Lima Charlie
Politics

Lima Charlie: Will A Further £1bn Keep The MOD's Future Spending Projects Afloat?

How will the budget announcement about extra funding for the MOD and its wider spending challenges impact defence?

Lima Charlie

How will the budget announcement about extra funding for the MOD and its wider spending challenges impact defence? Here, our Lima Charlie columnist gives an insider analysis.

The Chancellor Phillip Hammond used his budget speech to announce a further £1bn in funding for the Ministry of Defence over the next two years.

This additional money is intended to be spent primarily on further funds for the next generation of ballistic missile submarines (the Dreadnaught-class), improvements to the anti-submarine warfare capability, and enhancements to the UK’s cyber defences. 

While the news of extra money in a financially tight climate is always welcome, there are several questions to be asked and financial challenges ahead for the MOD that may make this money soon disappear. 

The funding is arguably not entirely new money, with a considerable amount of it drawn from the so-called ‘contingency fund’ that the Treasury holds for the Dreadnaught programme.

This is essentially a pot of additional funding that the MOD can draw on from the Treasury, outside of its existing departmental budget, to fund unexpected in year challenges for the programme, or to de-risk issues now in order to reduce the likelihood of a delay to delivery.

Ensuring that HMS Dreadnaught enters service on time to replace HMS Vanguard and ensure the continuity of the UK’s independent strategic nuclear deterrent is the highest priority in the MOD right now.

The programme is being run to very tight timescales and requires the highest possible engineering standards to deliver on time.

There is no scope for slippage, which considering the previous history of UK nuclear submarine construction (particularly the challenges with the Astute class), makes it even more critical that there are no delays because of funding issues.

The money that MOD is getting then for the Dreadnaught programme is not new, merely a reannouncement of funds that have already been provisionally allocated early.

The strong hints from the Chancellor as to where the additional money will go is a good sign of what he perceives to be the MOD’s critical priorities at present (ASW and cyber).

It is likely that some of this will go to enhancing the capabilities of the Type 26 programme, upgrading existing equipment on in service vessels like the Type 23s and Astute class submarines and potentially adding extra capability on the P8 Maritime Patrol Aircraft, due to enter service shortly. 

Type 23

This goes a long way to addressing the increasing threat from the Russian military, whose submarine force is still seen as a key threat to the UK.

This increasingly active, and capable, force is the issue most likely to pose a threat to the security of the existing submarine based nuclear deterrent, hence the priority placed on improving our ASW capability.

The importance of this role is also underscored by the wider announcement of a Defence Arctic Strategy that will help to prioritise UK defence capability in the polar region, which the Russian military is increasingly active in. 

The worry for the wider MOD though is that the ringfencing of most of the £1bn extra means that there is unlikely to be much left for wider extra procurement, for example on the army or RAF.

Given the significant funding challenges faced by all three services, the additional money is unlikely to either go a long way to stemming these challenges or solving them. 

The best way to view this announcement is that it provides a very short-term injection of cash into a couple of specific high priority areas for the MOD.

It is not a wider long-term uplift to the budget, but instead a one-off boost. The real battle for funding will come in the Spending Review, that is being held next year. 

The Government runs a regular five-yearly cycle of cross Whitehall spending reviews, where every Department works out what their financial plans are likely to be, what they want to spend new money on, where they think they can make efficiency savings and how much money overall, they will need each year.

This is a serious process, where political aspirations and financial reality meet head-on. The next review is due to be held in early 2019, setting out the deal for spending until the mid-2020s.

Already it is clear that the bulk of available extra funding has been allocated to the NHS, leaving other departments with very little spare cash to bid for.

Each Whitehall department will want to secure the best possible outcome and get extra money for its key projects.

Ministers will be keen to show that they are delivering, and politicians will want to try to persuade the voter that the Governments spending priorities are right. 

The MOD enters the spending round in a challenging position.

It has been in financial difficulties for some time, with its projected long-term budget, particularly for procurement, needing more cash than it has got.

At the same time, the Department still needs to make savings agreed in previous spending rounds (it is common to agree to find billions of pounds of ‘efficiency’ savings), but these have yet to be found and implemented. 

To try and make the budget add up, the MOD has been running a very long series of defence reviews (currently known as the Managing Defence Programme) to try and match up the strategic ambition and goals of the Government with an affordable financial programme.

This is made harder by politicians being unwilling to see further cuts to frontline troops or equipment, making it hard to find credible solutions.

The current challenge facing the MOD will be to find a way out of this situation that puts together a spending round bid that ensures the UK still spends 2% of GDP on defence (as per NATO guidelines), can continue to play a leading role in NATO and European security, particularly against the Russian threat, while also retaining a global reach.

Ex Trident Juncture NATO

This must be done against the backdrop of needing to manage a very complicated equipment plan and managing a highly skilled and technical workforce that is suffering retention challenges. 

To make matters more complicated still, the National Audit Office has conducted a deep review of the MOD Equipment Plan.

This is a 10-year plan that sets out all the planned equipment that the MOD wants to buy, when it will do and in what sort of quantities. 

Procurement for the MOD isn’t a matter of writing a cheque out when you order the equipment and then waiting for it to be delivered a few years later.

Almost every programme involves payments of different amounts and at different times.

This means that a project may not cost very much at first, will then cost a great deal later on, and then finally cost very little at the end. 

The very simplified table below tries to explain this visually.

Assuming three projects for a tank a plane and a warship all beginning at the same time, with a total budgeted cost of £190m.

Each project will have different levels of expenditure at different times – that’s fine if the total budget each year is sufficient to cover this.

If lots of projects are going to require a lot of money at the same time, then no matter whether the funding is there over the life of the project, there will be a problem. 

In this case, in year 4 of the projects, planners need to find £100m of cash to continue.

But, if due to cost overruns, or budget cuts or delays elsewhere there is only £80m available, then the MOD has a £20m shortfall ‘in year’ – in other words, it is £20m short of the cash it needs to fund the projects simultaneously, even though it has enough money overall.

Charlie Lima Table

To solve this sort of complex problem the MOD planners will look to do things like ‘defer’ or ‘descope’ projects – in other words, slip them to the left, maybe accepting a delay overall in delivery, but meaning that the financial cost balance out.

Alternatively, they may choose to ‘descope’ a project by reducing its capability overall, perhaps not buying as much equipment, or reducing the specifications.

This may save money up front, but they would need to plan on more money later to buy it back and fit it. 

Deferring or descoping can save money in that financial year, but it can add a lot of costs later on.

For instance, the Queen Elizabeth carrier programme was delayed ensuring that it remained affordable during a major MOD budget crisis during the 2000s – the impact was the carrier was delivered later than planned, but the delay to the project meant a lot of extra costs were incurred as a result.

But if the choice boils down to cancelling the carrier or spending more later, then its hard to see what other action could have been taken.

These cost increases then add to the longer-term pressure too, because as projects get more expensive, more money needs to be found from the wider budget to cover them.  

The outcome is that MOD financial planning involves a lot of juggling projects, trying to ensure that across the hundreds of major projects it runs each year, the spending on each project combined doesn’t exceed the available budget overall. 

The problem the MOD has now according to the National Audit Office is that there is a very substantial gap between their budgeted costs, and the estimated cost of the entire equipment programme is approximately £7 billion over the next 10 years.

In other words, the MOD is committed to spending £7bn that it doesn’t have right now, and which is unlikely to be found during the Spending Review.

The problem is even more serious because over 80% of this shortfall is due to be funded in the next four years – essentially between now and 2022, the MOD has got to find over £5.6bn in cash to address this overspend.

Given the annual equipment, budget is only around £8bn, this is an awful lot of money that needs to be found quickly. 

The challenge for the MOD then is to work out what to do. It needs to pull together a coherent bid for the next five-year spending review that explains how much money it will need when it needs it and what it's going to spend it on.

The problem is that it needs money now to fix many of its problems, and that money isn’t there. 

The next few months will see some frenetic work by the MOD to make its equipment plan affordable and ensure its spending round bid is credible.

This is likely to mean that tough decisions will need to be made on the affordability of some projects, potentially seeing deferral to order dates (always easier to delay placing an order for another year than scrap something currently being built).

Alternatively, they may buy less equipment (e.g. instead of 80 APCs, they may only buy 50). 

Cancelling projects is one way to save money in the short term, but it is incredibly wasteful and writes off a lot of public money for no gain.

The longer-term loss of operational capability caused by the cancellation is likely to have a major impact on UK capabilities.

For instance, the 2010 Strategic Defence Review cancelled the Nimrod MRA4 aircraft, instead choosing to rely on other existing assets to fill the gap.

Nimrod

This was quickly realised to have been a mistake, and in 2015 the UK committed to buying the P8 instead.

This will restore the capability, but at significant extra cost, and the challenge of rebuilding a maritime reconnaissance capability when many of the experts have moved on – it will take many years to regain a capability lost in one day when the MRA4 was cancelled. 

The wider sort of challenges that will need to be considered when coming up with options to defer, delay or cancel include working out the impact on UK industry – it may save money not to buy any new jet fighters for 5 years, but if this leads to the collapse of the military aircraft manufacturing industry in the UK, is this a false saving?

Running on a ship a few years longer beyond its planned retirement date may help fill the gap if its replacement is deferred, but how much of an impact would this have – will you need more refits, upgrades and changes to manning and career plans as planners suddenly must ensure the ship remains able to go to sea.

There is a very complex set of issues that need to be considered when looking at these numbers, and often it is not as easy as it may first appear. 

The reality for the MOD is that they will need to produce a plan that somehow meets the strategic guidance it has got to deliver military operations globally, while making significant budget cuts, and trying to protect the front line.

While the injection of extra cash by the Chancellor will help in the very short term, it will not make a meaningful difference to solving the longer-term challenges of the Equipment Plan. 

Unless there is a major increase in defence spending over the next five years, it is likely that the MOD will need to make significant adjustments to its structure and force levels.

This will be politically unpopular, but there seems on the face of it to be no other realistic option to choose from. Baring more funding, or a clever fudge, there are, more realistically, substantial defence cuts to come. 

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This article is the latest contribution in our Liam Charlie columnist section.

This is part of a series featuring unattributed contributions from experts and insiders providing opinion, insight and analysis on today’s Armed Forces, the wider politics of the military and observations on military life.

Under the pseudonym Lima Charlie, our contributors aim to explore the issues facing today’s military and their comment remains unattributed to allow our writers to present their analysis candidly and under one editorial voice.