The Blog

Ministry of Defence Basking in Some Good News for Once

I hope I may be excused feeling a little smug today - the chickens are coming home to roost in precisely the way I hoped they would. Two successive reports from the government's financial watchdog, the NAO, have effectively endorsed the very difficult decisions we took while I was at MoD.

I hope I may be excused feeling a little smug today - the chickens are coming home to roost in precisely the way I hoped they would.

Two successive reports from the government's financial watchdog, the NAO, have effectively endorsed the very difficult decisions we took while I was at MoD.

First their report today on the Equipment Plan shows the problem we faced was worse than the £38 billion figure we have used to describe the black hole we inherited in May 2010; in the report the NAO says the Ministry has

"... taken difficult decisions to address what was estimated to be a £74 billion gap between the Department's forecast funding and cost of the defence programme as a whole and to try to bring the Equipment Plan itself into balance."

Their broad conclusion is that,

"The Department has taken significant positive steps designed to deal with the accumulated affordability gap and lay the foundations for stability going forward."

They rightly add, though

"The crucial test will be whether the Department is able to deliver the Equipment Plan within planned expenditure limits, supported by the existence of a substantial contingency provision, over the next few years. If such a track record is established, which can only happen over time, the Department will be able to demonstrate it has really turned a corner."

This is a really encouraging conclusion and suggested the MOD has at last got its house truly in order. This means it can plan with far greater confidence for the future - especially after the welcome news that the prime minister is sticking by his pledge to increases the defence budget in real terms after 2015. This new certainty for industry and the armed forces is really welcome.

Earlier this month the NAO produced a report on the major projects being procured by the department and said this,

"In recent years we have reported several times that the Department has had to slip projects or cut equipment numbers to bridge the gap between estimated funding and the forecast cost of the defence budget. These decisions were not value for money and meant that new capabilities were not available on time. There are no such instances recorded this year...."

There was an important caveat once again,

"There are no such instances recorded this year, though difficult decisions may still be necessary as part of the Department's drive to keep the equipment plan in balance."

And again this month there was another piece of really good news when we heard of the success of Agusta Westland in selling at least 8 Wildcat AW159 helicopters to Korea for the Anti Submarine Warfare role. The 159 is, of course, the manufacturer's name for the UK's very promising Wildcat, the replacement of the highly successful Lynx helicopter in service with the Army and Navy.

The defence and security wing of UKTI, DSO, also tell me my two visits to Korea reinforcing the message were a contributory factor too. Perhaps they were, but it was earlier decisions that had made this possible, including one I took that was criticised in a spectacularly ill-informed way by the Daily Mail and others. They wrongly alleged we had turned down an offer to build at least one ship in a British yard and were therefore guilty of some kind of industrial treason. How wrong can you be?

The decision that attracted their misguided ire was the one to proceed with the procurement of four new tankers for the Royal Fleet Auxiliary from South Korea.

The build contract was awarded to Daewoo Shipbuilding and Marine Engineering (DSME) of South Korea, but the ships are designed by a British company, BMT. And there will be up to £150 million of associated contracts for the MARS project, many of them offering opportunities for SMEs here in the UK. This decision embodied much of the approach of the White Paper on defence equipment published last year, one of the contributory factors to these two excellent NAO reports.

In fact, far from being a betrayal of British industry, this decision shows how a more hard-headed approach to how the MoD acquires capabilities can bring real benefits to the British armed forces, taxpayers and industry.

A number of British companies took part in the international competition - which was quite rightly initiated by the previous government because they recognised, as tankers, they were not "warlike stores." However, no British company submitted a final bid for the build contract. Yes of course I would have preferred it if there had been a competitive British bid. But in the end there wasn't any British bid at all.

MARS means UK companies have the chance to show their potential to one of the world's largest shipyards. It also means that DSME will get firsthand experience of the services and products that can be provided cost-effectively from UK companies.

When I visited DSME's hugely impressive yard last year I heard of the close working relationship developing between DSME and BMT. It looks very likely to lead to further ships, based on the successful MARS design, being developed and sold to third countries. That means additional opportunities for the British marine engineering industry that would never have happened with a British built class, even if such a thing had been possible.

And the RFA will get the tankers on time, to specification and on budget. Hardly surprising when you realise that South Korean yards build around 47 million deadweight tons of merchant shipping each year while the largest European shipbuilder, Denmark, builds only 750 thousand dwt of shipping and Italy just 116 thousand dwt. The UK, sadly, just doesn't build tankers any more, which is why companies like Shell and BP don't buy their tankers from British yards either.

Just as important is the growing evidence of the opening up of the Korean defence market for other UK companies being enabled through the tanker contract. An early and encouraging sign was the significant breakthrough into the Korean naval propulsion market made by Rolls Royce. Now we have Agusta Westland's success.

I really believe the MARS tanker contract changed the dynamics of our relationship with South Korea and makes the prospect of a truly strategic relationship between the UK and the Republic a reality.

With many similar challenges and shared understandings, the potential for ever deeper collaboration and partnership at both industrial and military levels is very real.

So this is a time to celebrate success at MoD. I agree there are many challenges ahead but Philip Hammond and Liam Fox can take great pride in what they have achieved - and yes, I'm please to claim some of the credit for handing on to my successor a rather easier in tray than the one I faced.

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