Improving Defence Acquisition: The Debate Continues

Since the beginning of 2015, the Ministry of Defence (MoD) and the National Audit Office (NAO) have been trading assessments of the condition of UK defence-acquisition processes and programmes. Perhaps unsurprisingly, the NAO is significantly less bullish than the department of state. There have been three specific matters at issue: the affordability of the MoD’s plan for equipment and its support over the next decade; the progress of individual major projects; and the reform of the acquisition system through the Materiel Strategy. Two key documents on which these debates have focused are the NAO’s January combined publication, ‘Major Projects Report 2014 and the Equipment Plan 2014 to 2024’, and its February report, ‘Reforming Defence Acquisition’.

In relation to the first issue, namely the affordability of the MoD’s plan for equipment and its support over the next decade, the coalition government has not tired of reiterating the extent of the over-commitment inherited from its predecessor and has rejoiced in announcing that, after painful cuts and prudent contracting, it has consistently delivered a significant programme of purchases for the coming decade that can be accommodated within a balanced equipment and support budget. At Chatham House in February, Minister for Defence Equipment and Support (DE&S) Philip Dunne stated that: ‘We’ve filled the black hole in the defence budget and balanced the books. For the third consecutive year, we’ve published an affordable equipment plan, worth £163 billion over 10 years, with substantial headroom and flexibility built in.’ The NAO, meanwhile, offered a more qualified endorsement of the Equipment Plan, noting the centrality of assumptions about anticipated efficiency savings in both new procurement and support.

In engagement with the public, a sense of affordability has been generated by avoiding specific reference to what is included and, in some cases, the numbers involved. This leaves a number of questions open: for instance, around whether the Equipment Plan includes a provision to fill the maritime-patrol/anti-submarine capability gap created by the scrapping of the Nimrod fleet.

On the issue of numbers, there is also a lack of clarity. Ministers have expressed an intention to buy forty-eight F-35s by 2024. As yet, however, only four operational units are actually on contract and the government has backed away from a reported intention to buy an initial fourteen operational aircraft. Similarly, the MoD placed a contract in February for further work on the Type 26 frigate programme, the size of which (at £859 million) virtually commits a future government to building the ships. However, the MoD did not commit to building a specific number of platforms over the decade-long period covered in the Equipment Plan. This may ensure the affordability of the programme by reducing the number of units to be bought below that envisaged in the navy.

In relation to the second area under discussion, namely progress on individual major projects, the MoD claims to have ‘got a grip’ on the tendency of projects to increase in cost and schedule, citing the findings of the NAO’s Major Projects Report to support its case. As Philip Dunne further noted at Chatham House:

We’ve … got a grip on our big ticket procurement projects. And you don’t just have to take my word for it. We have in this country a National Audit Office admired around the world for its fearsome independence from the government of the day. Consequently its pronouncements on departmental performance, especially its report on major procurement projects, are eagerly anticipated by the Ministry of Defence each year. So to illustrate how far we have transformed defence acquisition, you can do no better than look at the position we inherited from the NAO’s report on 2009, where the top 15 defence projects were a staggering £4.5 billion over budget in year and 336 months overdue.

The 2009 figures quoted by Dunne come in stark contrast, in particular, to the NAO’s Major Projects Report 2014, published in January, which confirmed that the top eleven defence projects were £397 million under budget and, in aggregate, only fourteen months late.

The shift is indeed remarkable, but how much is due to the actions of the MoD and how much to the growing presence of mature projects is debatable: a notable veteran of acquisition, Graham Jordan, pointed to the dominance in the 2011 projects list of mature projects less likely to experience cost increases. He forecasted in a 2012 edition of RUSI Defence Systems that cost increases would not occur in the projects then listed because of this consideration.

Furthermore, as noted above, where significant risks remain to development or unit-production costs, the MoD has protected itself by not committing to acquiring specific numbers of units – that is, by not clearly defining ‘the project’. Significantly, the aggregate

£397 million of under-budget activity to which Dunne referred is more than accounted for by the MoD’s presentation of the F-35 programme as being £500 million under budget for the demonstration and production phase. Given the project’s history and continuing issues, those outside the defence industry may struggle to understand how this could be. Whilst many of the NAO’s notes on the project are difficult to grasp, most of the reduction in the financial commitment (£368 million) seems to be due to the MoD cutting its requirement for the incorporation of (British) weapons onto the aircraft; also significant were the positive changes in exchange-rate calculations over the period. Of course, when the UK first joined the then Joint Strike Fighter as a Tier 1 Partner, the British intention was to buy more than 130 aircraft. Now it appears that, at most, forty-eight aircraft will be bought over the next decade.

Looking in detail at the 2014 list, some mature projects remain, whilst others are based on established systems: the army’s Scout vehicle is a Piranha derivative (and has been priced at nearly £6 million a vehicle). There is also a series of other projects which is relatively early in the acquisition cycle and therefore still has the potential for higher-than-expected costs. The projects include the strategic deterrence Core Power (submarine reactor) programme and the successor submarine. The NAO noted that the MoD increased planned procurement spending after the MoD Cost and Analysis Service had voiced concerns about over-optimism, adding that ‘there is currently no overall estimate of whether, or to what extent, support budgets may be underestimated.’

As such, the recent stabilisation of project costs can be attributed to a mix of factors, including the fact that earlier in the coalition government’s period there were a number of mature projects for which risk was lower, and a reluctance to specify the details of a project in terms of system numbers until later in the procurement cycle.

The third area under examination relates to reform of the acquisition system through the Materiel Strategy. In 2010, the coalition government appointed Bernard Gray as chief of defence materiel and supported his efforts to introduce a government-owned, contractor-operated (GOCO) structure into DE&S. That effort collapsed when only one company opted to bid. Subsequently, two US-based managed service providers (MSPs), Bechtel and CH2M Hill, have been appointed to advise on programme and project management within DE&S, which has been re-constituted as a ‘bespoke government trading entity’ at ‘arms length’ from its customers and the rest of the MoD. PricewaterhouseCoopers has been appointed as an MSP dealing with people and skills, and the process of selecting a company to support financial management and information systems is still underway.

When Phillip Dunne spoke at Chatham House, the minister did not address these details, confining himself to stating: ‘We’ve rethought our approach to defence acquisition, redefining it along the principles of value for money and open procurement. Our Head Office now adopts a more commercial approach … ensuring we are a more intelligent customer; better able to get high-quality equipment and services at best value for the taxpayer.’

The NAO, in its February report ‘Reforming Defence Acquisition’, pointed out that the GOCO proposal had taken up two-and-a-half years before failing at a cost of £33 million. However, the report also recognised that the government had gained a better understanding both of what was possible and of its own needs.

Nonetheless, the NAO also made clear that ‘robust measures of success’ were still needed to assess whether the performance of DE&S was actually improving as a result of the more recent changes, including the use of MSPs. It laid responsibility on DE&S to establish metrics to measure the performance of the MSPs, and on the MoD head office to set realistic and more detailed performance measures than those currently in place to enable improvements to DE&S itself to be quantified. It will be up to the Public Accounts and Defence Committees in the next Parliament to decide how to respond to this NAO analysis of the DE&S changes.

In sum, in all three areas, these latest exchanges reflect not just a debate over the most recent developments, but constitute a discussion of the success of the coalition government’s full five-year effort to address and improve defence acquisition. Certainly, the equipment programme has been adjusted to the point where affordability, whilst remaining a risk, is less of an issue than it has been for decades. Reducing commitments further would obviously present other risks, not only to the overall capabilities of UK forces, but also to the ability of the MoD to spend its money. But a readiness to hold off on commitments to numbers and performance at Main Gate should help to keep the overall programme in check.

As for DE&S itself, the prime achievement of the Materiel Strategy relates to the fact that the organisation, with its new pay freedoms, is now able to recruit from a wider pool of talent than before. Bernard Gray’s contract was extended for just a year to early 2016 and in March the government announced the choice, endorsed by the prime minister, of Tony Douglas as the incoming chief executive of DE&S in September. It appears that the title of ‘chief of defence materiel’ is to lapse.

There has been one significant omission from these debates, concerning the aspiration to make the DE&S match fit by 2017. This continues to be part of the government’s discourse and the NAO is keen that DE&S should remain on schedule to become ‘the leading defence acquisition organisation’ in two years’ time. This, however, raises questions around measurement and comparison. What is currently considered the leading body in this field and how is this determined? Against which other defence-acquisition bodies will – and should – the UK measure itself? With visible and longstanding shortcomings of defence acquisition in familiar countries – such as France, Germany, the US and Australia – there are no obvious answers to these questions.

Trevor Taylor
Professorial Research Fellow, Defence, Industries and Society, RUSI.