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By Howard Wheeldon, Senior Strategist at BGC Partners

07 Jul 11. As reports on matters defence go the latest National Audit Office (Ministry of Defence – Carrier Strike) is remarkably polite in its nevertheless damming criticism of the subsequent procurement process. There is much to commend the NAO report and it should be seen as a shot across the bows to those who by their poor judgement and respective failure to conduct a proper process of strategic procurement implementation have significantly increased the potential for future financial risk. In other words and with regard to all aspects of Carrier Strike procurement the SDSR related changes demanded by the government with specific regard to air power capability and programme timing suggest that process of change has been ill considered and very poorly thought out.

Regretting the necessity but accepting the need for change the NAO report agrees that the subsequent Coalition Government decision to change the F-35 Joint Strike Fighter aircraft variant from that of STOVL to Carrier version will provide better capability. As many others have done over recent months the NAO report questions although does not directly criticise the risk-based judgement taken by the Coalition government to go without carrier strike capability for the best part of the next decade. There was however praise for the BAE Systems, Babcock International and MOD partner alliance approach that is being used to build the two aircraft carriers and the report confirms my own recent view that the CV project is progressing very well.

Despite the absence of hard language criticism the NAO report reserved the severest criticism for the MoD pointing out that the department has “an incomplete understanding of costs of the carrier decision” and particularly the risks attached to F-35 variant change. In questioning risks associated with the integration of UK capabilities with those of the carrier variant of JSF the NAO is essentially questioning the additional cost risk of requiring air-to-air refuelling, weapons integration, lack of defined user requirement (sovereignty) and dependence on the US for the next ten year gap period for initial training requirement. The report highlighted the potential large cost risk of having decided to acquire the ‘carrier’ version of the F-35 aircraft requires that one of the new UK carriers will require to be retrofitted with (the current MoD thinking is to acquire a US designed and built Electromagnetic Aircraft Launch System as opposed to acquiring the lesser risk and well proven steam catapult launch based system as currently fitted to all but one of the twelve aircraft carriers in the US Navy) plus of course, the related aircraft arrester system that will also now be required.

The bottom line of the NAO report is a belief that the MoD has an incomplete understanding of costs of the new carrier build arrangement and of its acquired air power capability citing the possibility that the eventual cost could significantly exceed £10bn. Whilst it is clear that the potential for costs to rise is real and that, as the NAO delicately pointed out itself, uncertainties with regard to technical, safety and commercial remain my own view is that the ultimate plus £10bn figure that they suggest fails to take account sufficiently of the netting off of overall cost saving provided by the decision to delay operational carrier strike capability renewal for ten years (in other words the benefit to the Exchequer of the ten year gap before the UK actually will have full carrier strike capability again) and the considerable saving in capital, operational and through life cost in both financial and risk terms of the change made in F-35 aircraft variant.

Today’s report on Carrier Strike from the NAO does make for compulsive reading as it tears apart what it appears to define as a lack of full strategic thinking behind certain carrier strike

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