2011/02/22 - Value for Money at the MOD

Speech delivered by Secretary of State for Defence at Civitas the Institute for the Study of Civil Society, Tufton Street, London on Tuesday 22 February 2011.

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
The Rt Hon Liam Fox MP


Being the Secretary of State for defence was always going to be one of the toughest jobs in the new Government.

Defence was the worst in a grim set of inheritances.

As the Chancellor said, Defence was the “most chaotic, most disorganised, most over-committed” budget he had seen.

Labour had avoided a strategic defence review for 12 years.

As a consequence we were always going to need a step change not incremental reform.

The black hole in the MoD budget by the end of the decade was more than one year’s entire defence spending.

This had resulted from the serial failure of Labour ministers to take difficult decisions and what Bernard Gray described as ‘the conspiracy of optimism’ in the department’s planning.

On top of this was the need to contribute to the deficit reduction.

Next year’s interest payment on the national debt will be bigger than the defence, foreign office and the international aid budgets combined.

Unless we deal with the deficit it will become an increasingly dangerous national security liability as more and more money is swallowed up in interest and less is available to spend on the safety of our country.

In less than a year huge progress has been made in turning these problems round.

The SDSR set a clear direction for policy, implementing the National Security strategy.

It decided on an adaptive posture for the UK - neither Fortress Britain nor overcommitted expeditionary forces on the other.

We had inevitably to divest ourselves of some legacy to enable us to invest in dealing with the threats of the future, not least in cyberspace where government will now spend an extra £650m.

But the SDSR was not a single event, it was part of a cycle of five yearly defence reviews designed to constantly adapt to changing global security circumstances.

The 12 year gap in defence reviews, the budgetary black hole and the need for deficit reduction inevitably meant that we would have to take tough and sometimes unpopular decisions.

But we were able, nonetheless, to show a path to the Future Force 2020 where Britain’s defences will be coherent, efficient and cutting-edge.

But the change cannot stop there.

Across Government, we must transform the way public services are delivered.

For years successive Defence Secretaries have failed to get a grip on the equipment programme and failed to hold the department and industry to account for delays and poor cost-estimation

Only today we are reminded by the Public Accounts Committee of Labour’s desperate legacy.

In their final year in office just two programmes reported an increase of cost by a staggering £3.3 billion.

The MoD must fundamentally change how it does business and today I want to set out how this change will come about.

The drivers of structural financial instability and the institutional lack of accountability, from ministers down, must be tackled if we are to avoid history repeating itself.

The constant postponement of difficult decisions created a bow wave in the department’s finances which became increasingly difficult to handle.

It would be folly to tackle this, as are doing, only to allow the systemic failures which created it to continue.

We need greater accountability and transparency to ensure that our resources genuinely match our ambitions and cost control is rigorously enforced.

Too often when ministers have wanted to pull levers they find themselves pushing string instead.

So there are a number of changes that are crucial.

First, the so-called conspiracy of optimism, through which the risks and costs in new projects are under-estimated, only to find mushrooming costs later, needs to end.

Second, future programmes should not be included unless there is a clear budgetary line for development, procurement and deployment.

Third, we must end the lack of real time cost control with tight budgetary discipline.

And fourth, we must rebalance our relationship with industry so that we achieve maximum value for money, remembering that the primary purpose of the procurement process is to give our Armed Forces to the need when they need it at a reasonable cost to the taxpayer.

Dealing with the Conspiracy of Optimism

For too many years projects have been included in the future defence programme without a proper appreciation of the risks or costs.

The conspiracy of optimism based on poor cost estimation and unrealistic timescales, across the Department has - to be frank - involved politicians, the civil service, the military and industry.

Too often in the past, in order to get pet projects included in the programme, unrealistic costs have been accepted at the outset knowing that they can be recovered later due to what are euphemistically called ‘cost overruns’.

These practices in the MoD would not be tolerated in the private sector and they cannot be tolerated in the MoD.

By looking at and approving programmes in isolation from the totality of departmental spend any programme can be made to look affordable.

But when they are considered together, the cumulative risk and cost become unmanageable.

So a risk-aware and cost-conscious mentality must permeate every level at the Ministry of Defence, civilian and military alike.

Now more than ever, every penny counts.

Value for money is not about compromising your defence aim. It is about realising that aim in a sustainable way.

From now on, guarantees of realistic budgets for development, procurement and deployment must be presented to ministers before spending can begin on new programmes.

At the same time we must examine the future programmes we currently have to ensure risks and costs are well understood and that they remain affordable.

I have asked the Permanent Secretary, Ursula Brennan and Bernard Gray to carry out this process immediately.

Real Time Cost Control

If we are to achieve real budgetary discipline we must also have better real-time control of project budgets.

How often have we had to listen to the National Audit Office detailing projects which run over time and over budget?

Too often the MoD has simply presided over a post-mortem on programs – in my previous profession a post-mortem was not considered a good professional outcome and it will not be so in the MOD.

There are a number of changes we need to make.

We need to give project managers the right resources and authority to deliver what we ask of them and hold them to account.

We also need to keep them in post long enough to deliver, ensuring that they have the skills available to make the tough calls necessary.

The private sector would view the rapid turnover of project managers in the MoD - with what I call the repetitive loss of expertise - as crazy.

It is for all these reasons that I am establishing the Major Projects Review Board.

This will be chaired by me as the Secretary of State and will receive a quarterly update on the Ministry’s major programs to ensure that they are on time and within budget.

This will begin with the 20 biggest projects by value and will rapidly expand to the 50 biggest projects.

There must be a real sense of urgency about achieving this goal.

Where projects are falling behind schedule or budget we must take immediate remedial measures.

Those responsible will be brought to account in front of the project board.

And in addition we will publish a list every quarter of the Major Project Review Board’s ‘Projects of Concern’.

That way the public and the market can judge how well we and industry are doing in supporting our Armed Forces while offering value for money to the taxpayers.

I want shareholders to see where projects are under-performing so that they can bring market discipline to substandard management where required.

Rebalancing Our Relationship with Industry

But change cannot just be internal.

This government showed from the outset its commitment to the defence industry and an understanding that the best way to sustain defence jobs in the long term is to widen the customer base through enhanced defence exports.

A great deal of energy has already been devoted to this across government departments with substantial results.

It will ensure that skills and employment are retained in some of our most technologically advanced areas, that SMEs can compete as equals and we keep British industry at the cutting edge on the world market.

In the Ministry of Defence we established the new Defence Exports Support Group to ensure that MoD, alongside our UKTI colleagues, is focusing its efforts in support of defence exports.

This way, the MoD can be at the forefront of the Government export led growth strategy.

In December we published a Green paper on equipment support and technology for UK defence and security and we are currently consulting on this.

The defence industry is a major source of revenue, jobs and exports and can play an important role in the government’s growth agenda.

But industry must also play a role in reducing costs at a time when budgets are constrained by the need to control the deficit we inherited.

Following the SDSR, we have entered into a period of intense negotiation with a number of our major industrial suppliers.

This is already looking at 130 contracts relating to SDSR decisions to ensure they are both necessary and give greater value for money for the taxpayer.

For the first time these negotiations are taking place at a company level as well as a project level.

The number of these contracts will soon be expanded by around 500 contracts and we will complete this work over the next 18 months releasing significant cost savings across the Department.

We must also have a relationship with industry that is open, transparent and reflects the realities of the current business environment.

We have recently launched an independent review, led by Lord Currie of Marylebone, into the pricing mechanism - called the Yellow Book - which the MoD uses for single source contracts.

Some of you may never have heard of this.

But these are arrangements have been in place since 1968 without a fundamental update from either Conservative or Labour governments.

They reflect an entirely different industrial era and they need to be updated.

Under the Yellow Book we currently place around 40% of our contracts on a non-competitive basis, worth around £9 billion annually.

We will set out the first stage of this review, recommending changes in consultation with industry, in the summer.

This will affect all future non-competitive contracts and is intended to save the taxpayer hundreds of millions of pounds.

The MoD is also working through the Centralising Category Procurement Initiative, run by the Cabinet Office, which will transform how government buys common goods and services through centralised management, standardisation of specification and aggregation of spend.

This again will deliver significant and sustainable cost reductions across government.

Finally, we need to update the way in which the MOD engages with industry itself.

The relationship must take into account both the overlapping interests and the differences which government and industry have.

We have a synergy to bring in areas such as defence exports where profits to industry also result in relationships and influence which can benefit the national interest.

Yet we must also remember that industry is ultimately answerable to shareholders for their profits while government is answerable to the taxpayers for the management of their money.

At present, the National Defence Industries Council acts as the body that represents the interests of the defence industry to Ministers.

This body, however, is self appointed and excludes some of the department’s major suppliers.

And though our defence industry relies on many thousands of Small and Medium-Size Enterprises (SMEs), I believe they are currently under-represented.

I can announce today that I am establishing a new Defence Suppliers Forum that I will chair which will include representatives of the full range of the Department’s defence suppliers from the UK and overseas and which will better reflect the defence industry as a whole.


We need to have the mechanisms to ensure value for money in the Ministry of Defence.

The SDSR took the necessarily tough decisions to correct years of mismanagement under Labour.

The Ministry of Defence needs to have the structures and mechanisms to deliver the conclusions of that Review and ensure value for money for the tax payer.

We need a new, frank and honest relationship between government and industry based on the national interest, mindful of commercial realities and sensitive market mechanisms.

The measures I have set out today will help towards achieving these goals.

Change, let’s face it, is seldom popular but the case for change in these areas is overwhelming.

Let us just remember that there is no such thing as government money.

There is only taxpayers’ money – money raised from individuals and from businesses large and small.

They expect us to spend money wisely and properly and to enter into contracts that will deliver the equipment that our Armed Forces need when they need it while protecting taxpayers’ interests and sustaining industrial growth.

Successive Labour Defence Secretaries have played pass the parcel with the black hole in the defence program.

Each one has made the situation worse for their successor by failing to take the difficult decisions necessary.

Well this is where the music stops.

It has fallen to this government and to me as defence secretary to deal with Labour’s appalling defence legacy.

It cannot be done overnight and it cannot be done painlessly.

But it can and will be done.

In the first nine months of government we have already started implementing a programme of fundamental change and will not rest until the job is done.

And the changes I have announced today will continue that process.

In the months ahead we will set out further reforms-for the Armed Forces, including the Reserves and Senior Rank structures and for structural change within the Ministry of Defence itself, including as a result of Lord Levene’s work on Defence Reform.

Our National interest requires that we continue to take difficult decisions.

And, as promised, we intend to govern in the National interest.

Published 22 February 2011