UK Defence Acquisition: an encouraging year for major projects

This year's Major Projects report (MPR)[1] is striking by its size and reflects the sheer scale of defence acquisition in Britain. It has grown to almost 300 pages in two volumes despite giving closest attention to only fifteen projects which have gone through the MoD's 'Main Gate' approval process and ten pre-Main Gate projects. It provides a wide variety of information and extensive analysis, covering in particular the capability management using  the Defence Lines of Development approach linked to each equipment project. There is reference also to the in-service arrangements for some older projects and to the operation of the DE&S Sentinel health check tool in support of project management. 

Clearly any reader is going to be selective about what is drawn from the document.  This commentator was struck by the message that the Treasury has decided to remove the cost of capital from project costs. This reinforced the heretical thought as to whether the huge effort and cost that the MoD made to introduce Resource Accounting and Budgeting from the mid-1990s was worthwhile: especially in an era when the level of government borrowing is central, is not the whole focus on how much money the MoD spends? Arguably the contortions that the Ministry goes through to calculate the resources it has consumed serve mainly to confuse many members of Parliament and any member of the public seeking to work out what is going on.

With this proviso, there are some points in the body of the NAO report that many will recognise as key.

Encouraging performance

Keeping the report from the front pages of the UK national press were the very modest cost growth and schedule increases recorded for the top fifteen projects in the past year, with Watchkeeper being the only prominent example of an industrial shortcoming: it fell behind schedule by twelve months (although its forecast cost fell slightly). There was an increase in £466 million in forecast costs for the fifteen projects, but only £53 million of this was down to technical considerations which could be lodged at the door of industry.  Macro-economic factors especially exchange rate changes accounted for £176 million, while MoD decisions, either to stretch out projects (most prominently the Astute submarine programme) or to enhance capabilities, made up the balance of £237 million.  Moreover, in terms of cost growth, the report shows clearly that project/technical factors have diminished steadily in significance since 2000. From 2008 to 2011 project/technical factors had zero impact whereas MoD decisions mainly to slow programmes were the predominant sources of cost increases.

The report is broadly compatible with the proposition that the Smart Procurement/Smart Acquisition initiative took about five years to take effect, since the report is clear that projects approved since 2002 have experienced much smaller overall increases in forecast costs (2.8%) than those what went through Main Gate before that date (16.8%).  Of course it may be that the newer projects have not yet reached their most difficult periods but generally the project list features projects that are already fairly advanced: the Lynx Wildcat, a new helicopter, is the exception.  Significantly, only one of the fifteen projects involves anything like the 'buy-off-the-shelf' approach advocated at the beginning of last year's Green Paper on Equipment, Support and Technology:  this is the 'Airseeker' Rivet Joint system being bought from the US under a Foreign Military Sales agreement. There is also the F35 Joint Combat Aircraft (see below) but the remainder are British or collaborative or 'European' in nature.

The report does not make clear how the recent performance of the big projects relates to the internal re-costing of the Equipment Programme for financial planning purposes which the Chief of Defence Materiel has been allowed to undertake.  Reportedly he has been allowed to increase the total anticipated cost of the (10-year) Equipment Programme by £5 billion. As his estimates were generated in the period after that covered by the MPR, we might anticipate that future NPR might not deliver such comforting news. On the other hand, the extra funding secured by the Chief of Defence Materiel should mean that a problem in one project does not have the spin-off effect of damaging others whose resources would otherwise have to be raided.

The privileged Joint Combat Aircraft

Emerging in the Report is the extraordinary, even privileged position of the Joint Combat Aircraft (JCA) in the UK acquisition process. The JCA is the UK designation of the US F.35/joint Strike Fighter.

 In the development of the original Smart Procurement guidance where McKinsey and Co were the lead consultants, there was  some discussion of the MoD using one approval point for projects, but the ministry eventually  insisted on two, Initial and Main Gates respectively.  The NAO tells us that the procurement of the Joint Combat Aircraft will involve at least five British 'tailored' Main Gate' decisions, only two of which have so far been made. The UK's formal involvement with the JCA dates back to a 1995 Memorandum of Understanding and sixteen years later the MoD has still not set firm prices, delivery dates or number of aircraft to be bought.  From a public accountability perspective, it is just not clear how the NAO will be able to evaluate the eventual JCA procurement using its established approach of comparing schedule, performance and cost against Main Gate estimates.

The largest figure for the JCA's Production, Sustainment and Follow-On Development phase in the NAO's project figures is £608 million which only covers the three pre-production aircraft that the UK has ordered.  Since the MPR is essentially backward looking, there are areas where it does not venture: it notes that the UK's contribution to the JCA's development costs is fixed, but does not explore whether the purchase prices eventually paid for aircraft might include some visible or disguised provision for the US and Lockheed Martin to retrieve some of the cost overruns associated with development.

The Astute programme and industrial capability

The programme where costs increased markedly was the Astute attack submarine (+£249 million), where the Government opted to slow down production to generate continuity of work at Barrow until the Vanguard successor programme is in place.  

These extra costs should arguably be added to the conceptual costs associated with the UK deterrent system rather than attributed to the UK's conventional capabilities.

The programme and portfolio dimensions

Moving from the particular to the generic, there must be some concern that the NAO has remained focused on specific projects while the Ministry is giving growing attention to the programme and even portfolio levels of defence management.  While the NAO has taken on board the non-equipment lines of development in its Major Projects report (which is conceptually a programme approach) there is no direct reference to the activities and performance of the twenty-nine or so multi-project Programme Boards based in Bristol or to the MoD's efforts to develop its portfolio management activities.

The major portfolio issue, of course, concerns the affordability of the overall Equipment Programme and support costs over a decade: looking at individual approved projects, even when they account for around £60 billion of the total programme,[2] does not allow a precise grip to be gained on this issue.  The NAO is understood to be interested in addressing all 'three Ps' (portfolio, Programme and Project) but it would appear that the MoD does not yet have the information and performance metrics in place to enable this to happen.

Conclusion

It is apparent that the National Audit Office feels compelled to rely predominantly on information provided by the MoD which places real limits on the scope of its work: press and other unofficial stories on development in projects are not evaluated or exploited and the individual project reports in Volume Two are essentially MoD products. But this does not prevent the overall publication being authoritative and informative and its place in the overall defence acquisition picture is prominent and assured.

This year's NAO report on defence projects brings a welcome indication that the MoD's acquisition performance has got better and could improve further. It also serves to reinforce the report's own position as the market leader in its field of the oversight of defence projects on behalf of a legislature and an electorate.

NOTES

[1] Report by the Comptroller and Auditor-General, Ministry of Defence: The Major Projects Report 2011, London, National Audit Office, 16 November 2011.

[2] The NAO specifically says that 'the projects we examined represent around 90% of the total value of post-main gate equipment projects (with a value over £200 million) currently being funded by the Department', p.6