Contracts at risk in crisis over budget
By Sylvia Pfeifer, Alex Barker and Stephen Fidler
Published: April 28 2008 04:24
The Ministry of Defence is preparing to order a formal review of equipment programmes that could lead to billions of pounds' worth of orders being shelved or delayed. This follows a budget crisis that has left the ministry struggling to balance its books.
The big contracts slated for the review include a £1bn programme for the next generation of Lynx helicopters, as well as contracts for new Astute submarines, Type 45 destroyers and armoured vehicles, according to defence officials. But a £4bn programme to build two new aircraft carriers for the Royal Navy is believed to be safe as it has the political backing of Gordon Brown.
Des Browne, defence secretary, is set to order the review after acknowledging that the department must break the habit of putting off difficult procurement decisions in order to balance its budget. A ministry-wide review would require the Treasury's blessing.
"We haven't been as rigorous as we should have been with our equipment programmes to meet the strategic framework. There are things in that programme that we no longer need and we can't do that in the confines of the planning round," said one defence official.
Plans for the equipment review come amid mounting frustration among industry executives about the paralysis gripping the MoD. The department is struggling with an estimated defence equipment budget shortfall of £2bn in the current two-year budget cycle. Although the cycle ended in March, ministers and officials have yet to make a significant number of decisions.
One likely option involves deferring several key decisions by launching a further planning round in 2009. Those deferred decisions would then form part of the equipment review.
A number of executives are privately warning that continued delays could lead to increased costs on key programmes and potential job cuts. They are expected to make their feelings plain at a meeting with Baroness Taylor, the defence procurement minister, on Thursday.
The MoD is expected to decide whether to go down the route of a review in the coming weeks.
Meanwhile, figures published in a US report on Monday reveal that Britain's spending on defence equipment has been flat in recent years in spite of inflation in the sector that has far outstripped that in the rest of the economy.
The data, in a report into European defence spending by the Washington-based Center for Strategic and International Studies, shows that UK defence investment - which combines defence procurement with research and development - grew at an annual 1.4 per cent rate in real terms between 2001 and 2006. But R&D expenditure grew by 3.5 per cent, leaving growth in procurement spending essentially flat over the period.
The MoD declined to comment on the review but said: "Decisions are still being made and announcements will follow in due course."
Copyright The Financial Times Limited 2008
http://www.ft.com/cms/s/0/0105728c-1476-11dd-a741-0000779fd2ac.html
'Black' mood at overwhelmed ministry
By Stephen Fidler
Published: April 28 2008 03:00
Britain's defence ministry faces its most severe funding crunch in three decades, leaving its strategy towards the industry in disarray and the armed forces stretched to the limit.
According to people with close knowledge of the department, the crisis has come to a head after building up for more than a decade. Most declined to speak on the record because they are employed by the ministry or have regular business dealings with it.
But one described the mood there as "black", and another questioned whether it was "fit for purpose". A third observed that its bureaucrats "do not understand why they're in the mess they're in". A panel of specialists whose views were summed up in an article in the Journal of the Royal United Services Institute has described "an atmosphere of chronic disrepair".
The ministry has been overwhelmed by the task of organising and equipping the operations in Iraq and Afghanistan, where 12,000 troops are in theatre and many more supporting them.
The pressures have been increased by a budget that is, according to General Sir Kevin O'Donoghue, the chief of defence materiel, tighter than at any time since the 1970s.
The ministry has been forced to consider cancellation of big equipment projects, each of which has been viewed as essential by the armed forces or for the survival of important parts of the British defence industry. The room for manoeuvre has been restricted by Gordon Brown's commitment to two big new aircraft carriers and a replacement of the Trident nuclear deterrent.
This has left the defence industry and workforces in a state of high uncertainty, and has made the government's defence industrial strategy - whose architect, Lord Drayson, resigned as defence minister in November - unworkable, they say.
A report out today by the Washington-based Center for Strategic and International Studies shows that procurement spending from 2001 to 2006 was flat - at a time when defence equipment inflation was running at an annual 10 per cent.
The military has received inadequate funding for the tasks set by the government for more than a decade, the people say. The tasks are still largely guided by the 1998 strategic defence review, which was underfunded by £1bn in year one, according to one estimate, and has never been funded adequately since, they say.
General Lord Guthrie, chief of the defence staff from 1997 to 2001 and one of five former military chiefs who criticised the government's defence policies in November in the House of Lords, told the Financial Times last week that underfunding dated back to the previous Conservative government. He said he had backed Labour's 1998 review because it sorted out what the armed forces needed to do. "We had a good defence review but it was never funded properly," he said.
Another person with close knowledge of the MoD said a twin crisis had emerged in the armed forces and in the industry.
"Over the last 15 years we have been running down our defence industry and reducing the size of our armed forces . . . We are at the breaking point because there aren't enough people to provide the effectiveness and flexibility that's needed.
"There isn't the critical mass in the system to sustain the capabilities they want to sustain."
One problem is that the Iraq and Afghanistan engagements, which depend on large numbers of soldiers on the ground, show how much the military is still dependent on people. But spending on another people business - health - has more than doubled in cash terms since Labour came to power, while defence spending has risen less than 50 per cent.
A spokesman for the ministry said the department always faced budgetary pressures, pointing to a sustained growth in spending in real terms that would continue for the next three years. He said costs of Iraq and Afghan operations were covered by Treasury reserve funds and not from the main defence budget.
The armed forces, he said, continued to be able to perform the key military tasks required by the government "but it is true to say there has been some paring down of activity in some discretionary areas".
"The armed forces are working hard but [the army navy and air force] chiefs are content they can cope."
Copyright The Financial Times Limited
2008http://www.ft.com/cms/s/0/fd871520-14bb-11dd-a741-0000779fd2ac.html
By Sylvia Pfeifer, Alex Barker and Stephen Fidler
Published: April 28 2008 04:24
The Ministry of Defence is preparing to order a formal review of equipment programmes that could lead to billions of pounds' worth of orders being shelved or delayed. This follows a budget crisis that has left the ministry struggling to balance its books.
The big contracts slated for the review include a £1bn programme for the next generation of Lynx helicopters, as well as contracts for new Astute submarines, Type 45 destroyers and armoured vehicles, according to defence officials. But a £4bn programme to build two new aircraft carriers for the Royal Navy is believed to be safe as it has the political backing of Gordon Brown.
Des Browne, defence secretary, is set to order the review after acknowledging that the department must break the habit of putting off difficult procurement decisions in order to balance its budget. A ministry-wide review would require the Treasury's blessing.
"We haven't been as rigorous as we should have been with our equipment programmes to meet the strategic framework. There are things in that programme that we no longer need and we can't do that in the confines of the planning round," said one defence official.
Plans for the equipment review come amid mounting frustration among industry executives about the paralysis gripping the MoD. The department is struggling with an estimated defence equipment budget shortfall of £2bn in the current two-year budget cycle. Although the cycle ended in March, ministers and officials have yet to make a significant number of decisions.
One likely option involves deferring several key decisions by launching a further planning round in 2009. Those deferred decisions would then form part of the equipment review.
A number of executives are privately warning that continued delays could lead to increased costs on key programmes and potential job cuts. They are expected to make their feelings plain at a meeting with Baroness Taylor, the defence procurement minister, on Thursday.
The MoD is expected to decide whether to go down the route of a review in the coming weeks.
Meanwhile, figures published in a US report on Monday reveal that Britain's spending on defence equipment has been flat in recent years in spite of inflation in the sector that has far outstripped that in the rest of the economy.
The data, in a report into European defence spending by the Washington-based Center for Strategic and International Studies, shows that UK defence investment - which combines defence procurement with research and development - grew at an annual 1.4 per cent rate in real terms between 2001 and 2006. But R&D expenditure grew by 3.5 per cent, leaving growth in procurement spending essentially flat over the period.
The MoD declined to comment on the review but said: "Decisions are still being made and announcements will follow in due course."
Copyright The Financial Times Limited 2008
http://www.ft.com/cms/s/0/0105728c-1476-11dd-a741-0000779fd2ac.html
'Black' mood at overwhelmed ministry
By Stephen Fidler
Published: April 28 2008 03:00
Britain's defence ministry faces its most severe funding crunch in three decades, leaving its strategy towards the industry in disarray and the armed forces stretched to the limit.
According to people with close knowledge of the department, the crisis has come to a head after building up for more than a decade. Most declined to speak on the record because they are employed by the ministry or have regular business dealings with it.
But one described the mood there as "black", and another questioned whether it was "fit for purpose". A third observed that its bureaucrats "do not understand why they're in the mess they're in". A panel of specialists whose views were summed up in an article in the Journal of the Royal United Services Institute has described "an atmosphere of chronic disrepair".
The ministry has been overwhelmed by the task of organising and equipping the operations in Iraq and Afghanistan, where 12,000 troops are in theatre and many more supporting them.
The pressures have been increased by a budget that is, according to General Sir Kevin O'Donoghue, the chief of defence materiel, tighter than at any time since the 1970s.
The ministry has been forced to consider cancellation of big equipment projects, each of which has been viewed as essential by the armed forces or for the survival of important parts of the British defence industry. The room for manoeuvre has been restricted by Gordon Brown's commitment to two big new aircraft carriers and a replacement of the Trident nuclear deterrent.
This has left the defence industry and workforces in a state of high uncertainty, and has made the government's defence industrial strategy - whose architect, Lord Drayson, resigned as defence minister in November - unworkable, they say.
A report out today by the Washington-based Center for Strategic and International Studies shows that procurement spending from 2001 to 2006 was flat - at a time when defence equipment inflation was running at an annual 10 per cent.
The military has received inadequate funding for the tasks set by the government for more than a decade, the people say. The tasks are still largely guided by the 1998 strategic defence review, which was underfunded by £1bn in year one, according to one estimate, and has never been funded adequately since, they say.
General Lord Guthrie, chief of the defence staff from 1997 to 2001 and one of five former military chiefs who criticised the government's defence policies in November in the House of Lords, told the Financial Times last week that underfunding dated back to the previous Conservative government. He said he had backed Labour's 1998 review because it sorted out what the armed forces needed to do. "We had a good defence review but it was never funded properly," he said.
Another person with close knowledge of the MoD said a twin crisis had emerged in the armed forces and in the industry.
"Over the last 15 years we have been running down our defence industry and reducing the size of our armed forces . . . We are at the breaking point because there aren't enough people to provide the effectiveness and flexibility that's needed.
"There isn't the critical mass in the system to sustain the capabilities they want to sustain."
One problem is that the Iraq and Afghanistan engagements, which depend on large numbers of soldiers on the ground, show how much the military is still dependent on people. But spending on another people business - health - has more than doubled in cash terms since Labour came to power, while defence spending has risen less than 50 per cent.
A spokesman for the ministry said the department always faced budgetary pressures, pointing to a sustained growth in spending in real terms that would continue for the next three years. He said costs of Iraq and Afghan operations were covered by Treasury reserve funds and not from the main defence budget.
The armed forces, he said, continued to be able to perform the key military tasks required by the government "but it is true to say there has been some paring down of activity in some discretionary areas".
"The armed forces are working hard but [the army navy and air force] chiefs are content they can cope."
Copyright The Financial Times Limited
2008http://www.ft.com/cms/s/0/fd871520-14bb-11dd-a741-0000779fd2ac.html
