Government and Institutions

We need better value-for-money in defence spending


Last week, Prime Minister Rishi Sunak committed to raising UK defence spending to 2.5% of GDP by 2030. The Prime Minister’s commitment grabbed the headlines, but it also raises serious problems. The headline defence spending figure cannot be the only focus of Britain’s defence policy. We also have to ask what the opportunity costs of this commitment are and how the money will be spent.

There are no free lunches, and higher UK defence spending means that something else has to be sacrificed: what goes to fund higher defence spending? The sacrifices include cuts in civil government spending and/or higher taxes and/or increased government borrowing.

Cuts in government spending might affect education, health, transport (e.g., roads, rail), sewage, and local government. As always, choices are difficult but cannot be avoided and will have electoral consequences.

But more importantly, there is no guarantee that this investment will live up to its promise. The decision to increase defence spending is only the start of some difficult choices for military planners. Increasing inputs does not always mean better outcomes.

New funds have to be allocated between equipment and personnel, between the army, navy and air force, and between nuclear and conventional forces. But there are further choices: between defence R&D and current spending (between old and new technology) and between reserve and regular forces. How confident are we that the extra funds will be spent efficiently?  The track record is not persuasive.

On equipment, the Ministry of Defence has a record of continuous cost overruns, delays in delivery and project failures reflected in costly cancellations.  Recent examples include cost overruns on Astute nuclear attack submarines, the continued failure of the Ajax armoured fighting vehicle and the cancellation of the Nimrod maritime patrol aircraft and its replacement by a US aircraft (Boeing Poseidon).

Personnel shortages remain, and the record on providing acceptable military housing is unsatisfactory to say the least.  The worry is that the increased defence spending will be wasted and lost in a series of ‘lazy’ choices based on incrementalism: lets buy a few more Typhoons, a few more warships and some more ammunition.

The Ministry of Defence has a ‘black hole’ which will readily absorb the increased budget with a philosophy of ‘spend it or lose it.’ The traditional solution to equipment spending has been ‘Buggins Turn’. This approach dictates that one year it is the Navy’s turn for a new frigate, next year the RAF can spend on its new fighter aircraft, the Tempest, and finally the Army can have its new tanks.

So how can the Ministry improve the efficiency of its decision-making? It can learn from the private sector where markets promote efficiency through competition and profit incentives. Outsourcing of defence contracts is a solution but the good incentives it could bring can be lost through ‘managed’ competition.

Attractive though competition might be, it takes time to implement. In the same way, converting increased defence spending into a greater output of defence equipment takes time for defence industries to respond. Increased defence output requires extra resources of capital and labour, none of which are available instantly and free. Defence industries are not like water taps which can be turned on and off instantly: the government should implement a consistent system of procurement competition to ensure a healthy supply of armaments. For example, competition can be extended by purchasing more defence equipment off-the-shelf from reliable overseas suppliers. This could increase capabilities at a lower cost than Britain trying to produce everything domestically.

One major problem remains. The government lacks any measure of the value of defence output such as sales, profits, and losses. Traditionally, defence output measurement, on the basis that inputs equal outputs, has been completely unsatisfactory and encouraged waste. In recent years, emphasis has been placed on capabilities such as the ability to fight a war in, say, Ukraine for up to one year or a similar deployment. This is the challenge for increased UK defence spending: how will it affect the UKs capability to fight wars overseas in an increasingly dangerous world?

 

Keith Hartley is Emeritus Professor at the University of York’s Economics Department and the author of a recent Institute of Economic Affairs paper, The Case For Markets in Defence: Driving efficiency and effectiveness in military spending.


1 thought on “We need better value-for-money in defence spending”

  1. Posted 10/05/2024 at 07:33 | Permalink

    The most enduring feature of defence procurement programmes over the last eight decades, or so, has been the total dominance of delays and cost overruns. In a desperate attempt to stem this wasteful spending of public money, the government has tried just about everything – with no success. But now it has chanced upon a solution which offers the very real prospect of consigning these intractable problems to history, once and for all.

    It has decided to buy new military equipment for the armed forces which automatically falls in the off-the-shelf category – specifically because an off-the-shelf equipment is a fully engineered and supported technical solution which satisfies the key user requirements at no additional cost or risk to the Exchequer, that is to say, it does not require any user-specified modifications or related development work laden with risk to be performed upon it – which has been the cause of persistent delays and cost overruns for as long anyone can remember.

    The reason why the government has moved away from its longstanding policy of procuring military equipment designed to a bespoke technical specification requirement is because it has been so badly scarred by contractors’ bogus claims, broken promises and blatant lies that it has no patience to consider any proposals that may be put forward by these same dishonest suppliers.

    You see, the government has come to rely on the private sector because it no longer has the ability to produce military equipment, as it used to do – not least because the means of defence production, distribution and exchange is now exclusively in the hands of private interests, that is to say, the State is entirely dependent on for-profit organisations for the design, development, production and delivery of new equipment to the armed forces. In effect, the provision of defence goods & services has been outsourced to the private sector, wholly and completely.

    The government has always looked to domestic equipment manufacturers as its first port of call for entirely good reasons, but the inescapable fact of the matter is that after lavishing unwavering support upon them for so long, none are in a position to offer authentic off-the-shelf equipment because they simply haven’t got any, and are unlikely to accumulate anything saleable in the foreseeable future – not least, because they haven’t bothered to self-fund product research & development or innovation, create intellectual property or upskill their employees when the going was good.

    Consequently, they can no longer satisfy the equipment needs of the UK’s armed forces which has, in turn, forced this government to look at alternative sources abroad.

    Consider the evidence.

    In addition to the six off-the-shelf purchases which are currently well under way – namely, the P-8A Poseidon maritime patrol aircraft, Apache AH-64E attack helicopters equipped with AGM-179A Joint Air-to-Ground Missiles, MQ-9B Protector armed drones, E-7A Wedgetail airborne early warning & control aircraft and BOXER armoured vehicles, the government has recently signed contracts to buy NLAW next generation light anti-tank weapons, Anti-ship land-attack Naval Strike Missiles, Archer 155mm Artillery guns and has now made a commitment to buy CH-47(ER) Chinook heavy-lift helicopters – the last four, after first conducting a comprehensive market survey and then a comparative analysis of existing, in-service platforms. All of this equipment is being sourced from manufacturers of foreign origin.

    During the time when domestic contractors were being fully subsidised by taxpayers, they had every opportunity to build-up a portfolio of fully engineered, off-the-shelf products to satisfy the current and future needs of both, MoD and export customers. They have squandered this chance.

    The government is not to be blamed for the predicament defence contractors find themselves in. In fact, the responsibility for this tragic state of affairs lies squarely on the shoulders of successive generations of contractors’ senior management people who had every opportunity to future-proof their businesses ages ago, but didn’t – not least, because they were too busy riding the gravy train. The future has arrived now, and today’s top management people have been caught with their pants down because they simply have no off-the-shelf products to sell. Nor have they taken the trouble to maintain an engineering design & development capability on their premises,* which means that they cannot even develop new products to stop themselves from being dragged further into this death spiral.

    Recent years have seen contractors put the interests of shareholders first, ahead of that of customers, but even in this fiduciary duty they have failed pretty miserably. This wilful neglect amounts to wanton destruction of shareholder value by the very people who were supposed to be preserving and enhancing it!

    Without a complete turnaround of an unprecedented nature, defence equipment manufacturers face the prospect of their domestic market share being haemorrhaged to foreign suppliers at a rapid rate.

    So, the defence manufacturing industry in the UK is in terminal decline, not because there are fewer defence contracts going around, but because it hasn’t got the ability to adapt to changing market conditions and shifting customer preferences, most notably, that of its primary customer, the UK government – which is why it is failing to satisfy the equipment needs of the armed forces.

    It is their failure to acknowledge, honestly within their own organisations, that they are the cause of delays and cost overruns which has been their undoing. It’s hard to fix problems if one doesn’t admit they exist.
    @JagPatel3

    * Written submission to the Defence Committee, Inquiry into Defence industrial policy – Procurement and prosperity, published 10 September 2019, pp.3-4. http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/defence-committee/defence-industrial-policy-procurement-and-prosperity/written/104907.pdf

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