Qioptiq logo Raytheon

Exposing Some UK Defence Procurement Myths? By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

boxer2I was somewhat amused last week to read the following article in the International Business Times under a headline “British MOD ‘fast tracking’ £3 billion arms deal with Germany after post-Brexit pound slump”.

“The British Ministry of Defence (MoD) is reportedly “fast-tracking” a £3bn (Euro 3.33bn) arms deal with Germany because of the sharp fall in the pound’s value following Brexit. Since June’s EU Referendum vote, the Pound dropped to a 31-year low on Monday (10 October) and fell 17 percent against the dollar. The weaker currency is expected to cost the MoD up to £2 billion over five years from overseas shipments, a spokesman from the McKinsey global management consultancy said and as a result, the MoD is reportedly pushing through the deal with Germany that will bring a fleet of 800 eight-wheeled armoured vehicles to Britain in order to mitigate against the prospect of further drops in the [value of the] Pound. Five companies were originally bidding for the British Army’s Mechanised Infantry Vehicles (MIV), including a British company, however military sources have told the publication the tendering process has been scrapped in favour of a deal with Rheinmetall of Germany.

I am not here and now intending to comment on the rights, wrongs or indeed accuracy of the article and I proffer no criticism at all to the ‘International Business Times for writing and publishing it. Other UK newspapers have also carried the story and which, if I am correct, was originally broken by the ‘The Times’.

My point is that to imagine that the MOD would bring a large procurement programme such as this forward on the basis of sterling having fallen just doesn’t stack up. The MOD has long had a policy of hedging its currency needs forward and my understanding is that the MOD has covered hedging requirements forward for the next three years. Whilst I appreciate that further clarity and guidance on the matter of how currency fluctuations impact on the MOD and how these are mitigated, I suspect that forward hedging requirement would already be in place to cover all requirements anticipated over the next three years and that these would cover any contract that is likely to be signed during that period.

Beyond three years I readily accept that there is a potential issue and risk but if anyone can forecast where the pound sterling will be in terms of value against the dollar, Euro or basket of currencies three-years’ from now and get it right all that I can say is that they would be deserving of a medal.

The IBT article goes on to say that “Though the deal would benefit the MoD’s future liability to the Forex market, it has been criticised for bringing up the cost of the purchase by £1bn and putting hundreds of British jobs at risk”. It then quotes “Conservative MP Bernard Jenkin who had supported Britain’s departure from the EU, as being critical of the [MIV procurement move] saying that “The idea of rushing to spend money in case you lose it is the wrong way to do procurement.”

I could hardly disagree with the implied remarks from Mr. Jenkins that if the MOD had brought forward this purchase on the basis of the falling value of the pound sterling that this would be the wrong way to do procurement. But the MOD has, in my considered view, not done that and one of the reasons may be that it neither has the flexibility to do this or funds within the 2016/17 Defence Budget to so do. Importantly, with the vast amount of process required ahead of any large procurement, to imagine that the Defence Board and the Secretary of State have been panicked into making a rush decision just doesn’t make sense. As with commercial aerospace, the majority of defence sales are based on dollar values. Of course, the dollar has a long history of both strength and weakness as well and who knows where it will go as a result of the November 8th presidential election!

To be fair, the IBT quotes another source, who did not wish to be named, saying that the MoD was “at risk of making a very poor decision, and making it for all the wrong reasons”. If it was/is made on the basis of expectation that the pound will continue to fall in value then I would have to agree but I have already made my view on this matter – it wasn’t or it won’t be! It will be based on being perceived as the best capability available or maybe, the cheapest!  The same individual is also quoted in IBT saying “A single-source contract would be pursued only because it’s an easy and quick option and that [the proposed] procurement could bring the £3bn price tag of the purchase down by 40 per cent. To that all I can say is REALLY? Frankly I rather doubt that could possibly be correct!

The UK will be buying a substantial amount of defence equipment from abroad over the next ten years including, on top of what has already been ordered, completion of the purchase the first 48 Lockheed Martin F-35 ‘B’ variants of the Joint Strike Fighter aircraft, nine Boeing P-8 Poseidon Maritime Patrol Aircraft and 50 of the latest generation Apache attack helicopters, also from Boeing in the US. Many of the components required for our ships, submarines and other Army vehicles are purchased from overseas companies as well. There is also the final one of three Rivet Joint aircraft purchased and that is currently undergoing fitting out by L-3 plus various other important defence capability that our armed forces need. Last but not least there is a substantial and ongoing requirement to support existing equipment such as Boeing Chinook helicopters, Lockheed Martin C-130J’s, the existing fleet of Apache helicopters, Airbus Puma HC Mk2 helicopters and Air Tanker Voyager aircraft and much else besides.

The reverse in relation to currencies is also true of course and Britain sells a very large amount of specialist defence related components to foreign countries and we export military jets such as Eurofighter Typhoon and the BAE Hawk. Importantly the UK has a 15% workshare on the Lockheed Martin Joint Strike Fighter programme and which in terms of jobs and benefits to the UK economy is massive and will stretch out for a couple more decades and more.

My point about currencies in relation to defence procurement is not just that there are swings and roundabouts in so far as currency fluctuations are concerned but that in a highly specialist industry such as defence equipment procurement while fluctuating currencies can be awkward there are also benefits to our exports as well. While I can hardly deny that the falling value of sterling as made procurement any easier and that it has increased the overall risk I do not believe that its fall has hastened or indeed, delayed sensible procurement decisions from being made.

CHW (London – 20th October 2016)

Howard Wheeldon FRAeS

hwheeldon@wheeldonstrategic.com

Tel: 07710-779785

Back to article list