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PM's choice: Outsource arms makers or squaddies

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An example is the new privately-owned Skynet military satcomms network, financed by City investors because - though they know the MoD has no money in its own budget to pay for Skynet - the conflict resolution cash will be there to rent their new bandwidth as long as the wars go on. By the time British troops pull out of Afghanistan, Skynet will probably have repaid its owners several times over.

The Treasury has also agreed in the past to pay for urgently-needed new kit from the conflict resolution funds, as in the case of the Iraq invasion. A lot of the new gear which British squaddies have actually used lately - night vision kit, for instance, as opposed to antisubmarine gear - has arrived in this way.

However, in the aftermath of the Iraq invasion there was a big closed-doors row, with Brown's Treasury refusing to pay several big bills, saying that they were expenses the MoD would have incurred anyway and nothing to do with "resolving conflict" in Iraq.

The MoD could have balanced its books by cutting a big procurement project, but this is always difficult as it will normally involve civilians losing their jobs and thus politicians losing votes. And the part of the armed services which wants the given new thing will always defend it to the death, too.

As a result, in 2004 combat units were cut across all three services to make up the shortfall. Astonishingly, even though it had just plunged into one big infantry war and was about to get into another, the UK actually shut down 10 per cent of its infantry units. People suggested that the infantry was at least 10 per cent understrength - owing largely to the terrible pay and conditions - so this was somehow a sensible idea. (Now the infantry is 10 per cent understrength again, indicating that the manpower bleed has continued unabated.)

Now, according to reliable sources, the same MoD/Treasury argument is happening again. Recent MoD budget increases have been wiped out and then some by spiralling procurement costs, and yet again the military needs more cash just to cover bills - let alone improve matters for its fighting men and women. Yet again, the Treasury won't authorise the full extra amount from Mr Brown's carefully accumulated "conflict resolution" chest.

The Independent reports that Browne went to see his boss Brown about some more cash last week, and was rebuffed: which probably led directly to the attack in the Lords on Friday. (Not that Browne is in league with the ex-chiefs, but they will have heard about the result of the meeting.)

Meanwhile, the MoD is fighting internal battles as well as external ones. Another big procurement decision is looming on the new Army vehicle fleet, a project known as FRES (Future Rapid Effects System). Three different plans are under consideration here; one involves the use of American vehicles, the other two would be based on European ones. No matter which is chosen, a "systems integrator" company will mod the vehicles and kit them out, scooping much of the profit from the £16bn contract.

Strong rumours suggest that the recently-departed Lord Drayson would have chosen a European vehicle and European/UK system-integrator company, a decision which would probably have increased costs but placed more industrial work in Britain. Drayson's entire ministerial record was that of a man who wanted to boost the British weapons-tech sector first, last and always; even if this meant that fighting troops had to wait for what they needed, or even didn't get it at all.

It now appears that other priorities - such as value for money - may have gained some traction at the MoD, with the trade press suggesting that Drayson departed after a row with permanent officials and officers who wanted to buy cheaper American gear. It has also been hinted that Drayson may have resigned over the larger failure to increase overall defence spending, but this would be uncharacteristic for a man who was principally focused on a bigger equipment budget - as opposed, let us say, to more cash for soldiers' pay, or even for hiring more troops so as to ease their workload. (And indeed, these two things are in opposition within a given defence budget).

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