DefenceSynergia on the Ministry of Defence Equipment/Personnel Funding Debacle
It seems to DefenceSynergia (DS) that the issue of Defence funding must be simplified for public understanding and proper transparency, accountability and analysis. In doing so we would want to focus upon the core issue – How the Armed Forces are Funded. In particular, there must be unambiguous clarity in how the budget is calculated, and defining what is included to be legitimate costs within the claimed MOD budget. The funding calculation and resource allocation process must deliver direct actual combat output, rather than include indirect costs as an accounting convenience to ‘fluff up’ the budget to at least 2% of GDP, such as wider government intelligence costs beyond military intelligence and war pensions etc, as is currently the case.
The Defence funding obfuscation emanates from Her Majesty’s Government (HMG)/Ministry of Defence (MOD) (e.g. ministers and MOD PR) penchant to talk in percentages (%) and generalities to the House of Commons Defence Committee (HCDC), to the Media and British Public rather than in specific monetary figures. For instance ‘the MOD budget is to be at least 2% of gross domestic product (GDP) that is a very opaque way of conveying information as it disguises the actual budget out-turn in real figures that everyone would understand. GDP % is a relational moving feast depending on when and how GDP is calculated (adjusted or unadjusted). Study of Office of National Statistics (ONS) records shows that GDP waxes and wanes annually, so what impact should this have on MOD annual budgets if there were to be a further economic downturn and negative GDP as in 2008/9? For instance, GDP has varied from -4.2% in 2009 to 3.1% in 2014 so should the MOD budget have been cut then increased around 2009?
In the 2015 summer Budget the government committed to increase Defence spending by 0.5% above inflation every year until 2021 and continue to meet NATO’s target to spend 2% of GDP on defence for the rest of the decade. But which UK ‘inflation index’ is this linked to, Retail Prices Index or Consumer Prices Index and is this the annual average, or some other variable, and how does it link with the 2% of GDP commitment?
In examining some of this confusing detail DS found that the sterling (£) weakness, often quoted as a reason for the Defence Budget to be under strain, is not quite the potential problem that some might wish us to believe, especially with regard to US Foreign Military Sales (FMS) procurements. This is because currency ‘hedging’ is common practise – currently and over the period under discussion the £/$ exchange rate is based on $1.45. So where is the shortfall really emanating from? It is acknowledged that exchange rates will have an impact on the price of materials imported/exported, but it seems that it is only negative exchange rate impacts that are passed on to MOD contracts.
Many point to a Defence Equipment and Support (DE&S) failure to control procurement costs for major platforms. However, when looked at in terms of future budgets, some of this expenditure has been expended already (sunk costs). e.g., Queen Elizabeth Class air craft carriers (QEC), F35B Lightning and Typhoon combat fighters, A330-300 transport aircraft Rivet Joint Intelligence gathering aircraft, Type 45 destroyers, etc. However, historic and future capital cost increases of these projects consumed and continues to consume a greater percentage of procurement costs, as does the disproportionate Defence inflation increase in through-life support costs. In the case of F35B, MOD has recently stated to the House of Commons Defence Committee it has little idea of what the total aircraft procurement support costs are likely to be. Therefore, how can the project be claimed to be on time, cost and performance as approved by the Initial or amended Main Gate Business Case? In the case of the T31e Frigate it is new procurement whose costings are allegedly to be better controlled, or, the spend has already been accounted for in the much vaunted MOD book balancing exercise of 2012 (but with what increase risk factors is still unclear). Remember the £38bn ‘black hole’ which the current Chancellor (the former Secretary of State for Defence) claimed to have resolved, but which has now reappeared as a £30bn-£40bn black hole only 2 years later? How can this be the current funding situation with all the checks and balances allegedly in place and audited within MOD procurement processes?
Technically, efficiency savings in an organisation would represent a net gain to the budget all things being equal. However, DS holds the view that the term ‘efficiency savings’ in government is a euphemism for ‘cuts’ if the demanded efficiencies are unrealistic, unachievable or not properly and completely recycled back into the MOD budget for exploitation. For example, quite rightly the Treasury states what a saving is required in the Defence Budget and it is left to MOD to meet the target by their preferred route and nomenclature. To meet the set target the Defence ministers will naturally ask the Chiefs of Staff for their advice with options that show savings and their consequential impacts, however, this not undertaken against stated national and military priorities or based on delivery of coherent Capability output contributed to by all Services. What we witness is silo thinking that offers single-Service personnel, capability, readiness, training, and sustainment reductions accompanied by asset, base and land sales. In many cases Peter is robbed to pay for Paul’s profligate spending and poor budget and military output management. Case in point is the reported likely savings in Royal Marines, amphibious ships, and other RN, Army and RAF cuts to keep vastly expensive and difficult to man aircraft carriers and submarines at sea. Effective military combat effectiveness and output is sacrificed at the altar of myopic efficiency ‘what is the least worst cuts I can offer to keep my Service operating’ stove pipe thinking and application of the individual Services.
Which has left DS wondering about annual MOD ‘Efficiency Savings’ which are expressed as £9.1bn over a 5-year Comprehensive Spending Review (CSR) cycle: these seem to equate to a minimum of £1.82bn per annum to be fund within a Defence budget subjected to a rolling demand for efficiencies over the past decades. If the Defence Budget is circa £38bn in real terms, by definition reduced Defence output will be delivered from circa £36.18bn, in real terms, as procurement programme and MOD running costs continue to rise with Defence inflation running ahead of real world inflation. At what point will the MOD senior political and military leadership admit to the confusion over how efficiencies are calculated and how they contribute to the overall total of the Defence budget funding. After pressing for unrealistic efficiencies for decades along stove pipe Service silos, the bottom of the efficiency barrel is now being scrapped and has resulted in MOD being asked again to deliver unreasonable and unachievable greater output with ever fewer people and assets – the input = output equation is unbalanced and plainly wrong.
In a military expected to take training, working and operational attrition, at some point, probably many years ago, the application of a civilian business orientated and economist efficiency dogma and clumsy budget tool became a detractor of military effectiveness, resilience and a negative and detrimental resource and budget management control lever. The MOD efficiency elastic has stopped stretching and has snapped as witnessed by all the equipment not deployable due to lack of maintenance, support, manning and funding shortages. But the Ostriches in charge of the MOD have failed to recognise this and/or are too scared to say so in public when they are in positions to do so – its too late once they are out of the military as armchair chiefs, they should have acted as they were paid to do when in senior leadership positions.
The word ‘NO” needs to re-enter the MOD lexicon to address both external demands for more from less, and from internal demands for more unjustified, nice to have, equipment and Capability. The answer to requests for more from the same or less, has to be that less can be delivered for less, or less can be delivered for more expensive resources. But whatever happens, Defence planning and management has to urgently return to coherent output focused assessment based on definable national and military priorities and a solid audit trail of Ends, Ways and Means Joint Service Planning and delivery approach as taught at Joint Staff College.
So, what does have an effect on the Defence Budget:
1. The fall in the rate of Sterling, but not as much as some would have us believe because of sensible currency hedging arrangements.
2. Defence procurement costs that were running amok are now reportedly being tackled to some degree. However, National Audit Office (NAO) reports continue to raise concerns of major project cost over runs in both capital and through-life support costs of the most expensive programmes (ships, submarines and aircraft).
3. The claim of a 0.5% annual defence budget increase above an unspecified inflation index versus at least 2% of GDP is totally confusing without providing the numbers – pure smoke and mirrors accounting and spin.
4. Not mentioned above, but DS cannot ignore the £36bn (plus £10bn contingency), over 10-20 years, unfairly loaded by The Treasury in 2010 onto an already overheated MOD budget in order to fund the essential ‘Dreadnaught’ project despite the non-operational funding aspects of past Continual at Sea Deterrent (CASD) systems coming from central funds not the Defence Budget.
5. What exactly is being claimed to be within the Defence Budget that delivers actual combat Defence output today, surely not the costs of historical Defence provided by those willing to serve their country (pensions, etc).
The Chief of Defence Staff and the Single Service Chiefs of Staff know all this, so it is complete sophistry to keep pretending to the British Public that it is all under control and the UK retains a globally effective and respected military. The Defence funding system is broken, the Treasury has pulled a fast one on MOD with regard to the national Nuclear Deterrent, Defence procurement inflation and MOD naive optimism bias is out of control, and the Chiefs, although constrained to publicly say so, undoubtedly know all this.
However, instead of logical and properly analysed and coherent national and Defence Strategy driving defence spending, we are on the brink of being offered another bout of myopic single Service ‘Salami Slicing’: a large cut in critical, ‘non-core’ naval Royal Marines and amphibious ships here; the odd Armoured Brigade there; mothballing equipment and cutting military posts elsewhere, whilst allowing increases in non-operational civil service posts and costs in seemingly unaccountable support organisations on the quiet.
DS is curious to hear what the Royal Air Force’s contribution to the salami slicing sausage factory is going to be towards further delusionary ‘efficiency savings’? The normal suspect approaches include: delayed F35B orders; fewer P8 Poseidon Long Range Maritime Patrol Aircraft; early retirement of overworked Tornados operating extended flying hours against ISIS; mothballing of air transport aircraft and helicopters; fewer large Unmanned Air Systems; later replacement of Tranche 1 Typhoons; increasing the number of combat sqns but with fewer aircraft each to provide the illusion of increasing capability; reductions in the RAF Regiment and other critical trades; less training budget; less fuel for flying; closer of more sites to be more efficient but less resilient to denial and loss of critical single airframe/Capability air power sites, etc.
Let’s hope 2018, being the Year of the RAF (100th anniversary), isn’t as disingenuous and debilitating as the Year of the Navy has been to the Senior Service which has in reality reduced in size and Capability and not grown as regularly and disingenuously claimed by the Secretary of State for Defence.