Defence acquisition: the reality and myths of reform
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Speech by Philip Dunne, Minister for Defence Equipment, Support and Technology.
It is my great pleasure to be here today and my thanks to RUSI and Cranfield University for laying on this conference and providing me with the opportunity to talk to you.
This is a very well timed conference because we have reached an important staging post on the path to reform of defence acquisition, as I shall cover shortly.
The title of the conference is also particularly apt and I’m impressed to see such an eminent cast of speakers, some of whom have been engaged on this topic for many years.
To the extent that the media have taken an interest in this subject it has not always been as well informed as some of us might wish… a cross those of us in politics often have to bear.
But the media play a vital role in influencing public perception on this topic, with the ability to dispel the myths and explain the realities about defence acquisition reform.
Myths that might include, that defence acquisition is a simple process, rather than a highly complex one; that reform is optional, rather than necessary.
And that the changes we are making are based on ideological principle, rather than rational analysis.
So today provides me, and Bernard Gray who is deeply involved in delivering this issue, with an opportunity to dispel these myths and establish the reality.
Progress so far
To do this I would like set the context for the reforms we are carrying out.
At a national level, the fiscal crisis and the need to tackle the country’s deficit were two incontrovertible truths that this government faced when it came into office back in May 2010.
And at the Ministry of Defence, the last government had not carried out a strategic review in defence for 13 years.
So this government recognised that in these circumstances a new vision for defence was required.
We started by conducting a ‘Strategic defence and security review’ in 2010, and we have committed to conducting a similar review every 5 years.
The SDSR sought to determine the shape our armed forces should take in order to meet evolving security challenges, given the available resources.
The solution arrived at was Future Force 2020: the adaptable, deployable, powerful and, crucially, sustainable forces our country will need in the future.
To ensure the sustainability of these forces it was necessary to get a firm grip on the defence budget.
The fiscal crisis was exacerbated in the department by a history of overspending which meant that this government inherited an enormous black hole in the budget.
In May 2012 the Defence Secretary was finally able to say after nearly two years of hard work that we had finally balanced the MOD budget, including the equipment plan.
This was only made possible by making tough, but necessary, decisions about manpower and equipment, allocating money in the budget for contingency and devising a new system to ensure the core equipment programme is fully funded.
These difficult decisions have had a painful impact across the defence community, both within the Ministry and throughout the industry.
But it has been essential in matching resources to commitments and we are now in a much stronger position to plan for the future.
The MOD has now set a £160 billion budget envelope for equipment and support spending over the next decade.
In January, for the first time we published a 10 year equipment plan which sets out how much will be spent, by sector, by year on equipment and separately support, to enable delivery of Future Force 2020, allowing the department, our armed forces and the defence sector to plan for the future with much greater confidence.
I believe that balancing the defence budget is one of this government’s most significant achievements and is central to our ability to maintain our national security.
But reform in defence is not just about balancing the books.
It also has to be about providing efficiency, accountability and most importantly of all battle winning armed forces.
We have made substantial progress in all of these areas.
Much reform has already occurred, informed by the Levene Report, the Currie review and of course the report into defence acquisition carried out by Bernard Gray, who you will hear from this afternoon.
Given the lifetime of a Parliament and the timetable for legislation, we have had to move quickly to lay out the major planks of reform, including: Defence Transformation leading on from the Levene Report; devolving responsibility and accountability to the Service commands as was touched on by Peter Watkins; and setting out the blueprint for Future Force 2020.
These are all topics which RUSI has discussed and analysed in great detail on previous occasions and so I won’t go over old ground.
Instead I will focus now on the areas of ongoing reform within my portfolio as Minister for Defence Equipment, Support and Technology.
This Bill will provide the enabling legislative platform required to bring reforms to the Defence Equipment and Support Organisation, Single Source Procurement and to the changes in our Reserve Forces.
In coming weeks we will publish a white paper on the Materiel Strategy and another later this summer that will detail how we are enhancing the Reserve force.
The proposals for DE&S are the central pillar of our plans to reform our acquisition system.
Analysis undertaken by Bernard Gray in his 2009 report, and subsequently by the team that are working this through, has shown that historically poor financial planning and schedule overruns have resulted in significant additional costs to the defence budget of hundreds of millions of pounds each year.
The Materiel Strategy is seeking to address this and introduce the reforms the system has needed for decades.
It focuses on three main areas which we consider to be the “root causes”.
The first of these was the overheated defence budget fuelled by an annual planning round, which generates competition between the single Services for scarce resources and is exacerbated by a desire to maximise the capability achievable within the available resource.
There has also been an historic reluctance to make the painful choices that would balance the budget, compounded by the so called “conspiracy of optimism”, where planned requirements significantly exceeded funding.
This led to delays and deferrals, often towards the end of each year, year in, year out, which themselves create additional, “frictional”, costs.
We have worked hard to balance the defence budget, as I have already said, but although much work has been done, this has not fully addressed the mechanical issues which cause underperformance in defence acquisition.
Unless we rectify these problems, and quickly, the good work to balance the budget will be undone and the system will slip back into bad habits.
The second root cause is the unstable interface between the requester, i.e. the front line customer within the commands and the deliverer, either DE&S or the GOCO, if it becomes a GOCO.
There is a moral imperative in all of this work: to ensure our servicemen and women have the best possible equipment and support.
Such pressure can lead to demands, at any point in the programme, to incorporate specification changes over short timescales which, in the present system, make accurate cost and time estimation difficult, with little accountability for the extra cost these adjustments incur.
The final root cause to be addressed is the insufficient skills and freedoms within the Defence Equipment and Support organisation.
I want to be quite clear that what we ask of our people in DE&S is not easy. And I would like to put on record my appreciation of the excellent staff at DE&S and the work they do.
The organisation has responsibility for a project portfolio that is one of the most complex and innovative in the world.
The skills and expertise which DE&S needs to perform its role effectively are very different to those required and valued by much of the rest of the civil service.
They are skills, especially in defence engineering, which often have a high market value, and consequently make our people very attractive to some of you in this room, the defence industry companies with whom they are negotiating.
So recruiting, developing and retaining these skills at all levels has become increasingly difficult.
Establishing the root causes of the challenges to the way we do defence acquisition was relatively straightforward.
Establishing the solutions is not.
Our dual objective is to find the optimal way to improve efficiency in the acquisition process and to cut waste.
We believe the private sector can help and we are looking carefully at how best this can be done.
The launch last month of the assessment phase for the Materiel Strategy represents a significant milestone in our efforts to improve the working parts involved in defence acquisition.
This ‘assessment phase’ will cover 2 activities in parallel: enacting the enabling legislation through the Defence Reform Bill as I said and secondly focussing on developing the information required to make a rational decision between the two preferred options.
The first: a commercial negotiation that will ensure we understand how a Government Owned Contractor Operated, or GOCO, option would work, and the costs and benefits associated with such a model; and secondly the development of a costed proposition for making DE&S the best it can be, while remaining within the public sector in a civil service construct.
The GOCO option would take the form of a contract with a private company or a consortium of companies.
The contractor would be expected to own and operate a limited company, known as the “operating company” acting as an agent for the MOD, which would retain risk as the principal.
They would be responsible for providing and improving the MOD’s equipment, support and logistics acquisition services, introducing ‘best in class’ processes, tools and skills, and controlling the management and operation of DE&S.
The final decision between the two options, the GOCO and DE&S, will be made at the end of the assessment phase, scheduled for summer 2014.
By the time we have completed this process, we’ll have all the data needed to compare the benefits and risks of the two options, including costed proposals from potential providers, enabling me and my Ministerial colleagues to make an informed decision based on what’s best for defence.
Whichever option we finally choose, the rest of the MOD will need to adapt to the new system quickly, ensuring that it is prepared to face-off with a more independent and upskilled DE&S.
The Customer Design programme, which reports to Bernard Gray, is building on those elements of Lord Levene’s proposals related to capability management and delivery of all aspects of the equipment and logistic support programmes.
We’re also working on how MOD head office would act as Governor of a GOCO solution, should we take that course.
Taken together the ‘customer design programme’ and the ‘Materiel strategy’ form the ‘Acquisition architecture programme’, driving reform in the entire acquisition system. The target operating model, which will delegate capability management to the front line commands is also another pragmatic step where we reached an important stage last month.
By the time we come to the final, “main gate”, decision on the Materiel Strategy, we can be confident that the rest of the MOD will be ready for the change.
Single Source Reform
As well as addressing the Materiel Strategy, the Defence Reform Bill will also introduce legislation relating to the new Single Source Procurement framework.
These changes, championed by Susanna Mason, aim to ensure the MOD gets the transparency and the value for money it requires for goods and services procured in the absence of competition, while also allowing single source defence suppliers fair and reasonable contract prices.
The current system, widely referred to as the Yellow Book, has remained largely unaltered since 1968 and is no longer fit for purpose, given the extensive changes to the commercial landscape and procurement processes.
This new framework takes forward the recommendations made by Lord Currie in his independent review published in October 2011.
It has been developed in close consultation with industry and will provide the MOD with a better understanding of industry costs which over time will deliver estimated savings of £200 million a year.
It places greater onus on industry to justify its costs which should provide a stronger incentive for greater efficiency within industry and encourage greater competitiveness in the UK and global market.
The creation of a fit for purpose Single Source Regulations Office (SSRO) will replace the Review Board for Government Contracts first set up in 1968.
The SSRO as it will be known will manage the new framework, ensuring we do not wait another 45 years before another comprehensive review of single source pricing arrangements.
We are currently working with industry, prior to legislation coming into force, to introduce the new approach on a voluntary basis, and we are very grateful for your support.
Protecting operational advantage and freedom of action
In addition to the measures we are taking in the Defence Reform Bill, the department is investigating ways to alter how we manage acquisition processes and our relationship with Industry.
Much of this change began with the publication of the ‘National Security through Technology’ white paper introduced by my predecessor, Peter Luff.
At its core is the need to deliver the best equipment for our armed forces at the best value for money for the taxpayer.
But it also provides a catalyst for making the UK defence industry healthy, competitive and therefore capable of winning a large proportion of additional export orders within the global market.
The white paper is clear that in order to ensure our scarce resources deliver the maximum possible effect, our default procurement must be through open competition, and buying off the shelf where possible.
But the white paper also underlines our commitment to protect our technology advantage where this is essential for national security. This isn’t about protectionism but protecting the nation and its interests.
We must also continue to look for the most cost effective approach to securing these advantages, whether that is working with allies, sharing military capabilities or entering agreements to ensure appropriate levels of technology sharing and security of supply.
Adopting this approach will ensure that every pound spent on defence has a tangible impact on delivering capability to the front-line and to the security of the nation.
Our open procurement policy makes the UK a very attractive location to other defence players: Boeing and Saab joined our Defence Industrial Equipment Policy this year, with Saab choosing the UK as the home of its new Europe and Middle East headquarters in January, which is good for jobs and the wider UK supply chain.
And it was the quality of the supply chain in the UK that encouraged them to locate here.
But although much of this work is about growing and protecting national interests, we must continue to look beyond our shores for new ideas, new partnerships and to maintain those political and industrial alliances that have served us so well for so long.
And so we are also looking at how we can collaborate more closely with our allies when it comes to the procurement of major platforms.
Some of you may have read the recent media reports that suggest the US is concerned and not supportive of the steps we’re taking to reform defence acquisition.
This is a perfect example of some of the myths this conference is helping to dismiss.
In reality, and you may hear more from Bernard later on this, our friends in the US and France have long been aware of what we’re proposing and are looking on with interest.
As with any change to the status quo, people rightly need to understand what could happen under the new arrangements.
I met my American counterpart, Frank Kendall, last month and although he had some questions, they are committed to preserving the strong operational and industrial relations our two countries have long enjoyed.
All of this consultation will be carried out in a bilateral working group set up by Frank Kendall that will meet regularly over the coming year, working through the issues that our allies raise.
Answering these types of questions from our allies and similar ones from industry is exactly why we’re having the Assessment Phase – a chance for both sides to discuss and understand what change would look like.
Joint procurement is more complex and there are often significant associated costs.
But, done well, it can increase our operational reach and interoperability with key allies such as the US and France, whilst also delivering important savings.
The C-17 transport aircraft is an excellent example of a truly inclusive and effective international cooperative arrangement.
It enables all international C-17 users to enjoy economies of scale, shared costs and a truly global footprint, meaning all partner nations can draw on the support that is available to the worldwide fleet of 240 aircraft.
The Future Anti Surface Guided Weapon, the helicopter launched missile we intend to develop jointly with France, is another significant example of our determination to exploit the benefits of joint development and procurement.
This missile will provide the sort of capability that we will both need in potential future joint operations. International collaboration is at the heart of the development and production of the F-35, Joint Strike Fighter, a 5th generation jet aircraft.
Principally, from the nine current partners, but also increasingly from other nations that are looking to procure the F-35 through foreign military sales.
It will continue to bring enormous benefits to the UK defence sector.
UK industry is responsible for manufacturing 15% by value of each and every F-35 aircraft.
That’s not just for those aircraft manufactured for UK defence, but the entire global fleet, which is set to comprise at least 3,000 aircraft, and as I said at a RUSI event last week to discuss the F-35, at US $420 billion, for the US aircraft alone, the largest defence procurement programme ever.
The production run alone will generate billions of pounds and benefit the 500 UK companies in the supply chain, boosting tens of thousands of jobs in the UK aerospace and defence sectors, highlighting the benefits of working collaboratively and building exportability in at the start point.
Building in exportability
The wider economic benefits of responsible defence exports is one of the reasons why we are committed to working with UK industry to boost the concept of exportability.
Not only is it in the country’s economic interest to help one of Britain’s most dynamic and successful industries to export, it is also in our operational interest.
This is best demonstrated by our armed forces using equipment that can be exported, which also enables better interoperability with partner nations because of common equipment, which in turn means more spare parts and extended supply runs.
Earlier this year I chaired a workshop with 20 senior MOD officials and representatives of 20 of our prime contractors to discuss what we can do in partnership to improve our procedures to encourage exportability in our acquisition cycle.
We have also strengthened the guidance we give to project teams when they develop business cases, to ensure they fully consider the export potential of our future equipment.
Whilst industry must continue to develop and produce ground breaking products and services for the international market, we, the government as a whole, must continue to work with companies of all sizes to build in exportability as the rule, rather than an optional extra.
I’ll just conclude by saying I hope you now have a sense of what is really going on with the reform of defence acquisition at the moment.
All of these reforms which we are proposing to bring in must deliver benefits to 3 important groups.
first, they must benefit the outstanding men and women of our armed forces who rely on this equipment and support to keep them alive
second, they must benefit the UK economy, ensuring that the defence industry plays its part in the growth agenda for Britain
and third, they must benefit the British taxpayer, who is hard-pressed, especially at the moment, and deserves effective and efficient government.
To those who say our reforms are unnecessary, I would say this:
Deciding to do nothing is still a decision.
But inaction now would continue to have a negative impact on the systems that protect these shores, the defence industry that equips our armed forces and the taxpayer who funds our national Defence.
So to return to the theme of this conference:
It is a myth that the status quo is an affordable option.
And it is a reality that reform is necessary.