Original URL: http://www.theregister.co.uk/2008/04/11/mod_planning_round_analysis/

BAE aims to keep all-u-can-eat ticket at MoD pie-shop

Wanna boost market value? Hire some economists

By Lewis Page

Posted in Government, 11th April 2008 12:32 GMT

Analysis Fairly soon now, most observers are agreed, the UK Ministry of Defence will have to announce budgetary plans for the coming years. Typically, this is a matter of dull routine. But this year business as usual won't do. The MoD budget rowboat is so overloaded, so near to capsizing, that something big has to be thrown overboard.

On current plans, the MoD will need around £1bn more than its allocated budget - and this assumes substantial Treasury top-ups for the Iraq and Afghan wars. Rumour suggests that the Treasury is very keen to squeeze these "conflict resolution" supplements this year, which is unsurprising given the recent events in the banking sector.

So the MoD needs to do something. The last time the pinch was this tight, in 2004, combat units were cut across all three services to make up the shortfall. Warships were decommissioned, jet squadrons closed down. Astonishingly, despite the fact that the UK had just plunged into one large infantry war and was about to get into another, ten per cent of the army infantry disappeared.

The services really can't take any more trimming of the front line this time. Efforts are underway to reduce the MoD's huge unwieldy back end - there are plans afoot to sack thousands of MoD civil servants, for instance - but these will take years to have much effect, and may actually cost money in the short term due to redundancy payouts.

The only thing left to cut would seem to be equipment-procurement projects, much loved as these are by everyone involved - the service arms who want the kit, the contractors who make it, and the politicians who hope to sustain the British economy and win votes by creating or safeguarding arms-industry jobs.

A lot of military brass, and some retired-officers' groups - with enthusiastic support from the UK arms industry - are campaigning vigorously for the MoD's budget to be significantly enlarged. On the face of it, this isn't wildly unreasonable - British military spending is actually quite small as government budgets go. At less than £35bn, the MoD gets a third of what the NHS does, less than half of what education does. The total defence budget is less than a fifth the amount the Treasury spends on social-protection and social services budgets.*

Even so, the pro-military campaigners are almost certainly living in dreamland if they think there'll be any serious, game-changing rise in the UK defence budget any time soon. Gradual increases are planned in coming years, but these will be called into doubt if the dreaded economic downturn comes. And even if they arrive, they'll largely be eaten up by the development costs of whatever provides the new UK nuclear deterrent after Trident.

What gives?

So the MoD really needs to cut a major equipment project, to the tune of some billions. As a result, the disparate bits of the armed forces are all terrified lest it be their future raison d'etre - or some part of it - which goes. The British arms industry are lobbying terrifically hard even in public, and harder still in private, trying to make sure that their stream of taxpayer cash doesn't get slowed down or cut off.

The arms makers, indeed, are using a tried and tested combination of stick and carrot to get at the politicians of Westminster - and in particular, at Labour politicians. BAE Systems, the global multinational which owns most of the UK arms sector, has applied both kinds of pressure in recent days. First a touch of the whip: BAE announced 600 UK sackings last Friday, as a little foretaste of what would follow if any of its pork got taken away.

At the same time, it is no coincidence that Friday also saw the release of a report (pdf), from analysis outfit Oxford Economics concluding that "BAE Systems is a substantial contributor to the UK economy". The Oxford economists said the company employed more than 35,000 people in the UK, contributing £2.1bn directly to the British GDP. Furthermore, BAE is responsible via "indirect [and] induced" factors for another 70,000 UK jobs and another £3.4bn of GDP.

Quibblers might point out that BAE's own corporate responsibility report for 2006 (pdf) says (p36) that the firm then employed just 31,544 people in the UK - and that 600 of these have just been fired. They might also note that the UK GDP is over a trillion pounds, so that £2bn of GDP from BAE is chickenfeed - 0.2 per cent of the economy. This seems all the more unimpressive when one considers that the company almost always receives the bulk of the UK's £6bn defence-procurement budget in exchange, and plenty more MoD cash for maintenance and other services. And moreover, that if Oxford is as right about the GDP boost as it is about the jobs, the figures are even less impressive.

BAE's critics might also be more than a little sceptical about the other £3.4bn of GDP we seemingly owe to the company, and the 70,000 other jobs. Nobody can deny that BAE keeps various other Brits than its own employees in work: the company commissioned the Oxford Economics report, for instance, keeping the analysts who wrote it off the dole queue for a while. But trusting BAE-commissioned economists on matters of this sort seems to be taking credulity too far. (Though much of the business press, followed by the stock market, seems to have done so.)

So perhaps BAE isn't that important to the UK. It seems certain that, in fact, the UK isn't terribly important to BAE either. The company claims almost 100,000 employees worldwide, and now just over 30 per cent are in Britain. The company has been sacking Brits and buying up American companies for years now. (Just since 2003, BAE has shed 15 per cent of UK employees.) In general, British taxpayers' money given to BAE doesn't, in fact, get spent on British workers and bolster the UK high-tech base. It gets spent overseas, especially in the US. The MoD has bankrolled BAE's move offshore for decades now.

Don't misunderstand us here - you won't find the Reg defence desk arguing that there's anything intrinsically wrong with making weapons and selling them to the accountable militaries of real democracies. But there's a lot wrong with using political arm-twisting based on heavily-massaged figures to force those militaries into buying overpriced gear which they don't need. And if you then take all the cash overseas, you really are adding insult to injury.

But all that to one side - what could the MoD do to straighten its numbers out?

Several big-budget projects are under way right now. Some at least, depending on your viewpoint, are not intended to produce things that the UK forces genuinely need - certainly not at the given price.

An example is Nimrod MRA4, the ongoing plan to refit and re-equip a dozen of the RAF's existing airliner-sized MR2 submarine hunter aeroplanes. The new planes, like the old ones, will use De Havilland Comet airframes dating from the 1950s, extensively replaced with lovingly-crafted new bits. The project is now running more than seven years late, the number of aircraft received has been slashed and costs have soared - almost tripling the price per plane.

Once MRA4 finally arrives, the main thing gained by the UK forces will be a renewal of the existing ability to hunt for enemy submarines. Nimrods can do other things - the old MR2s are being used for comms relay and electronic warfare above Afghanistan now, for instance - but you wouldn't pay £290m per aircraft and maintain the huge, expensive Nimrod support infrastructure just to get those other things done. (The Nimrod support infrastructure will be very expensive: it will, among other things, be the biggest vintage aircraft enthusiasts' club in the world, uniquely able to maintain De Havilland Comets in an airworthy state.) Much cheaper aircraft, probably unmanned, could do these jobs.

Unsurprisingly, the Parliamentary Defence Committee hinted strongly last week that Nimrod was probably the primary candidate for axing.

The company which is building the MRA4? BAE, of course. You can see why that Oxford Economics report came out just now. (Oxford Economics tell us that BAE commissioned it last year for just £55k; a very cheap way of putting several hundred million onto the company's market value in just one day.)

Horrendously expensive

The other obvious project for bending over the executioner's block is the Eurofighter, nowadays known in the RAF as Typhoon. The fantastically expensive and long-delayed superfighter is now at long last coming into service. It isn't quite cutting-edge - it has no Stealth, for example - and it can't fly off aircraft carriers. Also, it will need a lot of expensive conversion to make it much good for ground attack, the main mission of modern combat jets (though they are a very expensive way of doing this job). Apart from all that, though, Typhoon is pretty good.

But it's horrendously expensive. The Eurofighter project will have cost the UK £18bn or so on completion if no more jets beyond the currently-on-order 144 are bought. The original MoD plans call for a further 88 "Tranche 3" planes to be ordered soon, pushing up the overall cost to around £20bn according to estimates issued a few years ago.

In terms of unit costs, Tranche 3 could be a good idea. The RAF's 232 Typhoons will have cost the taxpayer an average £86m with Tranche 3; without, the 144 planes would each cost £138m, in the same ballpark as the Americans' new F-22 Stealth ultrasuperfighter. (Disregard any RAF Eurofighter cost quote you see lower than £86m. These lower pricetags can be produced only after highly creative accounting, or as it is sometimes known, 'lying'.)

The big snag with Tranche 3 is that the RAF can't possibly use 232 jets. Current plans call for Typhoons to replace the former Tornado F3 and Jaguar fleets at the pre-2004 level, which would mean a total buy of around 130-140 including a generous spares allowance. The RAF has no plans to train more pilots or expand its roster of squadrons - quite the reverse, in fact. So buying Tranche 3 doesn't mean you get another 88 jets cheaply - it means you get the same operational fleet of less than 140, and 90 or 100 planes stored in mothballs. Tranche 3 puts the price per jet actually available for use at an eyewatering £150m-plus.

(In case you don't believe that the UK government would buy expensive jets and then put them straight into storage forever - effectively throwing them away - please note that it has already happened at least twice, with the original Nimrod and the Tornado F3. Both from BAE, as it happens. BAE is also, funnily enough, the British segment of the Eurofighter consortium.)

One should also note, on Eurofighter/Typhoon, that all these figures are on the optimistic side. The MoD issued those cost estimates years ago; nowadays it refuses to publicly discuss how much the jets might wind up costing. Consider this little exchange between oversight MPs and the MoD's procurement chiefs, from the appendices to the recent Parliamentary report:

Robert Key MP: It is quite difficult to get a handle on some of these things. For example, the current cost forecasts for Typhoon are restricted. Why is that so?

General Sir Kevin O’Donoghue: I shall be very happy to offer the Committee a closed brief on Typhoon, but for commercial reasons it would be quite difficult to talk about it in open session.

Chairman: We would be happy to have a closed brief, but are you not able to answer the question put by Robert Key?

General Sir Kevin O’Donoghue: Not about the cost, no.

Robert Key: In principle, why is the cost restricted?

General Sir Kevin O’Donoghue: Because we are in the middle of commercial negotiations.

Robert Key: With whom?

General Sir Kevin O’Donoghue: With Eurofighter.

Robert Key: In that case I may be able to help. There has been a report this week in the German press of a letter from Eurofighter GmbH to the German Defence Ministry saying that the bill for the Eurofighter will increase by about €10 billion more than expected, of which Britain’s share of additional spending will be €5.8 billion [£4.5bn]... Is that right?

General Sir Kevin O’Donoghue: I am not happy to say any more. I am happy to say it privately.

Robert Key: Is it not extraordinary that we can get this information from Germany but our own Ministry of Defence cannot provide it?

All in all, if the reports out of Germany are correct, it seems likely that Eurofighter's costs are to balloon even further out of control. We might see the final taxpayer payout per operational RAF plane at £180m or even more, and the Eurofighter comfortably outstripping the American F-22 to the title of All-Time Most Expensive Combat Jet. And it doesn't even have Stealth.

Getting out of Tranche 3 would require agreement from continental partners, but this probably wouldn't be too hard to obtain given the way things seem to be shaping up at Eurofighter. It's a fairly obvious way to sort out the MoD's budget snags in the short to medium term - and avoid another runaway costs nightmare over the next few years.

Why is the RAF so keen on Tranche 3, then?

Nobody is saying so plainly, but it would appear that the Tranche 1 and 2 planes aren't actually going to be much good for ground attack, though some basic capability has been hastily bolted on. In essence, they aren't going to be much use. The RAF would rather mothball a lot of them and equip itself mostly with expensively-upgraded Tranche 3 models, throwing another £5bn after the original £20bn to do so.

However, there are those who would say that in fact the RAF already has lots of bombers, and that indeed the effectiveness of chucking huge amounts of explosives about - as a means of actually bending foreign people to your will - has long been overrated. Even if it hadn't, there are many cheaper ways to do this than buying hundreds of expensively modified superfighters. The first Eurofighter batches are the way they are because that's how the RAF ordered them, after all.

The other project the Parliamentary Defence Committee didn't like was the new aircraft carriers for the Royal Navy, aka Future Carrier. They went so far as to suggest that the MoD needs to explain "what capabilities these ships will give us that could not be provided in other ways".

The MPs have evidently forgotten about the Falklands War, and failed to notice how comparatively few land bases were available in Gulf II as compared to Gulf I. But it scarcely matters. The carriers themselves - as distinct from the aircraft that will fly from them - can't really be trimmed in numbers or delayed. There are only two on order, they've already been made cheap to the point of seriously affecting their usefulness, and they can't be axed entirely.

Why? Because they will be made in large part by Scottish shipyards which are critical to the political survival of Scottish Labour - and so to the political survival of the present Prime Minister. The actual carrier contract has been delayed and delayed - with a variety of differing theories as to what is holding things up - but preliminary orders for steel and large subassemblies have been given out.

Another big project which is clearly going to happen to at least some degree is the so-called "Future Rapid Effects System", or FRES. This is the Army's £14bn push to replace most of its current combat vehicle fleet, a lot of which is getting very old and embarrassing indeed. There's a lot to argue about regarding FRES - in particular, the requirement for the vehicles to be light enough to be carried by medium transport planes, yet armoured well enough to be used in dangerous warzones.

Given the extremely low threshold of tolerance the UK has lately shown for having its soldiers die in attacks on vehicles, this could be well-nigh impossible. Any genuinely airportable vehicle might soon be elbowed aside by hastily-purchased, heavier, less vulnerable stuff as soon as a future war gets serious - as has occurred in the current conflicts.

But in some ways these are side issues. Nobody can say that the Army doesn't need some new vehicles, asap. This means that there isn't much scope for savings on FRES, not soon anyway.

So it's down to Eurofighter Tranche 3, Nimrod, or - if Gordon Brown suddenly vanishes somehow - the Future Carriers getting axed. Either way, BAE Systems plc will lose a lot of money, and hundreds or perhaps thousands of people in key Labour constituencies will get fired.

So perhaps, as usual, none of them will go. Instead, there will be a fudge - a few combat units shut down, a few useful imported things like C-17 big cargo planes, unmanned surveillance aircraft or CH-47 Chinook choppers not bought.

According to General O'Donoghue, MoD kit-purchasing chief:

We are in the middle of a planning round and the programme will be made affordable. That is the purpose of planning rounds, but where we are at the moment is quite difficult.

No shit, General. ®

*These figures are from a handy Treasury pie-chart, found on page 17 of this pdf.