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SDSR 2015: Doubts about Affordability and Dependency

John Louth
RUSI Newsbrief, 22 January 2016
Defence, Industries and Society, Defence Spending, UK, Defence Management, Defence Policy, UK Defence
Although well received, the Strategic Defence and Security Review leaves two major questions unanswered

The 2015 UK Strategic Defence and Security Review (SDSR), released to Parliament last November, has been viewed by many commentators and analysts as an upgrade to the 2010 iteration. However, the long-term implications for acquisition policy and programmes are only now starting to become clear, especially in relation to questions of affordability and technological dependence. Robust parliamentary scrutiny of the defence-acquisition programme is needed to address these issues and ensure that the hard-won benefits from previous reforms remain effective.

Overall, the 2015 document is a substantial improvement on its 2010 predecessor both in terms of the process that led to its construction and the outcomes it aims to deliver. In 2010, the newly formed coalition government responded to the global financial crisis with sweeping programme cancellations and force reductions to the British armed forces. The staff work in the 2010 review seemed to be rushed and lopsided. This resulted in several less-than-ideal outcomes: for example, there was considerable indecision on which variant of the F-35 aircraft to purchase.

In contrast, the 2015 review returned to a more balanced and careful approach: it was prepared over six months with broad stakeholder consultation and involvement from within the UK and overseas. As an exercise in engagement management it appears almost peerless. So the unveiling of a £178 billion forward programme representing a real-term, above-inflation annual increase of 1 per cent in the provision of equipment was well received. This included: the purchase of 138 F-35 aircraft over the life of the programme; the commitment to operating both Queen Elizabeth-class aircraft carriers; the announcement of a mix of new frigates and corvettes; the buying ‘off-the-shelf’ of Boeing P-8 Poseidon maritime patrol aircraft; the decision to field two new Typhoon squadrons; and the announcement to invest heavily in the special forces. Moreover, the focus on placing conventional deterrence at the heart of future capabilities had broad cross-party support.

However, it is now time for a more sober reflection on the 2015 SDSR. There are two areas in particular that may be cause for concern. These fall under the broad headings of ‘affordability’ and ‘dependency’. Taken together, questions in these areas could expose woolly-headed thinking in relation to defence-acquisition policy, threatening to undermine the review as a whole.

Affordability is crucial to the credibility of the Ministry of Defence (MoD) and is, arguably, at the core of the British military’s ability to conduct enduring operations and to deter aggressors. Between 2010 and 2015 the government expended considerable effort to generate a balanced and affordable defence budget. After taking power in May 2010, the coalition identified an unfunded liability of £38 billion in the equipment programme and an unfunded cost of more than £8 billion in renewing the nuclear deterrent. In addition, the Defence Equipment and Support organisation re-valued the acquisition programme by an additional £5.5 billion. In other words, by 2011 the defence budget was unfunded by potentially £51.5 billion. Given this gap in funding and the general state of public finances, it was a remarkable achievement of the government to produce a balanced defence budget by the time of the general election last May. It would be similarly remarkable if SDSR 2015 unpicked this achievement and made defence commitments without the identified, budgeted wherewithal to finance them. Yet, on closer scrutiny, it appears that this is exactly what has occurred.

The SDSR lacks the funding detail for many of its new programmes. For example, take the air domain. In this area, the SDSR announces a number of new purchases: twenty new, remotely piloted Protector aircraft; new precision weapons; an additional F-35B Lightning II squadron; two additional Typhoon squadrons; and nine P-8 Poseidon maritime patrol aircraft. The review further outlines plans to recapitalise the air-transport fleet to include fourteen Voyager air-to-air refuelling aircraft and twenty-two new A400M Atlas tactical-lift aircraft. It also announced the life extension of the Hercules C-130J fleet, as well as the continued operation of the Tornado aircraft until their eventual replacement by the Typhoon.

Yet the SDSR does not provide a clear and unambiguous analysis detailing how this investment will be paid for. The authors of the latest review state that ‘the Cabinet Secretary led a process which has identified more than £11 billion of savings from MOD, the security and intelligence agencies and cross-government counter-terrorism spending’ which will fund these investments and other national-security priorities. But there is scant detail on these savings. Given that more than £50 billion in unfunded capabilities were withdrawn from the defence and security portfolio in 2010–15, it seems unlikely that another £11 billion in savings were identified over just a six-month period last year.

Perhaps part of this value is locked into the SDSR commitment to reduce – by almost 30 per cent – the number of civil servants and other civilians employed by the MoD, to a total of 41,000 by the end of this Parliament. However, cancelling employment contracts and making people redundant is an expensive activity, in the short term at least. Moreover, many of the jobs undertaken by these thousands of civil servants will have to be undertaken elsewhere, possibly by defence-service businesses from the private sector. This will require new money to be found for these support contracts. Without access to the business case – assuming one has been undertaken – it is not possible to form a judgment as to the economic merits of these propositions and their ultimate affordability. More than one senior official and military leader has told this author that these proposals are being undertaken ‘at risk’; the department is charged with finding savings between now and 2020 to enable the stated equipment and support investments. As the difficulty of this becomes evident in the months ahead, issues of affordability may well lead to the unravelling of the SDSR.

Concerns about the UK’s dependency on international suppliers and the erosion of sovereignty are also not addressed by the review. The coalition government’s 2012 White Paper stated clearly that government policy towards capability generation would be conducted, where possible, through off-the-shelf procurement of mature assets and platforms following a global, open competition to meet a stated requirement. The UK government would, however, reserve the right to intervene in defence procurement as necessary in order to protect the country’s sovereign capability and technical advantage – this was seen as a critical component of the UK’s ability to conduct independent defence and security operations. This was re-stated as government policy by the minister for defence procurement, Philip Dunne, at RUSI’s Defence Acquisition Conference in September.

Yet the announcement of the new maritime patrol aircraft specifically ruled out a competition process. This not only raises questions over how value for money can be tested, it also seems to directly contradict the government’s policy, reiterated only months earlier. While there may well be sound operational reasons for this, at first glance it appears to further increase the UK’s reliance on the technologies of its allies and could potentially lead to the erosion of its onshore capabilities.

Of course, a complex and interdependent global market may inevitably lead to an increasing reliance on offshore procurement. However, it is not possible to test the government’s thinking in relation to this capability or to hold it properly to account without a competition which allows a number of firms to submit bids in response to known user and system requirements. Furthermore, the through-life costs of capabilities have to be tested within business cases if those capabilities are to contribute effectively to a balanced and affordable defence portfolio. Reflecting the links between issues of dependence and affordability, the rush to insert a capability may ultimately make a project unaffordable if it is not tested by competent and thorough financial appraisals and/or the rigours of a commercial competition.

It is, therefore, important for the government to be held properly to account for the budget lines and announcements on expenditure contained within the SDSR. The business cases for decisions and their financial appraisals should be made available to Parliament and the forward work schedule of the National Audit Office amended to support rigorous parliamentary review. Without this, the aspirations articulated by the review may remain just that – aspirations. Strategy without the benefit of ongoing scrutiny remains a story we tell ourselves rather than a plan of action.

On a first reading, the SDSR is a credible and well-thought-out attempt to help the UK to address defence and security issues and risks from now into the 2030s and beyond. The most recent document is far more rigorous and considered than the 2010 edition. Yet, on closer inspection, issues emerge around affordability and dependency. This calls into question the ability of the UK to acquire the capabilities that the country seeks with the resources allocated – the very essence of an effective defence-acquisition policy.
Sharing detailed information about budgetary assumptions and actual commitments is an important ‘next step’ which would allow Parliament to hold the executive to account. This should be undertaken at the defence-enterprise level, as well as within capability programmes and projects; contracts should be written in such a way that enables parliamentary oversight through the House of Commons Defence Select Committee. This is, of course, detailed and painstaking work, but it is ultimately necessary if the vision of the SDSR is to be achieved.

Professor John Louth
Director, Defence, Industries and Society, RUSI.

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