Defence Budget and Transformation

Part of the debate – in the House of Commons at 2:34 pm on 14th May 2012.

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Photo of Philip Hammond Philip Hammond The Secretary of State for Defence 2:34 pm, 14th May 2012

Before I make my statement, I know that the House will wish to join me in paying tribute to Corporal Brent McCarthy of the Royal Air Force and Lance Corporal Lee Davies of 1st Battalion the Welsh Guards, who were tragically killed in Lashkar Gah on Saturday. Both servicemen were performing an invaluable role in training and mentoring Afghan police, helping to ensure that Afghans will be able to take responsibility for their own security so that Afghanistan will never again be a place from which international terrorists can launch attacks on us and our allies. Their sacrifice will not be in vain. Our thoughts go out to their friends, families and colleagues.

With your permission, Mr Speaker, I would like to make a statement on progress in balancing the defence budget and establishing a sustainable equipment programme as part of the work to deliver the vision set out in the strategic defence and security review—a vision of formidable, adaptable and well-equipped armed forces backed by balanced budgets, disciplined processes and an efficient and effective Department.

The United Kingdom’s armed forces and the Ministry of Defence exist to protect our country and its interests and provide the ultimate guarantee of its security and independence. My overriding priority as Secretary of State for Defence must be achieving success on military operations, but our defence is built on the extraordinary quality and commitment of our people, and ensuring their welfare is close behind. I am clear that when we ask the brave men and women of our armed forces to put themselves in danger to ensure our national security, we owe it to them to make sure that they are properly supported with the very best equipment we can give them to do the job.

The best way I can support our armed forces as they restructure and refocus themselves for the future is to give them the assurance of stable and well-managed budgets and the confidence that the equipment programme is affordable and deliverable. That is because the only way to ensure, in the long-term, the ability to project power, to protect our national security and to ensure that our troops have the equipment they need is to have a defence budget that is in balance. A strong, diverse economy and sound public finances are a prerequisite to being able to sustain the armed forces that our national security requires, and so correcting the disastrous fiscal deficit we inherited and returning the economy to sustainable growth are themselves strategic imperatives. Defence has, rightly, contributed to that fiscal correction, as well as putting its own house in order by dealing with the chaos we inherited in an equipment programme that left a yawning black hole under our armed forces.

Tough decisions have been taken, and I want to take this opportunity to pay tribute to those who have taken them: my predecessor, my right hon. Friend Dr Fox, who showed the courage to tackle head on some of the worst and longest-running procurement fiascos and to make agonising choices over capabilities that Britain could not afford; the armed forces chiefs, who have grasped the challenges that the SDSR has presented and embraced the opportunity to create a sustainable foundation on which they can build for the future; and the leadership team in the MOD, who have worked tirelessly to turn this supertanker round—to tear up the old ways of doing things and to embrace a new model that will ensure that the MOD never again gets into the mess it was in by early 2010.

Thanks to all of them, and with the decision I announced to the House last week on carrier strike being the final piece of the jigsaw, I can tell the House today that, after two years’ work, the black hole in the defence budget has finally been eliminated and the budget is now in balance, with a small annual reserve built in as a prudent measure to make sure that we are not blown off course by unforeseen events: a plan endorsed by the chiefs and by the Treasury. We have achieved this by facing up to the fiscal reality and taking the tough decisions that Labour shirked: reluctantly accepting smaller armed forces and redoubling our resolve to invest in the best possible equipment for them; transforming the role of the Territorial Army as the regular army gets smaller, making it an integral part of Future Force 2020; and embarking on a major restructuring of the Department and a reduction of just over a third in the civilian work force.

Those have not been easy decisions, but they have been the right ones. This has been a difficult period for all our people in the armed forces and more widely across defence. Major change, the threat of redundancy and uncertainty about the future all present challenges to confidence and morale. Reaching a balanced budget for the MOD’s “planning round 12”, or PR12, represents a hugely important milestone in the transformation of defence. It is a symbolic break with the failed practices of the past and a solid foundation on which to build. It starts to put the destabilising uncertainty behind us as we move forward with defence transformation.

At the heart of the plan is the defence equipment programme, which by the end of the PR12 period will account for about 45% of the total defence budget. I have seen for myself over the past seven months just how complex defence procurement is. We are developing cutting-edge technology so that our armed forces have a battle-winning edge, with projects that rank alongside the biggest being undertaken in this country today.

Although there have been widely publicised failures, there have been unsung successes, most notably in Afghanistan, where the urgent operational requirements process funded by the Treasury has repeatedly allowed us to deliver the equipment that our armed forces need quickly and efficiently. Brigadier Patrick Sanders, who commanded 20th Armoured Brigade last year in Afghanistan, has described the equipment that his troops had as “second to none” and

“the best that I’ve experienced in 27 years” in the Army. We need to build on the best elements of the UOR model to achieve that level of performance across defence as a whole. At the same time, we must learn from the failures.

Over the 10 years of PR12, we will spend almost £160 billion on new equipment and data systems, and their support, reflecting the planning assumption agreed with the Treasury of a 1% per annum real increase in the equipment and support budget from 2015. However, poor decision making and poor management have too often meant that the armed forces have not received the full benefit of all their spending.

Under the previous Government, the equipment plan became meaningless because projects were committed to it without the funding to pay for them, creating a fantasy programme. Systematic over-programming was compounded by a “conspiracy of optimism”, with officials, the armed forces and suppliers consistently planning on a best-case scenario, in the full knowledge that once a project had been committed to, they could revise up costs with little consequence. It was an overheated equipment plan, managed on a hand-to-mouth basis and driven by short-term cash, rather than long-term value. There were constant postponements and renegotiations, driving costs into projects in a self-reinforcing spiral of busted budgets and torn-up timetables. Rigid contracting meant that there was no flexibility to respond to changed threat priorities or to alternative technologies becoming available. It is our armed forces and the defence of our country that have ultimately paid the price for that mismanagement. The culture and the practice have to change.

We will move forward with a new financial discipline in the equipment plan. There will be under-programming rather than over-programming, so that we can focus on value rather than on cash management. That will give our armed forces confidence that once a project is in the programme, it is real, funded and will be delivered, so that they can plan with certainty. The core committed equipment programme, which covers investment in new equipment and data systems, and their support, amounts to just under £152 billion over 10 years, against a total planned spend of almost £160 billion. That £152 billion includes, for the first time ever, an effective centrally held contingency reserve, determined by Bernard Gray, the new Chief of Defence Matériel, of more than £4 billion to ensure the robustness of the plan.

The plan includes 14 new Chinooks, Apache life-extension and Puma upgrade; a programme of new armoured fighting vehicles worth about £4.5 billion over 10 years, including the assessment phase of Scout; and a £1 billion upgrade of the Warrior armoured fighting vehicle. It also includes the building of the two Queen Elizabeth-class aircraft carriers, the remainder of the Type 45 destroyers, the new Type 26 frigates and the Astute-class and successor nuclear submarines. It includes investment in new Wildcat helicopters, the Merlin upgrade programme and the assessment phase of Merlin marinisation; the introduction into service of the Voyager air-to-air refueller and troop transporter, the A400M air transporter and the Air Seeker surveillance aircraft; an additional C17 strategic airlifter; continued investment in Typhoon and the joint strike fighter; and £7 billion of investment in “complex weapons”—the smart missiles and torpedoes that give our Navy, Army and Air Force their fighting edge.

Balancing the budget allows me to include within that £152 billion core programme a £4 billion-plus investment in intelligence, surveillance, communications and reconnaissance assets across the Cipher, Solomon, Crowsnest, Defence Core Network Services and Falcon projects; the outright purchase of three offshore patrol vessels that are currently leased; capability enhancements to the Typhoon; and a range of simulators, basing and support equipment for the new helicopters and aircraft that we are introducing.

That programme represents the collective priorities of the armed forces, set out by the armed forces committee on which all the service chiefs sit. They confirm that the committed core equipment programme, together with the £8 billion of available unallocated headroom, will fund the capabilities that they require to deliver Future Force 2020 as set out in the strategic defence and security review. That £8 billion will be allocated to projects not yet in the committed core programme only at the point when they need to be committed in order to be delivered on time, and only in accordance with the military assessment of priority at the time. No project will be allowed to be committed without a 10-year budget line to cover not only its procurement but its support costs. Not rocket science, you might think, Mr Speaker, but quite an innovation in defence procurement none the less, and individuals and contractors can expect to be held to account for the estimates on which decisions to commit to projects are based.

The Government believe that transparency is a driver of performance. I want to be as transparent as possible about the defence budget, because greater transparency will help me to drive the change that we need to see in the Ministry of Defence. However, the House will understand that some elements of the defence budget are security-sensitive and others are commercially sensitive. It is essential that we preserve our negotiating space with defence contractors without announcing all our detailed intentions in advance. So to provide the reassurance that the House will want, while protecting the commercial and security interests of defence, I have agreed with the National Audit Office that it will review the equipment plan and confirm that it is affordable. The NAO will have access to confidential, detailed information on the equipment plan that cannot be published, but once it has completed its work, we will publish its verdict on the plan together with a summary of the plan itself.

Today’s announcement and the work that we are taking forward mean that for the first time in a generation the MOD not only has a balanced budget and an appropriate reserve but is putting in place the behaviour-changing incentives and structures that will keep it in balance. It means that the politicians and civil servants in the MOD can look the armed forces in the eye, in the knowledge that we are delivering them the stable platform that they need to build Future Force 2020. We are delivering them a budget agreed across Government, across the Department and by the service chiefs, and a firm baseline for the transformation that is under way to armed forces that may be smaller, but which will be adaptable, agile, equipped with the very best technology and supported by an MOD that is laser-focused on their needs. We are working alongside a defence industry that can invest with renewed confidence in an equipment plan that is actually deliverable. That represents the start of a new chapter in the long history of UK defence, and I commend this statement to the House.