Qioptiq logo Raytheon

UK Defence – MOD Defence Equipment Plan Passes NAO Muster By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

23 Oct 15. In case you had failed to notice, I will today touch on yesterdays’ interesting publication and ‘signing off’ by the National modAudit Office of the Major Projects Report 2015 together with the ten year Equipment Plan covering the period 2015 to 2025.

Having filled the ‘Black Hole’ in the defence budget left by Labour, having balanced the books and set out a new budget plan that contemplates a £500m increase in the defence budget in each of the next five years for increased equipment spend defence looks for the first time since 1997 to be in a fairly reasonable place. That the Government has effectively ring fenced the defence budget from further cuts and told us also that further efficiency gains can be retained by the MOD and rolled over are further welcome signs that SDSR 2015 when it comes will be as much about capability enhancement, filling huge capability gaps created in the previous defence and security review and thinking about the future.

SDSR 2015 expectations will be covered by me in a follow-on paper sometime over the next two weeks. But for now it is good to know that, as the auditor of government spending programmes, the NAO has given the MOD’s spending programme and ten year costing plan a reasonably clean bill of health. While the NOA has picked up a few areas of concern such as support costs, uncertainty about future cost increases on high value contracts that have not yet achieved ‘Main Gate’ these pale into insignificance compared to concerns expressed in previous audits.

That the NAO has expressed far less concern over MOD current spending and future plans than at any time over the last fifteen years is extremely welcome. But it does not harbour any room for complacency. The last five years have been spent balancing the books, adjusting, reorganising and making defence more affordable and efficient. The next five years in terms of procurement will all be about capability enhancement, making our armed forces more resilient, providing more capacity and filling serious capability gaps. To achieve ongoing success requires that all the lessons of past poorly executed procurement programmes are learned. I believe that they have but I remain seriously concerned about skills shortages particularly those of engineering and technical skills, training and also a shortage perhaps of highly experienced personnel required to make the whole system of procurement work inside the MOD.

The future will also require the MOD, our armed forces and industry to work ever closer together in partnership. Innovation, training and the prosperity agenda will be at the heart of SDSR 2015 and the future procurement model will need to take these into account. Neither, have words such as affordability and efficiency fallen from grace. Each and every player within UK defence will need to play their part in doing things even better and the hope is that the reinvigorated and hopefully much strengthened DE&S (Defence Equipment & Support) trading entity really is fit for purpose. I believe it is and also that the tick in the box from the NAO is a very good sign of that.

In the words of the NAO, ‘The Equipment Plan looks more stable than last year, and there are indications that it will remain affordable for the rest of the Parliament if this stability is maintained. However, the Department’s need to make room in its budget for the support costs of a range of new equipment is just one of the future challenges it faces in maintaining the affordability of the Plan.’

Whilst the above comments may signal a warning from the NAO I think we may take that as read. Elaborating, the NAO went on to say that the ‘forecast cost of the Equipment Plan 2015 to 2025 is £3.5 billion higher than the forecast cost of the 2014 to 2024 Plan (£166.4 billion compared with £162.9 billion), mainly due to the effect of bringing 2025 into the 10-year planning period. Today’s report found that the Plan appears more stable than last year and that progress has been maintained, but that the Department will need to remain vigilant with regard to uncertainties about future cost increases in high-value projects that are still at an early stage.’

Whilst accusing the MOD of “failing to ne clear about uncertainties within the plan, the range of possible cost outcomes across projects” reading through the detail I do not see anything that the MOD needs to be particularly alarmed about at this stage. In terms of the 13 major MOD projects cost and performance has remained stable. Although costs on three programmes including Astute rose the actual net cost reduction was £247 million made up of an accounting adjustment on Typhoon (£238 million) underspend on A400M (largely  due to foreign exchange and accounting differentials) £53m on FASGW(H) missile (scheduling change) and £51 million on QE2 class carriers. The NAO said that the MOD spent £14.47 billion in 2014-15, an underspend of £41 million against that of the original equipment budget, compared with an overspend of £185 million in 2013-14. There is, according to the NAO, evidence that the Department and its contractors are still underspending as they struggle to carry out planned activities on schedule, which could indicate future slippage in delivering these projects.

Finally, the NAO said that the amount of time slippage across the major projects was lower than the previous year, with one notable exception. In-year time variations during 2014-15 had totaled a net 60 months for five out of 12 projects. Apparently, most of this was due to a net 52-month deferment of the final stage of the Core Production Capability Project, to accommodate production of an additional reactor core (this plan was announced in an oral statement to Parliament in March 2014) for HMS Vanguard and to maintain the capability to supply a further core for HMS Victorious, if required. This could not have been foreseen by the project team and was beyond their control.

The latter is of course interesting in relation to the timing of ‘Successor’ the decision to which in terms of moving to Main Gate I would not be at all surprised to see HMG move through the required parliamentary process as early as December this year.

For the record the ten year Equipment Plan budget of £166.4 bn is made up of procurement costs of £69 billion and support costs of £84 billion. There is a contingency reserve of £4.3bn and unallocated budget of £9.5bn.

The decision to bring out the Major Projects Report and Equipment Plan ahead of the result of SDSR 2015 (due to be announced as far as I am aware on November 26th, one day after the publication of the Comprehensive Spending Review or at worst, a few days after that date) is wise. It comes in fact just nine months after publication of the delayed report that covered 2014. Programmes looked at include A400M, Astute, Apache and other Helicopter Sustainment programmes, Complex Weapons, Lightning, MARS, Project Marshall, QE2 Carrier, Scout, Voyager, Warrior Capability Sustainment and both Type 26 Global Combat Ship and Successor and Nuclear propulsion and is inclusive of Assessment Phase, Demonstration and Manufacturing phases and programmes for which capability is already in service. The full details of the NAO Major Projects Report and Ten Year Plan can be found on:

www.nao.org.uk/wp-content/uploads/2015/10/Major-Projects-Report-2015-and-the-Equipment-Plan-2015-2025.pdf

The Appendix to the Major Projects Report 2015 and Equipment Plan 2015 to 2025 contains and interesting array of programme costs, data and detail. In the context of what might occur in SDSR 2015 it is well worth reading although, of course, it contains no mention of programmes such as Maritime Patrol Aircraft/Multi-Mission Aircraft capability that I might suggest will be included in SDSR 2015 and thus, in subsequent on Major Projects and Equipment Plan Reports.

CHW (London – 23rd October 2015)

Howard Wheeldon FRAeS

hwheeldon@wheeldonstrategic.com

Tel: 07710 779785

 

 

Back to article list