'Management, not money, is key to achieving Future Force 2020'

28 March 2012

James Gilbert, Senior Analyst at RAND Europe, assesses the impact of the SDSR on the equipment and support plan for Future Force 2020

Many observers consider the 2010 SDSR to be an austerity-enforced aberration; a 'Treasury-led' exercise driven by an overly harsh budget constraint to be corrected by SDSR 2015, if not before. The government has resisted calls to unpick SDSR 2010, and within defence the spotlight has now shifted onto whether the planned future force structure – Future Force 2020 – is actually affordable.

In order to deliver Future Force 2020 within the current budget, the MoD must overcome two major challenges. First, it must realise major reductions in its operating costs. In the past, there has been a tendency to simply move cost from one part of the budget to another, or substitute civil servant salary costs with fees to external contractors. The scale of the current challenge demanded a robust approach to reform, and the MoD has commissioned a series of far-reaching reviews into its personnel, basing and organisation.

The recommendations resulting from Lord Levene's Defence Reform study aim to establish more efficient structures, while decisions to reduce civilian staff by 40%, increase the ratio of reservists to permanent troops and trim senior officer ranks will significantly reduce personnel costs. The raft of proposed changes represents the most radical overhaul of the department in a generation; responsibility falls on MoD senior management to deliver real savings without sacrificing performance.

In the shadows of such radical reforms lies a second, more prosaic and familiar challenge to the MoD, but one that will determine the future shape of the UK's armed forces: executing the equipment and support plan.

Even at the time of SDSR, it was evident that the equipment for Future Force 2020 was unaffordable without a real-term rise in funding. Soon after Bernard Gray assumed his position as Chief of Defence Materiel, his organisation identified a further £5.5bn increase in likely final outturn costs. The number became headline news, and cynics claimed this was further evidence of a defence budget out of control. One of Gray's first orders was to re-cost the top 40 major equipment programmes, and the real significance of the exercise was that it signalled the MoD's belief that it now had realistic cost estimates and sufficient contingency against its largest and most risky projects.

The 'Three Month Review' also announced a Treasury commitment to 1% real-term annual increases in the equipment and support budget after 2015. The message was that realistic cost estimates and stable long-term budgets would allow the MoD to deliver Future Force 2020 as planned.

What are the risks to the equipment pillar for Future Force 2020?
In reality, the 1% increase after 2015 cannot be guaranteed, particularly with austerity measures set to stretch into the next parliament and other government departments eager to collect a 2015 'Afghan peace dividend'. But even if the next government agreed to a 1% budget increase, would it be enough?

The Treasury's pledge to increase funding after 2015 is worth roughly £3bn over five years, but the extra funding could prove impotent against ongoing cost uncertainty in the MoD's Equipment Plan. Last year alone, the cost of the MoD's 15 largest programmes rose by almost £500m: cost growth continuing at this rate would entirely offset the planned increase in expenditure and would necessitate a further downsizing of equipment numbers.

Tackling such an overcommitted Equipment Plan required renewed realism with respect to problem procurement programmes. While the decision to cancel the Nimrod MRA4 programme was difficult, particularly after so much investment in the aircraft's development, Philip Hammond explained the logic by saying: "not only was this a hugely expensive programme with ongoing, very high operating costs, but it was something of an open-ended commitment, because the thing, frankly, was not working".

A handful of similarly large, complex and high-risk equipment programmes are still to be completed. Among them, the NAO describes 'significant levels of operational, technical, cost and schedule uncertainty' remaining in the Queen Elizabeth class aircraft carrier programme.

The Joint Strike Fighter (JSF) programme also continues to trouble MoD planners. In the last 12 years, the unit cost of a JSF aircraft has almost doubled, and the expected delivery date has slipped by six years. The UK's role in this US-led programme means that while the MoD has made significant investments, it has very little influence over the programme's schedule, cost and performance management. The MoD is yet to sign a final delivery contract for JSF – a rare source of uncommitted funding – but the aircraft forms an integral pillar of future capability and carries unusual levels of political and industrial importance for the UK. So while leaving the programme is not a viable option, the MoD does not know what its planned aircraft will cost, and cannot control when they will be delivered.

Difficult choices also lie ahead with respect to equipment procured for Afghanistan using the Treasury-funded urgent operational requirement (UOR) process. The MoD has yet to announce plans on which capabilities it will bring into the core defence budget, including armoured vehicles, unmanned aircraft systems and helicopters. This has implications because these costs are not yet part of the MoD programme. For example, the army must choose either to lose much of the protected mobility capability built up over the last decade, or find funding for what a senior MoD official described as potentially "extortionate" reconstitution and support costs.

Finally, the MoD must realise long-term industrial efficiency gains that have already been included in its budget plans across a number of sectors. For example, the ministry expects its three main industrial partners in the submarine enterprise to deliver collective savings of £900m. These efficiency savings will be difficult to realise, particularly in a complex and disjointed enterprise.

Given these challenges to delivering the Equipment Plan, it is understandable that the MoD's current posture towards the defence industry is driven by contract renegotiations and cost saving targets. At the same time, the MoD must establish a clear position on the future of the UK's defence industry.

The current preference for international competition and off-the-shelf equipment has left key industrial sectors without future development pipelines. Hopes that export orders will sustain the UK's defence industrial base are likely to be misplaced: exports do not typically exercise the most high-value design engineering skills in an enduring way. With major programmes drawing to a close in the coming years, the UK faces a potentially enormous loss in industrial capability unless funding can be made available for technology development programmes.

The combination of these difficult short-term challenges means that the department will need to keep a strong and disciplined grip on near-term delivery. But the temptation of the MoD to focus on the short-term at the expense of long-term strategy is likely to be overwhelming during the period of the current government.

The regular drumbeat of SDSRs was designed to allow for clear, long-term planning. With the cycle of defence reviews and CSRs now closely intertwined, the risk is that difficult decisions are deferred, and the SDSR becomes a forum for resolving short-term issues.

In a benign environment, overcoming these challenges would be difficult enough. At a time of unprecedented change in defence, the task at hand is even harder, but even more crucial. Debates around MoD finances will continue. However, success ultimately depends on strong management, not more money.