Procurement and support of military equipment consumes around 40% of annual defence cash expenditure and is of immense importance to the nation. The dedication of a wide group of individuals in attempting to deliver a complex programme of future capabilities while supporting our Armed Forces in current combat was apparent to the Review team throughout this work. The Department's commitment to improvement in acquisition is genuine and progress in some areas has been significant.
Nonetheless, the Ministry of Defence has a substantially overheated equipment programme, with too many types of equipment being ordered for too large a range of tasks at too high a specification. This programme is unaffordable on any likely projection of future budgets.
This overheating arises from a mixture of incentives within the Ministry of Defence. In particular, the Armed Forces, competing for scarce funding, quite naturally seek to secure the largest share of resources for their own needs, and have a systematic incentive to underestimate the likely cost of equipment.
Unfortunately the current system is not able to flush out at an early stage the real costs of this equipment, nor does it make effective prioritisation or rationalisation decisions. As the MoD almost never cancels an equipment order, the process of over-ordering and under-costing is not constrained by fear on the part of those ordering equipment that the programme will be lost.
Equipment plan construction is dominated by a "bottom up" aggregation process, which makes it hard for "top down" strategic guidance to control the balance of investment. Effective forums do not currently exist to allow top down guidance to control the evolution of the equipment programme.
With each force bidding for the highest specification product as a result of the system incentives, there is insufficient clarity over which systems need to be the most technologically advanced, and which could be used sensibly with an "80% solution" that would field a certain capability that could be grown over time. As well as increasing risk by encouraging great technical leaps, it also militates against making products exportable, since the most sophisticated products may not be affordable in many markets.
These forces and incentives create an over-large equipment programme, which contains within it a significant underestimate of the likely out-turn, making the programme even less affordable than it appears at any given moment in time. When this over-large and inflating programme meets the hard cash planning totals that the MoD can spend each year, the Department is left with no choice but to slow down its rate of spend on programmes across the board.
The result is that programmes take significantly longer than originally estimated, because the Department cannot afford to build them at the originally planned rate. They also cost more than they would otherwise, because the overhead and working capital costs of keeping teams within industry and the MoD working on programmes for a much longer period soaks up additional cash. The MoD also has to bear significant costs in running on old equipment because the new equipment is not yet ready for service.
Across a large range of programmes, this study found that the average programme overruns by 80% or c.5 years from the time specified at initial approval through to in service dates. The average increase in cost of these programmes is 40% or c.£300m. This study also estimates that the "frictional costs" to the Department of this systematic delay are in the range £900m -£2.2bn pa.
As well as costing significant sums, this squeeze on short-term cash expenditure in an effort to manage an over large programme has a number of other undesirable impacts. It reduces funds available for technology demonstration or risk-reduction activities, which might reduce risk in new procurements. It depresses spend in areas such as Research & Technology, where by their nature, budgets tend to be committed less far ahead, and so are vulnerable to a cash squeeze.
Balancing this equipment programme, and keeping it in balance, is clearly a very significant objective of this report. As a result, the report recommends routine Strategic Defence Reviews, to be conducted in the first session of a new Parliament, as a mechanism to ensure periodic "resetting" of the MoD's plans. The report also recommends a set of detailed changes to keep the Equipment Programme on track between reviews.
The report also finds a blurring of roles and accountability between the "Capability" group, which specifies new equipment on behalf of the MoD, and the Defence Equipment and Support "Delivery" organisation, tasked with taking this specification and turning it into a procurement process. New tools, such as Through Life Capability Management, are designed to allow the MoD to manage and trade off attributes of its equipment, manpower and infrastructure, but they currently lack the hard financial data that would be required to make quantitative decisions.
The report makes recommendations to separate and clarify roles and accountabilities between the MoD Centre and the DE&S and to significantly improve the operation of TLCM.
Defence Equipment and Support, the MoD's delivery arm, also needs significantly greater skills and tools in a number of areas if it is to be able to deliver effectively on a better-balanced equipment plan. There is a need for a greater level of resources and skills in Programme & Project Management, Finance, Cost Estimating, Engineering and Contracting, as well as a need for better Project Management and Management Information systems.
When merging the Defence Procurement Agency and the Defence Logistics Organisation into DE&S, the MoD took the decision to remove the entity's next-steps agency status, and return DE&S to being part of the "core" MoD despite the DPA having achieved its targets on Performance, Cost and Time. This report is concerned by the reduced operational flexibility that this gives DE&S, and by a reduction in clarity that came from the customer-supplier split that the creation of the DPA had produced.
In analysing programme performance for this study, it was found that the programmes managed under the "Smart Acquisition" regime that was part of the creation of the DPA performed significantly better than previous programmes. This report is concerned that the disciplines that came from Smart Acquisition risk being lost under the newer governance arrangements.
Although much needs improvement in the planning and delivery of longer term requirements, it is notable, and to the DE&S's great credit, that the equipment acquisition system works best when needs are greatest. The UOR process, which is designed to provide battle winning equipment at short notice to current operations, appears able to deliver better trade-offs between performance, cost and time in the interests of ensuring that, by and large, the front line receives the right kit at the right time.
How best to inject key skills and tools into the DE&S organisation is the third main area of concern for this report. This report contends that the most effective way to achieve the objective of creating a world-class programme management organisation in DE&S, would be through a partnership with a private sector programme management organisation, of the type operating in civil engineering and other complex engineering fields.
The suggested route to achieve this is through a Government-Owned, Contractor Operated entity. However, creation of such a Go-Co is a significant and controversial step, and this report recommends that it should be subject to further work over the next 12 months to ensure it does not cut across other defence objectives.
Finally, this report notes that similar pressures to those that exist in the new equipment programme also exist within the support of in-service equipment. The detailed nature of in-service equipment support, and the lack of time to delve into these issues, means that this report has not sought to tackle this area in detail.
It is recommended that significant further work be put in hand to analyse this area further and produce recommendations for further action.