The UK MoD fared better than usual in this year’s NAO report. Are things improving, or have the goal posts moved?
At first glance, the UK Ministry of Defence’s latest performance in procuring military equipment warranted its least-severe mauling from the National Audit Office (NAO) spending watchdog in recent years. The overrun on its largest contracted projects fell by £700 million ($1.2 billion), and while these suffered an average delay of two and a half months during the financial year to 31 March 2005, the NAO says the statistics seem to show that the MoD has managed to “bring its equipment programme under control”.
But for the first time in recent memory the effectiveness of the NAO’s annual MoD Major Projects report has been called into question after its agreement to omit all new cost information on the UK’s acquisition of 232 Eurofighter Typhoons. While it says the justification for this action is “absolutely robust” and that the project’s impact on the 2005 spending review would have been “broadly neutral”, the removal from scrutiny of the UK’s single largest defence procurement does not bode well for future transparency.
Why the Typhoon secrecy? Major projects report director Tim Banfield says the NAO agrees that revealing programme values at this stage would “give commercial advantage to others during the Tranche 3 [contract] negotiations already under way” for the UK’s final batch of 88 aircraft. But by agreeing to suppress data on a project worth an estimated £19 billion, the watchdog has weakened the validity of its annual review and reduced the scope of its study of 19 programmes worth a combined £29 billion. These are an average of 10% over budget and 20 months behind schedule, it says.
The numbers do not add up on Typhoon. Originally benchmarked at £16.7 billion, the programme by March 2004 was projected at almost £19 billion, half of which had been spent by 31 March 2005. Add to this the acknowledged £4.3 billion cost of the UK’s Tranche 2 production order for 89 aircraft signed last December and not much appears to be left for it to acquire the most advanced version of the fighter. Having cost almost £65 million per aircraft over the two production orders agreed so far, surely future Typhoons will cost much more than the £4 billion supposedly left?
Cuts have begun to bite into the Typhoon balance sheet, with £55 million saved by slashing the number of MBDA Meteor beyond visual-range air-to-air missiles to be acquired and other enhancements, such as a requirement to retrofit Tranche 1 aircraft to the Tranche 2 standard, diverted into a yet-to-be-approved capability project.
This policy of trading capability to keep projects on the financial straight and narrow is also apparent in those acquisitions left open to scrutiny. Notable examples include a decision to cut the number of BAE Systems Nimrod MRA4s to be acquired from 18 to 12 – saving £155 million – to offset the impact of programme costs spiralling by over £400 million. The MoD has already dipped into the Joint Combat Aircraft project, scratching a future weapons requirement worth almost £370 million from the UK’s Lockheed Martin F-35 Joint Strike Fighters and ditching plans for an alternate helmet-mounted display.
Another threat to the validity of future NAO reports comes from the MoD’s policy of shying away from providing in-service dates for new equipment until a production decision is made. A prime example is the Future Strategic Tanker Aircraft project, still at the preferred bidder stage almost two years after AirTanker’s selection to replace the Royal Air Force’s Lockheed TriStars and Vickers VC10s. When the MoD signs a contract from early next year it will establish a new in-service date for the aircraft and effectively wipe away a four-year programme delay. This will make its contract schedule appear healthy, but strains the legacy systems required to soldier on until their replacements arrive.
This adverse impact on the frontline can be combined with a growing trend to stretch the assessment phase of major projects to remove future risk. Banfield welcomes this approach. “It is very sensible that you don’t draw a line in the sand on a programme when you’re not entirely sure what you will deliver,” he says. He praises an MoD decision to extend the assessment phase of the Thales UK-led Watchkeeper unmanned air vehicle programme by 12 months. Although this initially increased costs by £13 million it will save £100 million in the long run by delivering a simplified solution.
While no-one wants the Defence Procurement Agency to rush into multi-billion pound deals without fully understanding their complexities, its new practices are delaying the replacement of obsolete equipment. The effect of this, as seen through 2003’s involvement in the Iraq War, can push essential procurement to the urgent operational requirement stage – an unsatisfactory way of doing business.
This year has seen a pause in major UK defence orders, partly as a result of the June general election and a subsequent review. This will result in the delivery before year-end of a Defence Industrial Strategy document to make recommendations on the UK’s future competition policy and identify a shortlist of key industrial capabilities that should be retained nationally. The MoD must deliver on its pledge to acquire the equipment it needs at the right time and affordably. From the most recent evidence it still has much room for improvement, but disguising its inadequacies as evidenced this year with the Typhoon is the wrong way forward.