Of Typhoons and time-warps

One UK government department above all others has needed modernisation. It has gone billions of pounds over budget; procurement programmes have been completed years late; and it has found Resource Accounting and Budgeting almost impossible to come to terms with. Yet it resists much of the Government's attempts to modernise it. Paul Gosling considers what is wrong at the UK's Ministry of Defence

The Ministry of Defence is stuck in a time-warp. Arguably, the underlying problem is that rising through the military ranks does not necessarily make a person a brilliant controller of a massive government department. The MoD is a bastion of old-style amateurism which has survived the onslaught of the professional administrator.

Not for much longer, though, if ministers have their way. Recent years have seen the beginning of a wholehearted attempt - first under former Secretary of State, George Robertson, and subsequently under current Secretary, Geoff Hoon - to bring it into the 21st century. No wonder.

The scale of the problem is immense. A report from the National Audit Office published at the beginning of the year illustrated the scale of the MoD's budgetary problems - or the ministry's incompetence, as some MPs term it. MoD procurement of current major projects had gone £3.1bn over budget, said the NAO.

Projects dating from the mid-1990s had gone horribly wrong. The Eurofighter plane, now renamed the Typhoon, is now expected to cost a total of £20bn against the original agreed budget of £17bn. It will also arrive almost a decade late.

Then there are the three ordered nuclear-powered Astute submarines, which were to cost £2.7bn but for which the MoD will have to pay an extra £1bn. Delivery will be three years late. Nimrod aircraft, which were to have cost £3bn, will now cost £3.4bn, and be at least five years overdue.

In all three cases the MoD contractor was British Aerospace, which was responsible for all but £400m of the total £3.1bn overspend. Ministers probably already suspected that BAE were not as worried as they should be that tenders were realistically priced. If so, those concerns must have been magnified when they heard Sir Raymond Lygo, a former BAE chief executive, talk about the problem on the radio. 'A well-known fact, whether anybody admits it or not, is you'll never get any programme through the Government if you ever revealed the full cost,' said the candid Lygo. 'After a year you say 'I'm terribly sorry but the costs have now risen for this reason and the other reason'.'

It is no wonder, then, that defence procurement minister, Lord Bach, said that the arms industry 'must raise its game', nor that the rest of the world assumed that he specifically meant BAE. Ever since then relations between BAE and ministers have been awful. It was widely reported that at one meeting the current BAE chief executive, Mike Turner, began shouting at Defence Secretary Hoon. This led to company chairman, Sir Richard Evans, telling the House of Commons Defence Select Committee that he was prepared 'to go to see [Hoon] and eat humble pie'.

Ministers have embarked on a dual strategy for sorting out BAE and major projects procurement. They are playing hardball with BAE by refusing to provide the company with an automatic preferential position for MoD contracts - the company is in the process of being removed as prime contractor on a major aircraft carrier project, in which the French company Thales has the other major role. Hoon bluntly told BAE that he expects to award other contracts to overseas bidders and will not give BAE the home markets protection it demands. But years before this - in 1998 - the then Defence Secretary, George Robertson, initiated a 'Smart Acquisition' system, designed to provide a cheaper, faster and better procurement methodology. The NAO review confirmed that the 13 projects subsequently embarked upon had performed better.

It is widely believed that the Treasury has little sympathy for either BAE or the MoD and is demanding a big improvement in performance from both. It is not just the procurement muddle and the BAE pleadings that have irritated the Chancellor and his officials - they are also understood to be annoyed that the MoD struggled in introducing Resource Accounting and Budgeting (RAB), with problems on the valuation of assets taking years to resolve.

Shadow defence minister, Gerald Howarth, has already complained that the use of RAB by the MoD has persuaded it to move to just in time purchasing, which may work well in car manufacturing, but - Howarth claims - led to kit shortages in Iraq and the unnecessary death of at least one soldier as a result.  Tension between the Treasury and the MoD is now running at a very high level with a real dispute over this year's public spending allocations, with demands by the Treasury for the MoD to cut administrative costs - to an extent which the MoD argues is impractical.

Mark Stoker, a defence economist at the International Institute for Strategic Studies, believes this is not the end of the MoD's financial problems. The Treasury has allocated £3bn for the war in Iraq - as part of an overall package of £6bn provided for Iraq, Afghanistan and anti-terrorism activities - which is likely to prove inadequate. (This compares with budget authorisation, so far, of $187bn - £104bn - in the US, which has been criticised by some commentators there as too small.) And a major investment by the US in digital technologies and network enabled equipment is requiring compatible and very costly expenditure by all its NATO partners to upgrade existing kit. Meanwhile, the continuing problems with historic procurement have to be paid for.

'It's true to say there has been a long held feeling that the MoD has been a particularly inefficient ministry,' says Stoker. But improvement will not be immediate. 'It's like turning round an oil tanker, particularly in terms of procurement programmes. Things are in the R&D phase for five or 10 years before even getting to testing.'

Yet Stoker says it is a mistake to assume that the MoD performs badly in international terms. 'These problems are repeated throughout European MoDs,' he says. Figures published by the UK's defence ministry, taken from the Stockholm International Peace Research Institute, back this view up, showing that UK military expenditure (in 1999) was, at $31.8bn, significantly below that of Germany, at $39.5bn, and France, at $46.8bn.

'There is a problem of France, Germany, Italy and the UK all doing their own R&D,' argues Stoker. 'This is a huge inefficiency across Europe. Every economist looking at this says the only sensible thing is for all of Europe to get together, pooling R&D.' But politically this is impossible.

Perhaps the biggest surprise, though, is seeing where the troops are now deployed. It is not Iraq but Germany which hosts the largest number - years after the elimination of the threat of a land attack from the East. This is probably explained not by any perceived continuing danger, but by the lack of cash to build new barracks in Britain to hold the extra 20,000 troops that would land if pulled out of Germany. And if the number of troops in Iraq today looks small, remember that during the war the figure was 40,000 and that military planners use an equation of three troops needed for every one on the ground - the other two are in training, rest, or support.

According to defence analysts Jane's, the next big deployment of troops might be in 'the lawless roads' of Africa, ungoverned territories in places like Somalia and Sudan, where Al-Qaeda might re-emerge. The prospect of resulting troop over-stretch should worry not just the politicians and military strategists, but the financial managers too.

Paul Gosling is contributing news editor of accounting & business and a specialist on public sector issues.