Defence Reform Bill

Lord Stirrup Excerpts

Tuesday 10th December 2013 Lords Chamber

[Lord Stirrup (CB)]

My Lords, as other noble Lords have remarked, the uncertainty surrounding the Government’s intentions for defence acquisition and support have made it rather difficult to prepare for this debate. The first part of the Bill is designed to pave the way for a government-owned, contractor-operated solution and, as we have heard, that is no longer in prospect, at least in the short term. Nevertheless, there will be substantial changes to the way in which defence equipment is procured and supported, and it is important that we take the opportunity to reflect on the challenges involved, so my remarks will focus on this part of the Bill.

Over the past two decades we have seen major reviews and reforms of defence procurement every four or five years on average. Each one has aimed to resolve serious problems and each has achieved some improvement, but each has failed to address the central issue of cost and time overruns. Before proceeding with the latest of these reorganisations, it is perhaps worth asking why the problem has proved so intractable.

Some years ago, a major management consultancy firm conducted an independent assessment of defence procurement in nations with substantial armed forces. It concluded that the UK’s performance in this area was about average—not that it was good, but because the problems of time and cost overruns were fairly common across comparator nations. We should not be surprised by this. Some people might have the impression that the United States does better than we do, but the facts do not bear out that contention. The track record of complex projects, such as the F22 fighter, the F35 Lightning 2 Joint Strike Fighter, and the ill starred future combat system for the US Army, is unenviable.

One of our most successful acquisitions, in terms of cost and time, was the C17 transport aircraft, which has proved such a godsend in recent operations. We bought it, unmodified, off the shelf once it had been designed, developed and proved in service. It is worth noting that the C17’s development programme was so troubled that the United States Air Force would have cancelled it had there been any alternative.

These problems are not confined to defence. The London Olympics were rightly hailed as a great success story, but the final cost of the Games will be somewhere between four and 10 times the original estimate, depending on which figures one uses—and I probably need only mention the name “HS2”.

That is a description of the water, but, of course, the problem is how to avoid drowning in it. With this in mind, it is important to recognise that, in the case of defence acquisition, failure is not, unusually, an orphan, but has many parents. The first is the nature of the defence business itself. The efficacy and true value of defence equipment can be assessed accurately only once it has been employed tactically on operations, usually in competition with enemy systems and tactics. This problem becomes even more complex when we consider that the equipment being developed today will be tested in combat not tomorrow, but 10, 20 or even 30 years in the future. Judging the likely competition that far ahead, and thus the capabilities required, is no easy task.

The task is even more difficult when one considers the rate of change of some of the technologies involved. A great deal of military capability today relies on extensive computing power and information management systems. Our main attack aircraft, the Tornado, came into service some 30 years ago. Noble Lords may recall that in the early 1980s, the cutting-edge technocrats among us were playing around with the Commodore 64 computer, with its massive 64 kilobytes of memory, and not with iPads.

The second source of difficulty in defence acquisition is the wider political and industrial picture. If we bought everything off the shelf, as we did with the C17, we would have much greater predictability in our defence programme, but we would have no significant defence industry. Employment and order-book pressures may have no bearing on short-term military considerations, but they undoubtedly complicate the procurement of military capability.

The third problem is the annuality of the defence budget and the way this has been handled. In-year cost pressures have to be dealt with in-year, and the traditional way of approaching this has been to delay projects. This saves money in the short term but, of course, drives up the whole-life cost of the project considerably. The MoD’s institution of a contingency fund within the budget to help deal with such pressures is a sensible step, but the danger is that this will lead to persistent underspends, and the loss of funds back to the Treasury. A more sensible approach would surely be a long-term budget that had to be balanced over a period but not in each individual year.

The final problem I will touch on is the ability of defence acquisition personnel to negotiate and contract effectively with defence companies. I do not want to imply any criticism of the staff within defence equipment procurement and support. There seems to be a growing sense in the public sector that the way to improve the performance of personnel is to denigrate them. I do not consider this a wise policy, and I agree with the words of the noble Lord, Lord Levene of Portsoken, in this regard. However, there is considerable evidence to suggest that in some cases we are putting the wrong kind of people up to deal with defence companies. They find themselves overmatched, not by the intrinsic worth of their industry counterparts, but by their training and experience. The numbers may be small, but the malign effects can be very large.

This is not, in most cases, the fault of the people involved. It is the fault of the organisation that is exposing them in such a way. Defence equipment and support need negotiators and lawyers who can match those in industry, but to get them they will have to pay the going rate, which has not been possible under the present system. We certainly need to fix this, and I welcome the moves that the Minister has announced. However, I cannot believe that the GOCO route, which clearly remains an aspiration, is the only—or even the best—long-term way of going about this. Nor do I think that any solution will be a magic bullet, and I fear that there has been some sense of that in this afternoon’s debate. Staff skills levels and experience are a problem but, as I have tried to explain, there are many other challenges. The fundamental difficulty, to my mind, is how to combine cutting-edge technology with financial predictability.

Some have suggested that so-called “requirement creep” is the issue, and that if we define the requirement and leave it alone, we will solve many problems. This is probably true, but I doubt that it would represent value for money for the taxpayer in the long run. Equipment that from conception to out-of-service will be around for upwards of half a century must be kept up to date. The one thing worse than overspending on defence equipment is surely spending less on equipment that cannot do the job required of it.

I am reminded of the US defence company which, some years ago, tried to persuade us that it was better value to buy a fighter with 75% of the required capability but only 60% of the predicted cost. This demonstrated a total misunderstanding of the nature of value. The proposition might look attractive, but, when one understands that having 75% of the capability would mean losing 100% of the air combats, the picture changes. It is hard to think of a proposition that could offer worse value for money.

The problem, of course, is that changing the requirement does drive up the cost. To some extent, this is unavoidable, but I have long believed that we need a multitrack approach to our procurement processes. We can have the slow, majestic, leviathan process when it comes to large platforms. After all, the fundamental elements of an airframe or a ship do not change much or rapidly over its lifetime. However, we need capability spaces within those platforms. In these, we need plug in and play sensors, information systems and weapons to deliver cutting-edge capability. The acquisition of such systems needs to be much faster and more agile than the acquisition of the platforms themselves. This is one way in which we can square the circle of performance and financial predictability.

There are, of course, other possible approaches. What is important is that this latest attempt to reform defence acquisition and support should address the full range of underlying problems, not just one of them. If it does not, it will follow in the path of its many predecessor reforms; it will bring some improvement but make no substantial difference to the underlying issue—and in four or five years, we will be here again, discussing yet another set of proposals for reform.