Is the MoD living beyond its means?

An old joke in the Armed Forces is that if the Secretary of State has to choose between sacking military personnel or Whitehall desk-drivers, the military personnel have to go because he needs the latter to do the calculations. There has been some shedding of top brass and civilians in recent years but the hierarchy remains excessive. The Royal Navy has 30 admirals and 70 commodores to supervise the commanders of the 29 fighting ships we still have. We also have a miscellany of 48 support ships and boats including HMS Victory, still included in the RN’s list of 77 active ships 212 years on. That must frighten Johnny Foreigner. The 7,760 Royal Marines (about five brigades) have four generals and 10 brigadiers. Top heaviness also applies in the other services.

The aggregate defence bill for 2016/17 was £44bn., the main items being service personnel, hardware and IT procurement and equipment support at £9bn. each, and £7.5bn. on running the department. Between 1980 and 2014, the number of service personnel halved to 160,000, with talk of more cuts to come, whilst the proportion of officers increased from 13% to 17%. Estimates are hard to establish but between 5% and 10% of service personnel are probably employed in civilian roles, mostly procurement and equipment support.

The Royal Navy is far the most expensive service. After 50 years of maintenance experience, it is strange that we still need four ballistic submarines in order to have one at sea. The only two naval engagements in the last 70 years were in the Falklands, where two frigates pursued an Argentine coaster which escaped by running aground, and in 2011, a British destroyer, together with Canadian and French warships, scared off a few pro-Qadhafi boats attacking Misrata. No one was hurt nor damage done. Of course the Royal Navy has also been keeping order on the high seas and responding to humanitarian crises.

The MoD’s central problem is procurement. The armed forces first decide what they want.  They know procurement policy requires competition but faced by a choice of tailor-made or off-the-peg, the former is chosen 50% of the time, by value or number, and not tendered competitively. It is awarded to a favoured supplier on a cost plus profit basis. In theory, more profit is permitted when there in higher risk but in practice all the risk falls on the taxpayer. Seven of the top ten suppliers obtained more than 80% of their business non-competitively. In these cases, no one says “why not have the tried and tested that will do much the same job at less cost?” When spending other people’s money, only the best is good enough.  Unfortunately, the “best” too often turns out to be mis-specified, more than budgeted and years overdue. On all 14 occasions (out of 166, January 2015 – September 2017) where the MoD’s Investment Approvals Committee (IAC) challenged the bespoke decisions, they were told it was too late as commitments had already been made.

Procurement has been a mess since the MoD was born. The latest reform addressed non-competitive contracting in particular.  The Defence Reform Act 2014 established the Single Source Regulations Office (SSRO) and the accompanying Single Source Contract Regulations. In essence the idea was that full transparency would enable buyers to look for better value and discourage contractors from taking the advantage they traditionally have. In 1961 I was auditing Fairey Engineering, then on government cost-plus contracts. We were encouraged not to stint on our expenses because the more we charged, the more profit Faireys made. Today’s regulations would have made little difference.

Now, three years after the new regulations became law, only 110 of the 1,891 MoD non-competitive equipment contracts are operating under the SSC Regulations. The government claims that these new regulations will save £1.7bn over 10 years but with equipment purchasing running at £9bn. p.a., that is only about 2%. And how is the counterfactual, what would have been the case, calculated?

Add the MoD’s procurement section’s internal problems. After a very mixed career, and none in procurement, the head of Heathrow, Tony Douglas, was selected to run Defence Equipment and Support but quit just two years later: “after claims that his department is in chaos and struggling with rising costs”. Half a dozen other top procurement officials have quit too. Procurement management was compromised by 386 (24%) of the commercial posts being unfilled at the end of August 2017. Of the 33 major projects independently monitored in 2017, five were in serious trouble. One recent example of procurement failure was the near £1bn. computer upgrade “suspension”, i.e. fiasco. The MoD, naturally, blames its US supplier, DXC Technology, “the world's leading independent, end-to-end IT services and solutions company, helping clients harness the power of innovation to thrive on.” With annual revenue about $25bn. and a workforce numbering over 170,000, it seems unlikely that such a business would be unprofessional.

At best, the new procurement arrangements appear to be sticking plaster. The MoD is believed to be £20bn. overcommitted. It claims to be able to offset that with unspecified short-term savings. Perhaps more cuts of military personnel.

The MoD is the largest customer of British industry. A radical cutback in its procurement would severely damage our economy. The solution has to be buying competitively whilst ALSO buying British.  We must get away from the cosy cottonwool relationships that exist at present and benefit the later careers of the upper reaches of the MoD.

As a major player in the global market, the UK has some ups and downs. In terms of heavy weapons, the UK is the 6th largest exporter, just ahead of Israel[15], with great dependency on Saudi Arabia and the middle east but that may be more due to political relationships than competitive, value for money considerations. And the terms offered overseas, or even domestically, may not always match those obtained from the MoD.

The solution is quite simple: the Investment Approvals Committee must be made independent of the MoD by transferring it to HMT and given teeth. In future, the MoD should not be allowed to make non-competitive procurement commitments without the IAC’s explicit prior approval. The IAC must insist that good enough is good enough, especially where that equipment improves compatibility with our allies. For the good of the country and our armed forces, the IAC must gently wean British contractors dependent on the MoD towards winning in the free market competition. Of course, there will always be some areas where, for security reasons, the UK needs its own solutions but they need independent verification.