and Foreign Policy (the Review), which it is due to publish in November 2020. We are extremely frustrated that the government has failed on several occasions to hold a strategic spending review to address the defence budget’s unaffordability, which has resulted in a debilitating lack of clarity for the Department and its suppliers. The 2020 Review will consider the government’s ambitions for Carrier Strike, including its future role and the level of engagement with allies. The Department has confirmed that Carrier Strike remains a vital component of the UK’s military power, and that it aims to operate the carriers as a sovereign capability by 2023. It assures us that it will prioritise funding to develop Carrier Strike, but the lack of clarity on its role, level of operational readiness and flexibility affects the type of supporting capabilities that it needs, and the level of funding required.
Recommendation: The Department must ensure that its ambitions for Carrier Strike are clearly articulated and understood across government as part of the Integrated Review. Once this Review is published, the Department should quickly publish its policy ambitions for the carriers and translate them into affordable plans for future investment and operation.
3.The Department still does not fully understand Carrier Strike’s support and operating requirements or costs. In 2018, we highlighted that the Department must develop detailed estimates of the costs of supporting and operating Carrier Strike. This is even more important now as the defence budget is likely to come under increasing strain in future years. The Department based its initial assessment of support and operating costs—such as fuel and spare parts—on estimates and has started to update these using information from its sea trials. However, it says that it needs more time to develop better estimates, with the deployment in 2021 providing a crucial opportunity to improve its understanding of what it takes to run a carrier strike group. The Department acknowledges that it has scaled back investment on support activities on affordability grounds, such as postponing buying a second Lightning II spares pack, and tells us that the situation is tight. As a result, it cannot assure us that it has enough funding to meet future support and operating costs.
Recommendation: The Department should collect full information on the costs of operating a carrier strike group during its 2021 deployment. This is a crucial opportunity to develop its understanding of consumption issues and the level of spares it needs. The Department should be prepared to set out its findings at a future evidence session with the Committee and be able to demonstrate that it has a better grip of future support and operating costs.
4.The value for money of the investment in the carriers will be significantly reduced if the UK cannot afford enough aircraft to sustain operations over the carriers’ service life. The Department acknowledges that it will need more than the 48 Lightning II jets it has ordered so far to sustain Carrier Strike operations through to the 2050s and beyond. It originally intended to buy 138 aircraft, but its assumptions for using the carriers have changed since 2015 and it failed to give us a clear answer on how many more jets it now needs. The Department is considering the number and type of combat aircraft it will require in the future—across all operations—as part of its wider Air Combat Strategy. However, it could only provide us with a broad breakdown of the estimated costs of the Lightning II programme. The Department has forecast that the programme’s whole life costs are £18.4 billion but, as at June 2020, it had an approved budget of only £10.5 billion. It has told us that each plane currently costs approximately $100m and that this price is falling. Nevertheless, this basic purchase price is just one element, and other costs must be taken into account, including the UK’s original investment to be a Tier 1 partner with the US, and the costs of weapons integration, sustainment and the supporting infrastructure. We are concerned with the Department’s lack of clarity on these costs as it will need to find additional funding to purchase all the jets it will require.
Recommendation: Within one month of this report, the Department should provide the Committee with a full and detailed breakdown of Lightning II related expenditure to date, the approved budget and the forecast whole life costs of the Programme. It should also set out the additional whole life cost of buying more than 48 jets.
5.The Department’s failure to ensure the timely delivery of the Crowsnest radar system leaves the carriers with less protection than planned in its early years. The Department has regarded the Crowsnest project—which will provide a new airborne radar system to protect Carrier Strike—as a very high-risk project from the start. There were problems with it between 2016 and 2018, including slippage against milestones. Then, in January 2019, the Department realised that Crowsnest’s initial contracted capability would not be delivered until September 2021, 18 months later than planned. It has told us that the problems were because the sub-contractor did not understand the technical risks and had been overly optimistic when reporting progress. The Department assures us that there will be a “credible baseline capability” when Carrier Strike deploys in 2021 and it will be able to respond to potential threats. Although it plans to improve incrementally the radar capability by 2023, it could not assure us that it would achieve this.
Recommendation: The Department should write to the Committee to advise how it has addressed the challenge of not initially having a fully operational Crowsnest system, and on the timetable for enhancements. More broadly, it should advise the Committee how it has improved the oversight of sub-contractors in the light of this case.
6.The Department’s failure to fund several key supporting capabilities will restrict how it can use the carriers for many years. The operational freedom of a carrier group relies on support ships providing munitions and stores where and when they are needed, and the Department has long understood that it will need three new support ships to provide this. However, in 2019 it cancelled a competition to build the new ships and it has not yet started a new one. In the meantime, the Department must rely on one elderly ship, RFA Fort Victoria, which has limited cargo capacity and is due to go out of service in 2028, to perform this role. Furthermore, it will need to make alternative arrangements to restock the carriers, such as using allies’ international bases, both when this ship undergoes maintenance in 2022 and when it retires. We are also concerned that the Department has not found a solution for other unfunded supporting capabilities since our 2018 report, such as a long-term solution to move people and goods to, from and within a carrier group. In addition, the Department will face other funding pressures as it replaces the ships needed to sustain carrier operations over the next 50 years, such as anti-submarine frigates.
Recommendation: The Department should develop a plan setting out the investment required to develop essential supporting capabilities for a carrier strike group. This should include cost-benefit assessments of potential capability enhancements and how to maximise the value of investment to date. It should write to the Committee by June 2021 setting out its planned investment over the next 10 years.
Published: 13 November 2020