In control

In 2015, the then prime minister, David Cameron, boasted that he had brought the defence budget back in balance, overcoming, he claimed, a black hole from 2010 that was “bigger than the entire defence budget for that year”. In effect he was fulfilling one of the 10 rules of defence reviews set out by Professors Paul Cornish and Andrew Dorman in their 2015 paper for The Royal Institute of International Affairs: “On completion of a review, the government will claim to have gained control of defence inflation and cost overruns.”

Yet, as Labour revealed in September last year, there is an ongoing crisis in budget management within the Ministry of Defence. As shadow defence secretary John Healey put it: “Ministers have lost control of costs and contracts, and the defence secretary has no plan to get a grip [on] problems.”

The figures are indeed alarming. Ten programmes have seen costs escalate by at least £7.5bn in the past year, with 42 out of 45 projects rated “amber” (experiencing significant issues) or “red” (delivery unachievable as currently envisaged).

Many of the higher profile examples of these are easy to identify – take, for instance, the design problems with the Ajax light tank, or the Protector drone programme, which, as of January this year, was five years late and £530m over budget. These, however, are just the tip of the iceberg: procurement problems are endemic at every level of the MoD.

 The most compelling argument for better procurement practice is that it can achieve long-term savings as opposed to a one-off reduction in spend

The House of Commons Public Accounts Committee report on major defence equipment contracts published in November last year found a catalogue of failings across every aspect of procurement from programme conception to projected cost, and from contract negotiation to realisation and delivery. Findings included a general lack of transparency in procurement practice. There is no routine value monitoring or value management, with too many contracts procured non-competitively even where no considerations of national security apply. Contract negotiations fail to reliably produce a fair distribution of risks and rewards, and there are few consequences for suppliers for poor performance. Within the budget, funds allocated for new and existing capacity have been diverted into running cost commitments such as pensions and childcare payments. Another significant problem highlighted in the committee’s report is an inability to recruit and retain skilled staff.

When looking for efficiency savings, the current government tends to default to cuts to the workforce, staff costs often being one of the largest areas of expenditure. But in the case of the MoD, capital costs not only hugely outstrip staffing and wider running costs, but increased by 43 per cent in the 2020 budget compared to just two per cent for running costs.

Efficiencies achieved through cuts to a skilled workforce can, in many cases, be matched – if not exceeded – through better, leaner procurement practice. Of course, the former is easy to implement; the latter far less so. The most compelling argument for better procurement practice is that it can achieve long-term savings as opposed to a one-off reduction in spend – and a corresponding loss of expertise in the running of public sector programmes with long-term impact on delivery. Simply put, there is no downside to achieving efficiencies through improved procurement practice. Since the MoD spends so much through procurement and capital spending, it is the government department most likely to realise significant benefits from improvements. The question is: why should defence procurement be so singularly resistant to what would appear to be self-evident good practice in other departments?

Affordability has driven decision-making in defence since the start of the Cold War, but affordability is a political judgement. There is one line of argument that capability reduction is not made inevitable by the force of economic circumstances and that government always has a choice regarding resource allocation for defence. But for any government, especially a Labour government with a strong commitment to delivering important domestic programmes such as the NHS, early years support, and improved public infrastructure, budget constraints are unavoidable.

Given the current parlous state of the public sector within a faltering economy, managing defence spending could prove an exceptionally large thorn in the next Labour government’s side. In 2009 the National Audit Office declared that the defence procurement programme was: “consistently unaffordable.” Clearly nothing has changed in the interim to ameliorate that judgement.

The standard procurement model does not sit easily within the realm of defence, which is subject to a number of unique, context-specific considerations. These include the prevailing monopsony, with the products and services of several sellers being sought by a single monolithic buyer: the MoD is by far the largest customer to the UK arms industry.

The outbreak of a conventional war in Ukraine should serve as a caution against relying on disruptive technologies alone

Uncertainty afflicts both sides of the procurement equation. Given the specialist nature of the evolving challenges in defence and the highly sophisticated technical response needed, the MoD cannot be expected at the start of many processes to have anything other than a speculative grasp of what is needed. That, in turn, means the supplier has much work to do to establish firmer specification and feasibility. Development and production can constitute an exceptionally high percentage of life cycle costs of any new programme. Most capital defence cost increases occur from initial concept to the award of contract, rising to as much as 60 per cent, and these costs are all too often absorbed by the MoD rather than reasonably managed with suppliers. Off-the-shelf purchases could be used more often, where viable, for which the cost of development has already been absorbed by the supplier.

But to say defence procurement is exceptionally complex is not a reason to except it from the requirement that it be done well.

The concept of partnering – a collaborative management approach that encourages openness and trust between parties to a contract – first entered official government parlance with the 1993 White Paper on procurement, and defence has not been excluded from this practice. However, the 2022 Committee of Public Accounts report found that, although the MOD talks of partnering, this has not translated well into actual practice. Furthermore, while past performance of suppliers can be taken into account in awarding public sector contracts, there is little evidence that either this, or any realistic competitive tendering, is part of current defence procurement strategy.

But these are not the only issues. Disruptive technologies have attracted significant R&D spend, and they certainly play a role as the military’s focus has shifted from conventional defence of the state to proactively addressing security challenges across the international arena such as terrorism and rogue states. However, the outbreak of a conventional war on the ground (and in the skies) of Ukraine just over a year ago should serve as a caution against relying on such technologies alone.

There are other issues specific to defence. Unanimity of approach between the services – army, navy, air force – can be hard to maintain, as each individual service will tend to prioritise its own needs over a commitment to defence overall. Then there is the need to attract and retain skilled staff either from within the services or through civilian recruitment.

Defence spending has historically shown itself to be hard to predict (or subject to over-optimistic projections). Defence inflation almost always exceeds cost increases elsewhere in the economy, but there is consistent failure to allow for this in the interests of keeping predicted costs low in response to immediate political considerations.

In 2019, an MoD acquisition specialist gave the following gloomy assessment of current defence spending: “We are…allowing ourselves to be sucked…into a piece of financial fiction, that means the most likely outcome [is that], at some stage, we will have a bust of some quite sizable proportion in the ability to finance what has been positioned through government as a defence plan.”

Labour must ensure that bust does not happen under its watch and move quickly to address the problems afflicting defence procurement. Effective reform of defence spending may not sit front and centre of Labour’s declared missions, but it is imperative that it is addressed with seriousness and skill when we are in government.

Image credit: Martin Stitt/MoD via Wikimedia Commons

Image credit: Cpl Si Longworth RLC (Phot)/MoD via Wikimedia Commons