The real questions on defence equipment

by Rt Hon Jim Murphy MP, published today on Defence Management.

Will the non-equipment budget for welfare, housing and manpower be raided when equipment projects over-run? This is just one question defence ministers need to answer, writes Shadow Defence Secretary Jim Murphy

Defence Secretary Philip Hammond declared in May last year that “the budget is now in balance”. Had he been able to unfurl a ‘mission accomplished’ banner from the roof of the House of Commons he no doubt would have done so. But ‘wishful thinking’ is now a more apt slogan.

The National Audit Office has now reported on Hammond’s claims, only to raise more questions than answers and undermine assertions that defence financing is on a stable footing.

The current government’s claim of a ‘balanced budget’ was always spurious as it only ever applied to the equipment budget, 40 per cent of the total MoD annual expenditure. The NAO report did not even go that far and did not look at ‘equipment support costs, which make up just over half the equipment plan cost’, and so only passed judgement on 20 per cent of the total MoD budget. Even then, the conclusions are damning.

It is hard to accept figures produced by ministers when the NAO reveals there is ‘systemic over-optimism inherent in the department’s assumptions around the costing of risk’. Such a conclusion by the auditor, coupled with the assessment that understanding of risk and its incorporation in to planning was ‘yet to be consistent’, means that the contingency of £8bn built in to the core equipment programme, just 5 per cent of the £160bn total, ‘may not be sufficient’.

The lack of action taken to date to limit projects’ cost over-runs could jeopardise the contingency, which would in turn limit the department’s ability to fund the ‘white board’ – the list of programmes not part of the equipment programme – and leave resultant capability gaps.

The NAO’s assessment of the department’s approach to long-term planning of platforms’ cost as not ‘statistically valid’ will worry those who want certainty over when to invest or the capabilities that will come on stream.

While disputed by the department, the NAO’s finding that the cost of the procurement projects in the equipment procurement plan has been understated by £12.5bn would suggest that the contingency may already have disappeared and cuts need to be made in the core equipment programme to provide balance, let alone the white board.

Furthermore, it went little-noticed that the NAO said achieving affordability is “contingent on savings being achieved elsewhere in the budget”, meaning the non-equipment budget, comprising welfare, housing and manpower, is likely to face further reductions to sustain the core equipment programme. This is the definition of imbalance.

To give the country and industry confidence, the secretary of state and his ministers need to act rather than pat one another on the back.

First, it will be important to publish a thorough equipment programme, with funding lines. The slim line document published last week did not give a full account of what is budgeted for.

Second, ministers should be clearer about the future of the non-equipment budget and whether this will be raided on each occasion a project over-runs.

Third, on contingency, ministers should confirm whether there are plans to increase the £8bn over the course of the ten year programme. Also, departmental underestimates in the equipment and procurement need to be assessed to clarify whether these eradicate the contingency.

Fourth, it will be important to know from which baseline the 1 per cent year-on-year post-2015 rise in the equipment programme will be made, whether this is on top of the annual core equipment programme totals published last week and whether this will begin in 2015/16, which will have a potentially significant impact on the deliverability of Future Force 2020.

Finally, the government must react to the stinging criticism of their accounting methods. There is cross-party consensus on the need for action to reform procurement practices. Labour has proposed ideas to entrench a foundation of sound accounting.

This comes on the day the Defence Select Committee says that ‘the absence of a defence industrial strategy which supports appropriate national sovereignty puts the UK at a disadvantage against competitor countries’. Without such an approach jobs are at risk. The UK is experiencing a loss of skills, contradictions in export policy, worries over investment in science and no strategy to support sovereign capabilities. A new industrial strategy must improve the speed of procurement, share the burden of risk with industry, support small businesses and strengthen co-operation between companies, the department and the military.

The contradictions between the Prime Minister and the Defence Secretary over spending pledges got the headlines last week but there are some worrying trends in MoD procurement. A lack of basic competence can be corrosive when it comes to defence planning and funding.

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