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Assessing Britain’s Procurement Problems

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Unread 08.27.09, 07:24 AM
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Assessing Britain’s Procurement Problems

On 08.27.09 06:11 AM posted by Theodore Bromund

Last week, we noted that a set of slides summing up an internal report from Britain’s Ministry of Defense on defense procurement that had been leaked to the BBC did not place its serious charges into context. The full report has now been leaked to the Sunday Times, which will presumably publish it in due course. Only then will it be possible to assess the report’s merits and demerits. But even now, the parts that have been produced raise important questions.

The report, by Bernard Gray, a former senior MoD adviser, has captured headlines with its assertion that the MoD’s procurement plans are over budget by 35 billion pounds, and will not come into balance until 2028, presuming nothing else is ordered in the interim. Undoubtedly, Britain will want to order more in the interim. But the plans Gray is concerned about include the recapitalization of much of the British armed forces, including two new aircraft carriers, a substantial purchase of F-35 Lightning II fighters, and a replacement for the Trident nuclear missile submarines. Once purchased, none of these systems will have to be replaced in the foreseeable future.

More fundamentally, while 35 billion pounds is a lot of money, the 18 budget years until 2028 are also a lot of years. This implies that, if nothing else affects the MoD’s budget, and if the costs are evenly spread out over the 18 years, the MoD only needs 2 billion pounds more per year to pay its bills. Of course, neither of those assumptions is correct: the unexpected happens, and the cost of major weapons systems does not spread out so nicely. But the point is still valid: the MoD’s hole is big in Gray’s report, in part, because it looks so far ahead.

The casual reader of press reports might gain the impression from them that Britain spends the majority of its defense budget vainly trying to buy military hardware. This is categorically untrue. NATO annually produces a study(pdf) of where the defense expenditures of its member states go. For the period from 1985 to 2004, Britain spent between 21% and 24.8% of its defense budget on equipment, about the same – though always a bit less – than the United States. Since 2004, the British percentage has bounced around between 21.2% and 23.1% — if anything, a bit lower than its 25 year average.

Figures from the MoD, though not precisely comparable to those from NATO, tell the exact same story: in 2007/08, Britain spent just under 8 billion pounds on equipment and buildings, about 21.2% of the defense bill. That’s up from 5.9 billion, or 19.1%, in 2003/04. The procurement bill, in other words, has risen recently, but it has never consumed, and is not now consuming, anything close to a majority of British defense spending. Nor has its recent growth led it to consume a share of defense spending that is out of line with historic norms. If the MoD has budget problems, they are worsened by the procurement situation, but they are not caused by them.

The leaked sections of Gray’s report also contain harsh criticisms of the MoD’s competence, including the claim that the MoD “does not really know the price of any kit and project management does not exist in the Department.” The result is pervasive over-optimism about procurement, and regular and costly reprofiling of major programs. We have made our own criticisms of the MoD, but the Gray criticisms are unusual for several reasons.

First, one of the Labour government’s claims to fame – in its 1998 Strategic Defense Review, which Gray himself directed – was that it had instituted “smart procurement,” a system that would make cost over-runs, excessive initial optimism, and delays a thing of the past. Gray’s report now acknowledges that Labour’s innovation has made no difference at all. This honesty is commendable, but it implies that cost-over runs and the like are inherent to procurement, and not easily attributable only to MoD’s management.

Second, during its twelve years in power, Labour has changed the culture of the MoD. In pursuit of “smart procurement,” and cost control throughout, Labour instituted a new accounting system, introduced private finance, and radically changed the culture of the MoD. In the words of one very unhappy officer:

[The MoD] is an organization dominated numerically, culturally and structurally by civil servants and consultants, many of whom are unsympathetic to its underlying purpose or even hostile to the military and its ethos. You just have to spend a few days at the MOD before you realize that the culture there is not just non-military, but anti-military.…

In other words, Labour instituted the reign of the Treasury in the MoD. There are many cultural and financial problems with this approach, but the Treasury is at least supposed to be good with numbers.

It turns out that not only has Labour broken the military culture of the MoD, it has replaced it with a system that is not even good at costing projects. It is therefore not entirely fair to state, as too many in the press are doing, that the “problem is that the military chiefs want everything they see in the sweet shop and the officials and politicians can’t say no.” In fact, the MoD is not run by the “military chiefs.” The MoD that Labour has is exactly the one it wanted: it is not very military, or even particularly good at acquiring things for the military, but it is very good indeed at saving money, because that is what the Treasury is there for.

The only problem is that saving money in procurement is usually accomplished by delaying programs, which raises their cost in the long run. This is exactly what the Gray report excoriates the MoD for doing, and it is exactly what has led to the current ‘crisis.’ As we warned in February, “Delaying defense programs—apart, of course, from reducing the nation’s military capabilities—only raises their final price. [The latest cuts] have trimmed the coming year’s deficit, but they have done so by increasing future costs.” We are now told that the price of delaying the aircraft carriers alone is 1 billion pounds.

And that leads to the real problem. There are many ways to measure defense spending, but whether one considers it as a percentage of GDP, or as a percentage of the budget, there is no denying that defense spending is a less significant part of Britain’s national effort now than it was in 1996, before Labour took over. If Britain was still spending defense at the 1997 level, for example, the 2006-07 defense budget would have been about 6 billion pounds higher, and there would have been no great procurement crisis. This crisis, in fact, is entirely artificial: if you cut spending enough, you can always claim that the defense budget has a hole below the waterline.

But if that is so, some recent British decisions are difficult to justify. Take the late July announcement that Britain would purchase another 40 Eurofighters. Even at the low estimate of 100 million pounds per plane, that is a 4 billion pound bill for a plane that is demonstrably inferior to the F-35. Why, then, did Britain buy it? The answer is that the Eurofighter is a big slab of Euro-pork – shared, in this case, between the UK, Germany, Italy, and Spain – that allows everyone to subsidize jobs. The July announcement, the government was careful to state, would “help to safeguard about 15,000 jobs at BAE Systems, the principal British manufacturer of the multi-role aircraft.”

And that is the basic problem with procurement in Britain. It is not, mostly, about buying equipment for the forces. It is mostly about things that are extraneous to fighting, like saving jobs and cooperating with Europe. And it is managed not with an eye to producing equipment in a timely and inexpensive fashion, but with a focus on supporting domestic industry, on achieving diplomatic objectives and winning ‘goodwill’ in Europe, and on the government’s desire to spend money on anything but defense. Given those constraints, it is not surprising there is a procurement ‘crisis’ in Britain.

One reaction to the leak of the Gray report might be to assume that the government is unhappy to see it out there. But, while the government has indeed done its incapable best to deny and suppress the report, it may not be as unhappy as all that, because, unbelievably, the message the press has gotten from it is that the MoD has too much money to squander. The Economist, in its August 15 edition, claims the “military spending cuts are likely under the next government” because, “thanks to the ministry’s reputation for waste, cuts in procurement could be comparatively uncontroversial.” The Times says that “cuts are inevitable.” And while the Tories have ring-fenced money for the NHS and international development, they have done no such favors for defense spending.

Incredibly, Britain appears to be coming to a consensus that, because of the incompetence of Labour in spending the little it has allotted to its forces, they will need to get by on even less. And given Labour’s predilection for spending on everything but defense, that may be exactly the conclusion they hoped the Gray report would produce. Instead of a mandate for real reform, it is, astonishingly, being treated as a license to continue cutting.

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