Wednesday, August 20, 2008

UK MoD budget: War of the Worlds

Deep in the 2008 British summer political recess the Financial Times has run three articles reflecting the funding crisis in Britain's Ministry of Defence, "MoD ‘lurching from crisis to crisis’", "Business partnership comes under strain" and "UK Tries to offload Typhoon fighters".

The reality underpinning the headlines has been common knowledge for many years. Defence is not a funding priority for politicians, defence inflation runs at a level ahead of normal inflation and equipment is being worn out at a prodigious rate not envisaged by Cold War planners and budgeteers.

The Department has proven adept over the years at pushing its funding to the limit, however three factors it could be suggested have led to Ministry to run out of road;

1. Military Operations
The frequency, duration, tempo and distance at which British forces are operating on a sustained basis is a major pressure from wear and tear on vehicles, to 'harmony' policies for service families. Iraq, Afghanistan are the two largest commitments.

2. Changing processes
The traditional cat-and-mouse game with the Treasury over funding has become one-sided by introduction of Resource Based accounting standards leading the Department to have a huge quasi-corporate annual report. Moving away from 'cash funding' - something clearly understandable to the not insignificant uniformed military managers atop the Ministry of Defence - was always going to require a much higher degree of financial awareness amongst military and civil service leaders - not necessarily the most obvious skill you would want in a Department geared towards managing security threats. The movement from a one-year equipment planning cycle, to two year and then back in the face of operational demands has only served to make the situation more challenging than anticipated.

3. New versus old equipments
One can imagine in the environment of the late 1980s the genius idea of breaking the cycle with regard to political interference in defence programs whereby numbers procured get reduced and unit costs escalate. This was the Eurofighter negotiation where governments get locked into production or face hideous financial penalties.

The problem now is that the Royal Air Force cannot afford to fly its 232 Eurofighter Typhoon commitment. The Army wants a new generation of combat vehicles ('FRES') which is being undermined politically by UOR's (would anyone want to bet on the mixed fleet which will be in service around 2030?) and the Royal Navy is suffering increasing cuts to the fighting fleet in return for the promise of two modern aircraft carriers (or "CVF") (although their is a real risk that USA may cut procurement of the STOVL Joint Strike Fighter variant for domestic needs).

What is the way out ? It could be suggested that by any Whitehall metric the Ministry of Defence has delivered on security of the United Kingdom whilst under extreme 'value-for-money' scrutiny and external pressure. Has the National Health Service or Education delivered to the same extent ? A questionable premise although for sure, politicians of all persuasions in the UK have not favoured expanded defence spending since the Falklands War of 1982 - and that was a transient period.

For the Defence Industrial relationships in the UK it is fundamentally problematic. The MoD in lieu of more funds can only delay (or 'push to the right') major new equipment programmes. Political squeamishness and effective lobbying will ensure nothing gets cancelled - TRIGAT in the late 1980s was the only program in recent memory to be cancelled - after a 25 year procurement in which no anti-tank missiles were delivered [Note: the TRIGAT programe started in 1973 and although Britain and France dropped out the TRIGAT-LR missile remains in development - 35 years and still going strong !].

For industry the funds available to defence will likely be focused on niche acquisitions related to operational necessity, new but relatively cheap technologies (such as UAV's) plus maintenance and upgrade (or ideally 'spiral development') of existing platforms. Companies will be faced with some difficult decisions - do they have the staying power to hang on for the Ministry ? Can they export elsewhere (if so, where is DESO ??), Should they acquire companies with 'mission-critical' positions in equipment support (take for example Marshall's aerospace or Babcock International Group) ? Many smaller businesses (represented by the Defence Manufacturers Association) may choose to re-focus their efforts elsewhere, serving only to increase the fragility and expense of the defence procurement enterprise.

One thing is certain, that the heady days of Lord Drayson and 'Defence Industrial Strategy' seem already to be in the distant past.

Technorati Tags:

No comments: