Defence Budget

Lord Astor of Hever Excerpts

Monday 14th May 2012 Lords Chamber

[The Parliamentary Under-Secretary of State, Ministry of Defence (Lord Astor of Hever)]

My Lords, first, I am sure that the whole House would wish to join me in offering sincere condolences to the families and friends of Corporal Brent McCarthy of the Royal Air Force and Lance Corporal Lee Davies of 1st Battalion Welsh Guards, who were killed on operations in Afghanistan recently. My thoughts are also with the wounded, and I pay tribute to the courage and fortitude with which they face their rehabilitation.

The Statement made in another place by my right honourable friend the Secretary of State for Defence is as follows.

“With your permission, Mr Speaker, I would like to make a Statement on progress in balancing the defence budget and establishing a sustainable equipment programme as part of the work to deliver the vision set out in the strategic defence and security review—a vision of formidable, adaptable and well equipped Armed Forces, backed by balanced budgets, disciplined processes and an efficient and effective department.

The United Kingdom’s Armed Forces and the Ministry of Defence exist to protect our country and its interests, and provide the ultimate guarantee of its security and independence. My overriding priority as Secretary of State for Defence must be achieving success on military operations. However, our defence is built on the extraordinary quality and commitment of our people, and ensuring their welfare is close behind. I am clear that when we ask the brave men and women of our Armed Forces to put themselves in danger to ensure our national security, we owe it to them to make sure that they are properly supported with the very best equipment we can give them to do the job.

The best way I can support our Armed Forces as they restructure and refocus themselves for the future is to give them the assurance of stable and well managed budgets and the confidence that the equipment programme is affordable and deliverable, because the only way to ensure, in the long term, the ability to project power, to protect our national security and to ensure that our troops have the equipment they need is to have a defence budget that is in balance.

A strong, diverse economy and sound public finances are a prerequisite to being able to sustain the Armed Forces that our national security requires, so correcting the disastrous fiscal deficit that we inherited and returning the economy to sustainable growth are themselves strategic imperatives. Defence has, rightly, contributed to that fiscal correction, as well as putting its own house in order by dealing with the chaos we inherited in an equipment programme that left a yawning black hole under our Armed Forces.

Tough decisions have been taken and I want to take this opportunity to pay tribute to those who have taken them: my predecessor, the right honourable Member for North Somerset, who showed the courage to tackle head-on some of the worst and longest-running procurement fiascos, and to make agonising choices over capabilities that Britain could simply not afford; the Armed Forces chiefs, who have grasped the challenges the SDSR has presented and embraced the opportunity to create a sustainable foundation on which they can build for the future; and the leadership team in the MoD, who have worked tirelessly to turn this supertanker around, to tear up the old ways of doing things and to embrace a new model that will ensure that the MoD never again gets into the mess it was in by early 2010.

Thanks to all of them, and with the decision I announced to the House last week on carrier strike being the final piece of the jigsaw, I can tell the House today that, after two years’ work, the black hole in the defence budget has finally been eliminated and the budget is now in balance, with a small annual reserve built in as a prudent measure to make sure that we are not blown off course by unforeseen events—a plan endorsed by the chiefs and by the Treasury. We have achieved this by facing up to the fiscal reality and taking the tough decisions that the party opposite dodged, reluctantly accepting smaller Armed Forces and redoubling our resolve to invest in the best possible equipment for them; transforming the role of the TA as the Regular Army gets smaller and making it an integral part of Future Force 2020; and embarking on a major restructuring of the department and a reduction of just over a third in the civilian workforce.

These have not been easy decisions, but they have been the right ones. This has been a difficult period for all our people in the Armed Forces and more widely across defence. Major change, the threat of redundancy and uncertainty about the future all present challenges to confidence and morale. Reaching a balanced budget for the MoD’s planning round 12, or PR12, represents a hugely important milestone in the transformation of defence—a symbolic break with the failed practices of the past and a solid foundation on which to build the future—and it starts to put that destabilising uncertainty behind us as we move forward with defence transformation.

At the heart of the plan is the defence equipment programme, which by the end of the PR12 period will account for around 45% of the total defence budget. I have seen over the past seven months just how complex defence procurement is—developing cutting-edge technology so that our Armed Forces have a battle-winning edge in projects that rank alongside the biggest being undertaken in this country today. While there have been widely publicised failures, there have been unsung successes—most notably in Afghanistan where the urgent operational requirements process funded by the Treasury has repeatedly allowed us to deliver quickly and efficiently the equipment our Armed Forces need. Brigadier Patrick Sanders, who commanded 20th Armoured Brigade last year in Afghanistan, has described the equipment his troops had as ‘second to none’ and ‘the best that I’ve experienced in 27 years’. We need to build on the best elements of the UOR model to achieve that level of performance across defence as a whole.

At the same time, we must learn from the failures. Over the 10 years of PR12, we will spend almost £160 billion on new equipment and data systems and their support, reflecting the planning assumption agreed with the Treasury of a 1% per annum real increase in the equipment and support budget from 2015. But poor decision-making and poor management have too often meant that the Armed Forces have not received the full benefit of all this spending.

Under the previous Government, the equipment plan became meaningless because projects were committed to without the funding to pay for them, creating a fantasy programme. Systemic overprogramming was compounded by a ‘conspiracy of optimism’ where officials, the Armed Forces and suppliers all consistently planned on a best-case scenario, in the full knowledge that once a project had been committed, they could then revise up costs with little consequence. It was an overheated equipment plan, managed on a hand-to-mouth basis, driven by short-term cash rather than long-term value, with constant postponements and renegotiations driving costs into projects in a self-reinforcing spiral of busted budgets and torn-up timetables. Rigid contracting meant no flexibility to respond to changed threat priorities or alternative technologies becoming available, and it is our Armed Forces and the defence of our country that have ultimately paid the price for this mismanagement. The culture and practice have to change.

So we will move forward with a new financial discipline in the equipment plan—underprogramming, rather than over-programming, so that we can focus on value rather than cash management—giving our Armed Forces confidence that once a project is in the programme, it is real, it is funded and it will be delivered, so they can plan with certainty. The core committed equipment programme, covering investment in new equipment and data systems and their support, amounts to just under £152 billion over 10 years, against a total planned spend of almost £160 billion. That £152 billion includes, for the first time ever, an effective, centrally held contingency reserve, determined by the new Chief of Defence Materiel, of over £4 billion to ensure the robustness of the plan.

It includes: 14 new Chinooks, Apache life extension and a Puma upgrade; a programme of new armoured fighting vehicles worth around £4.5 billion over 10 years and a £1 billion upgrade of the Warrior armoured fighting vehicle; the building of the two Queen Elizabeth-class aircraft carriers; the remainder of the Type 45 destroyers and the new Type 26 frigates; the Astute class and successor nuclear submarines; investment in new Wildcat helicopters; the Merlin upgrade programme and the assessment phase for Merlin marinisation; the introduction into service of the Voyager air-to-air refueller and troop transporter, the A400M air transporter and the Air Seeker surveillance aircraft; an additional C17 strategic airlifter; continued investment in Typhoon and the Joint Strike Fighter; and £7 billion invested in complex weapons—the smart missiles and torpedoes that give our Navy, Army and Air Force their fighting edge.

Balancing the budget allows me to include within that £152 billion core equipment programme: a £4 billion-plus investment in intelligence, surveillance, communications and reconnaissance assets across the CIPHER, SOLOMON, Crowsnest, DCNS and Falcon projects; the outright purchase of three offshore patrol vessels which are currently leased; capability enhancements to the Typhoon; and a range of simulators, basing and support equipment for the new helicopters and aircraft we are introducing.

This programme represents the collective priorities of the Armed Forces set out by the Armed Forces committee on which all the service chiefs sit. The chiefs confirm that this committed core equipment programme, together with the available £8 billion of unallocated headroom, will fund the capabilities they require to deliver Future Force 2020, as set out in the SDSR. That £8 billion will be allocated to projects not yet in the committed core programme only at the point when they need to become committed to be delivered on time, and only in accordance with the military assessment of priority at the time. No project will be allowed to commit without a 10-year budget line to cover not only its procurement but its support costs—not rocket science, you might think, but quite an innovation in defence procurement none the less. Individuals and contractors can expect to be held to account for the estimates on which decisions to commit to projects are based.

This Government believe that transparency is a driver of performance, and I want to be as transparent as possible about the defence budget because greater transparency will help me to drive the change that we need to see in the MoD. But the House will understand that some elements of the defence budget are security-sensitive and other elements are commercially sensitive. It is essential that we preserve our negotiating space with defence contractors without announcing all our detailed intentions in advance. To provide the reassurance that the House will want, while protecting the commercial and security interests of defence, I have agreed with the NAO that it will review the equipment plan and confirm that it is affordable. The NAO will have confidential access to detailed information on the equipment plan that cannot be published, but once it has completed its work we will publish its verdict on the plan, together with a summary of the plan itself.

Today’s announcement and the work we are taking forward mean that for the first time in a generation the MoD not only has a balanced budget and an appropriate reserve but is putting in place the behaviour-changing incentives and structures that will keep it balanced. It means that the politicians and civil servants in the MoD can look the Armed Forces in the eye in the knowledge that we are delivering them the stable platform that they need to build Future Force 2020, with a budget agreed across government, across the department and by the service chiefs, and a firm baseline for the transformation that is under way to an Armed Forces that may be smaller but will be adaptable, agile and equipped with the very best technology, supported by an MoD that is laser-focused on its needs and working alongside a defence industry that can invest with renewed confidence in an equipment plan that is actually deliverable. It represents the start of a new chapter in the long history of UK defence. I commend this Statement to the House”.

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[Lord Astor of Hever]

My Lords, of course I agree with what the noble Lord said about the bravery of our Armed Forces in Afghanistan. However, I am sorry that he took such a pessimistic line on our Statement by saying that there is not much to it. We have had to make some very difficult decisions. In the SDSR, as the noble Lord knows, the Harriers went, the “Ark Royal” went and MRA4 went, along with a whole lot of other things that we would much rather have kept. We have had to make some very difficult civilian and service redundancies. There is much greater financial discipline in the department now than there was. It has been a very difficult task.

The department's fundamental approach is to deliver the Future Force 2020—so I can confirm to the noble Lord that there is absolutely no loss of capability. We have debated that over a long period, and we are absolutely convinced that that is correct. The process had the SDSR at its core and has made no significant changes to it. At the end of the SDSR we acknowledged that there was more work to be done, and, obviously, balancing the budget is a vital part of that process.

The noble Lord asked if I could guarantee that there would be no cuts for 10 years. The Government have committed to carrying out an SDSR every five years. Although we would not want to pre-empt the outcome of that process, it is clearly important that the department is able to make long-term plans. However, I cannot say what the next SDSR, in 2015, will come up with.

The noble Lord asked if all commitments were fully funded. I can confirm that the answer is yes. He said that a “miracle” had taken place. The Secretary of State has a brilliant—outstanding—head for figures, along with all his other very great leadership qualities. This has given great leadership to the department as far as the budget is concerned. We have a much better relationship with the Treasury than we used to have. The Permanent Secretary is adopting a very disciplined approach to all budget holders, which is a great help to us.

The noble Lord asked about redundancies. I can confirm that, as far as the civilian headcount is concerned, there will be a reduction of about 32,000 by 2020, which equates to just over a third of civilian manpower. Service manpower will be reduced by 33,000, or 19%, by 2020, of which approximately 19,500 will be in the Army, 8,000 in the Royal Air Force and 5,500 in the Royal Navy.

The last of the noble Lord’s questions was whether I felt we had the capability to keep hold of the plan. My answer is: absolutely, yes.

[Lord Lee of Trafford]

My Lords, I should like first to join these Benches in the earlier tribute.

Now that the MoD budget is on much more of an even keel, and given the long-term nature of so many MoD contracts—10 years is not particularly long, and my noble friend talked about the 10-year line—would it not make sense now for the political parties to try to get together to agree a common approach to the level of defence spend? Would it not make a lot of sense if that could be achieved?

I appreciate that my noble friend may not be able to answer all my specific questions at this stage, so perhaps he will write to me. First, have there been any changes to profit margins on non-competitive contracts? Secondly, on the reductions in the civilian workforce that he talked about, how many reductions have taken place so far? I know that there is an aspiration to reduce by about 30,000, but how many specific redundancies have taken place?

My noble friend referred to the offshore patrol vessels that have apparently been leased. Leasing is normally quite an expensive operation. When were they originally leased and what are the financial terms of the purchases? Further, are any other naval vessels currently being leased?

On the question of the NAO review, can my noble friend give an indication of how long the work will take and when publication might come through? Finally, will the likely considerable costs of withdrawing equipment from Afghanistan come out of the normal defence budget or will they be treated as, in effect, the equivalent of urgent operational requirements?

[Lord Astor of Hever]

My Lords, I thank my noble friend. He has asked quite a few questions and I will not be able to answer them all here, but I will write to him. He asked first whether I think it is a good idea for all the parties to get together. I certainly have very good relations with my shadows and I am very happy to take this back to the department and come back to my noble friend. It is an excellent suggestion, and it is one that he has made in the past. I shall let him know how I get on.

I cannot give my noble friend an instant answer to his questions about profit margins and reductions in the civilian and Armed Forces staff. He also asked whether we are leasing any other vessels which might be bought. Off the top of my head I think that HMS “Protector” might fall into that bracket, but I do not want to be held to that answer and I will write to my noble friend. I am not sure how long the NAO report will take, but I am happy to write to him about that as well.

[Lord Gilbert]

My Lords, when I first was lucky enough to join your Lordships’ House some 15 years ago, and I was already appointed as the Minister of State for Defence Procurement, I held strongly to the view that defence matters are far too important to be treated in a partisan way. I was extremely flattered and gratified that when I was introduced into the House, one of my two sponsors was a distinguished Conservative former Defence Minister and former Secretary-General of NATO. The Statement I have heard today is replete with political self-justification of a sort that should have no place in a Defence Secretary’s Statement. I am very sorry for our Minister because he has had to read it out. The last defence Statement took 13 minutes to repeat, and this one took 15 minutes, with large parts of it just as odious as the previous one. Again, I am sorry that our Minister has to come out with all this stuff because he is a thoroughly decent man. It has no place whatever in a Defence Secretary’s Statement, and if he wants to bandy about political remarks, I would ask him to look at who it was that saddled this country with the F35C—Dr Liam Fox—and he can put that in his pipe and smoke it.

However, today I have only one question for the Minister, who I regard as a good friend and hold in great respect. I hope that he does not consider himself tainted with the remarks I have found it necessary to make. What assessment has been made in the MoD of our ongoing loss of the C130, which is going to be kept by the Americans for many years? We are going to lose interoperability with around a dozen of our closest allies—the Australians, the Canadians, the Americans, the Qataris and many others. I think that this is going to be one of the most damaging consequences of these so-called reviews, and I should be grateful for the Minister’s views on the subject.

[Lord Astor of Hever]

My Lords, I hope that the noble Lord, Lord Gilbert, does not feel that I approach matters in a partisan way. I do not use this as a criticism, but I try to go out of my way to invite Members of all parties in this House into briefings. This is indeed a very complicated Statement so I shall be happy to lay on a briefing in the Ministry of Defence on all these issues. However, I hear what the noble Lord says.

With regard to the C130, the problem as I understand it is that the production line is going to close quite soon. I did have a flight in the A400M the other day—it was its first flight. I did invite the noble Lord and I had hoped that he would join me—and I think I very nearly got there. It is a wonderful plane and the Royal Air Force, which was originally very much against it coming into service, is now absolutely delighted. I think it makes a very good addition to the Royal Air Force.

[Lord King of Bridgwater]

I apologise to my noble friend for not being here to hear the opening Statement, but I have for greater accuracy obtained a copy, which I have had a chance to read. He spoke about a bipartisan approach. If I understood correctly the noble Lord who spoke for the Opposition, he called for no more cuts. It seems that we are moving in that direction, which is encouraging. The MoD is very good at producing plans; the problem is whether they are fully executed. Even if the NAO approves the plan, the challenge will then be the difficulties of having single contractors and the various contracts which might be entered into—they are major challenges. In that connection, I agree with what my noble friend said about the Secretary of State. We have a more numerate, literate Secretary of State than perhaps were some in the past. If he keeps up the initiative that he has announced in this Statement, the challenge for him is to make sure that it happens.

[Lord Astor of Hever]

I thank my noble friend for his support. I do not underestimate the difficulties, but, as my noble friend said, the current Secretary of State is very numerate. He is on top of his brief, and I am fully confident that we can carry these plans out.

[Lord Stirrup]

I welcome the new arrangements that the Minister has announced, but following on from what the noble Lord, Lord King, said, it seems to me that the MoD enters into contracts which, to my inexpert eye, more or less boil down to, “If you want more than you originally asked for, you pay more; if you want less than you originally asked for, you pay more; and, actually, if you want what you originally asked for, you pay more”. For the MoD’s books to have a chance of remaining balanced, we will need contracting staff and legal staff who are at least as good as those employed by industry. When will the Minister be able to say something about the approach that the new Chief of Defence Materiel will take on this subject? How will he recruit that level of skill within his staff that ensures that contracts are to the benefit of both sides and not just of the one?

[Lord Astor of Hever]

My Lords, the noble and gallant Lord makes a very good point. There have been cases in the past where the department has been let down in negotiations with industry by the legal staff. We are looking closely at this issue; we are aware of it and of the sums of money that need to be paid. It is certainly in our in-tray at the moment.

[Lord West of Spithead]

My Lords, after 25 years of serving at sea and then serving in the madhouse—I am sorry, I should have said the MoD—I share the view of the noble Lord, Lord King, and the noble and gallant Lord, Lord Stirrup, about the difficulties associated with contracts. I worry that it is not that easy to stay within costs, and there is an awful lot of smoke and mirrors as well. I hope that the projections are true, but I have real doubts about them. I also share the view that defence is so important for the nation that we should try wherever possible to be cross-party in our approach to it.

Looking at the 10-year timeline for PR12, am I right in assuming that the money for the replacement of the V class submarines, which will be coming to its big spend at the end of that period, is being allowed for in the figures that have been given in this Statement? This morning, at the EIS summit, the right honourable Member for Runnymede and Weybridge spoke very strongly about the need for deterrence.

[Lord Astor of Hever]

My Lords, I can assure the noble Lord that we have a new team in the MoD who, as I have seen with my own eyes, are absolutely on top of this issue and will do their very best to make sure that this plan is properly carried out. On submarines, as confirmed in the SDSR, the MoD is committed to delivering seven Astute-class submarines, at a cost of approximately £10 million. In order for the UK to continue as a nuclear power, the MoD is committed to delivering continuous at-sea deterrent. The MoD has started the £3 billion assessment phase for the £25 billion successor programme to deliver long-term CASD.

[The Lord Bishop of Wakefield]

My Lords, first, from this Bench, I join with all others in their tributes to those who have lost their lives recently in Afghanistan. I am grateful to the Minister for the considered Statement and for the acknowledgement that the budget should be balanced. I am sure that we would all agree with that. I assume from what he said that much of this is derivative from the SDSR. I am concerned about three questions. First, progress has been made recently with the military covenant, particularly in the area of welfare for families affected by casualties and injuries, and, more generally, for those serving in the Armed Forces. At a time when the conflict continues in Afghanistan, I want to be assured that all that has been set out there can be fulfilled in the short term.

Secondly, and similarly in the short term, in thinking about resources for those serving in Afghanistan, we have all heard on a number of occasions the fears of senior officers in the forces, who are unhappy with the present support in terms of equipment. Can we be assured of that support at present, rather than looking further into the future?

My third question is about morale. I am grateful for all the briefings that the Minister has organised. Morale is one issue that has come up time and again. There are bound to be difficulties at a time when such drastic cuts have to be made. In the Army, I think another 20,000 people will eventually lose their jobs within the forces, and that uncertainty causes continuing difficulties with morale. I want assurances on welfare, the equipment at the present time and how we will try to encourage morale at this tricky moment.

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[Lord Astor of Hever]

I am grateful to the right reverend Prelate. On the military covenant, nothing in the Statement will affect any decision or commitment to members of the Armed Forces. The right reverend Prelate also mentioned equipment. I am sure that some noble Lords went to the briefing by Brigadier Sanders the other day. He is just back from Afghanistan and said that the equipment is better now than at any time in his 27 years in the Army. He could not say enough good things about the equipment. Finally, it is a difficult time as we have to make these redundancies but we are doing our best to ensure that morale is as high as possible.

[Lord Forsyth of Drumlean]

My Lords—

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[Lord Forsyth of Drumlean]

My Lords, would my noble friend take this opportunity to pay tribute to the role which Scottish regiments have played in the British Army and reaffirm that the best future for regiments such as the Black Watch, with its proud tradition, is in Scotland’s remaining part of the United Kingdom and continuing to play such an important role in its defence?

[Lord Astor of Hever]

My Lords, I share my noble friend’s views. I am a strong supporter of the union and the Scottish regiments. My brother served in a Scottish regiment. I have the highest respect for them.

[Lord Davies of Stamford]

My Lords, the noble Lord’s own remarks in the House today have been temperate and statesmanlike, as they always are. Yet the Statement that he read out from the Secretary of State was tendentious, and quite disgracefully so. The great difference between the Labour Government and the Conservative-led coalition in defence spending is that we built up the nation’s Armed Forces. We increased real spending by more than 10 per cent. This coalition has run down the numbers in our Armed Forces by 20 per cent and disgracefully exposed us to having no carrier strike capability for 10 years. The noble Lord said that the equipment in Afghanistan was better than it had ever been. I wonder as a result of which decisions that equipment came through the pipeline.

I was amazed to hear the Secretary of State, whose remarks were read out by the noble Lord, taking credit for a whole lot of projects, such as the A400M, the new Chinook helicopters—although the Government have reduced their number by 10—and the Scout vehicle, which I negotiated. It was a very disingenuous Statement and I hope that the Government will think twice before coming to the House with such a piece of party-political propaganda on so serious a matter in future.

[Lord Astor of Hever]

My Lords, I am happy to pay tribute to the noble Lord and the Opposition for many of the defence procurement decisions that were taken. I think that he would agree that we were left with a big black hole and a whole host of problems that had to be sorted out. That is why I am here today.

[Lord Trefgarne]

My Lords, my noble friend has announced the planned future size of the regular forces—the Army, Navy and Air Force. Will he give parallel figures for the Reserve Forces—the Territorial Army, the Royal Naval Reserve and the Royal Auxiliary Air Force?

[Lord Astor of Hever]

My Lords, I cannot give my noble friend those figures today, but I will be able to do so very soon.

[Lord Hennessy of Nympsfield]

My Lords, I add my thanks to the Minister for his Statement and particularly welcome the firm place that he gave to the successor submarines in the long-term costing and programme. Reverting to the question asked by my noble and gallant friend Lord Stirrup, when will we get the report of Mr Bernard Gray, Chief of Defence Materiel, on the options for structuring future procurement operations? I think it was completed several months ago; it was ready at the end of last year. Some of us have been awaiting it with keen anticipation.

[Lord Astor of Hever]

I am also waiting with keen anticipation. I cannot give the noble Lord a date, but as soon as I hear one, I will let him know.

[Baroness Browning]

I welcome my noble friend’s Statement. Having spent six years on the Public Accounts Committee, where we spent many hours dealing with defence procurement, I believe that it is important to get the books balanced first. Will he say something about what changes are to be made in project management within the MoD? Clearly, from the reports that the Public Accounts Committee has received from the NAO over the years, there is a serious systemic problem there involving both systems and personnel.

[Lord Astor of Hever]

My Lords, my noble friend makes a very good point. I assure her that the Permanent Secretary is getting on top of that issue and taking a very disciplined approach to budget holders. A number of them have had a quiet gripe to me about that, but it is the right thing to do and the only way to get on top of the problem.

[Baroness Symons of Vernham Dean]

My Lords, I thank the noble Lord for his briefings. He is extremely helpful. I, too, regret that the tone of the Statement was at such odds with the way in which the noble Lord conducts his business with other Members of the House.

The Statement lays great stress on the spiralling costs in defence procurement, which has been a problem for a very long time. What is being done about the other problem which has been around for a very long time, which is the constant delays to the programme? Once we are told that a capability will be delivered in five years, in my time—and I have seen it go on since—one was always certain that there would be delay after delay. Getting that under control, as well as the costs, is so important.

[Lord Astor of Hever]

The noble Baroness makes a very good point. We hope that now that we are on top of the budget, there will be less need for delays. Industry and the MoD will be certain where they are, so there will be less need for delays.