"Threat to defence projects if Carrier Strike runs over budget" says PAC

REPORT SUMMARY

Carrier Strike is central to the Government’s plans for Britain’s future defence. It incorporates two Queen Elizabeth class aircraft carriers, new F-35 Lightning II jets and a new radar system – Crowsnest.

The defence budget is very strained in the light of commitments made in the last Strategic Defence and Security Review. Carrier Strike is expensive, and despite the Department assuring us that it will manage costs, there is a threat to the future of other programmes if it goes over budget.

In addition, there are aspects of Carrier Strike that still need to be fully costed as the three elements come together.

For the Department to secure value for money from its significant investment in this long-term capability, it will need to ensure that the carriers and jets can be fully and flexibly used alongside other military equipment, and can be upgraded to keep pace with technological advances. 

The Department must also seize opportunities to bring high-tech and skilled jobs to the UK by securing further global support contracts for the Lightning II jets.

Completion of transformation within DE&S is key to ensuring it has the necessary commercial skills and capabilities, and is well placed to win such contracts.

COMMENT FROM PAC CHAIR MEG HILLIER MP

“There is a lot at stake with Carrier Strike – a hugely complex, costly programme intended to be at the heart of national defence for years to come.

“The project continues to leave the MoD exposed financially. Government must bring Carrier Strike in on budget or risk jeopardising the funds available for other defence programmes.

“Uncertainty over some costs and the potentially negative impact of foreign exchange rates mean this will be no easy task.

“There are also questions over the Lightning II jets and the eventual deployment of Carrier Strike, which could threaten the programme’s value for money.

“All this is taking place as the MoD awaits clarity on the future size of the defence budget.

“We will be keeping a close eye on this programme and will expect the Department to keep us abreast of developments.”

CONCLUSIONS AND RECOMMENDATIONS

Value for money will only be achieved if the carriers are flexibly and fully deployed. Re-introducing a ‘Carrier Strike’ capability represents a very significant investment for the Department. The carriers will offer greater flexibility in how the Government can respond to global events, support the UK’s political influence, and enable cooperation with allies. They will also fundamentally affect how the Navy operates, and incur significant operating costs. The Department has choices as to how it utilises Carrier Strike and is undertaking modelling to look at the cost of these options. The decisions it makes are likely to require some compromises because of the available budget, equipment and personnel. Given the significant investment, it will be important that the Department can demonstrate that the carriers are being used to their full potential, and able to be deployed flexibly alongside a range of other military equipment. However, concluding definitively on the value for money of Carrier Strike, as for other military capabilities, is difficult because the benefits cannot easily be quantified. To maintain the value for money over the life of the carriers and jets, the Department has sought to ‘future proof’ the designs so that they can be upgraded in light of technological advances. Predicting future changes is inherently difficult and the Department will need to continue to develop the equipment over time. It believes that budgets are sufficient to enable the capability to evolve to the point when the budgets end in 2026.

Recommendation: In firming up its plans, the Department must ensure they are designed to use the carriers flexibly and to the fullest extent possible in order to secure value for money from the investment. We will continue to monitor this.

Changes in the naval fleet and the availability of other vessels at particular times may limit how the carriers can be used. The carriers will not be used on their own. Depending on what they are tasked to do, they will be supplied and protected by other warships, submarines, helicopters and other equipment. The Department told us that the first carrier would be modified to allow it to provide air and helicopter support to amphibious operations. However, the carriers would not themselves be used to launch amphibious craft. We are concerned to hear speculation in the media about the future of the current amphibious ships. We were told a review is underway, but welcome the Department’s confirmation that there were no plans to take them out of service. Changes are also planned to the fleet of frigates, with the new Type 26 replacing the fleet of Type 23s currently in-service. These vessels perform an anti-submarine role that is necessary to support the carriers in use. The Department recently signed a contract to buy an initial tranche of Type 26s, the first of which is expected to enter service in 2027. The Department told us that it was confident that a capability gap would not emerge between the Type 23s being retired and the Type 26s coming into service, which could limit use of the carriers.

Recommendation: In the event of unforeseen events in the manufacture of the Type 26 frigates creating a capability gap, the Department should write to the Committee setting out how it will manage the impacts.

There are a number of technical issues with the jets, which may delay operation of Carrier Strike. The Government has sought to influence the design of the jets by a close relationship with the US government, from whom the UK is buying the jets under a memorandum of understanding. The UK contributed $2 billion to be a ‘Tier 1’ partner and so have influence over the design as well as be part of the testing process. There have been a number of independent reports of technical problems with the jets. The Department asserted that the level of technical challenge with the jets is normal when compared to other aircraft, and considerable progress has been made in many areas reported on. In response to the specific concerns we raised, the Department told us that although the test jets were overweight, they could land vertically on the carriers. The Department also dismissed concerns regarding the size of the computer memory of the jets. As the design phase of the jets comes to an end, currently planned for 2019, so does the UK’s Tier 1 status. At that point, the UK will become a 4.5% shareholder in the Lightning II programme, reflecting the number of jets ordered by the UK out of the total planned production.

Recommendation: The Department should set out how it plans to maintain its influence on the US Lightning II programme after 2019, for the purposes of ensuring that the jets purchased fully meet UK needs.

There is uncertainty over some support and operational costs, which are not fully included within current budgets. The Department stated that the cost of procuring both carriers, 48 jets and Crowsnest radar system are fully included within the defence budget. It gave a commitment that the carriers will be delivered within the approved cost of £6.212 billion, despite projected cost growth of between £62 million and £124 million (1% to 2%). For the jets, the most recent approval was for 30 at a cost of around £3 billion, equivalent to £100 million each, although the Department’s estimate of the whole life cost to 2048 of each jet was £270 million. The full cost of the remaining 90 jets is less certain because the Department is still to decide when it will buy them, and whether they will be used for Carrier Strike. There is  less certainty regarding the costs of supporting and operating Carrier Strike because the Department does not yet have experience of using the equipment, and the Department is undertaking modelling work to assess these costs under a number of different scenarios. This work is crucial given the need to integrate the routine use of the carriers with wider defence responsibilities at a time of constrained finances. We note also and completely agree with the Defence Committee’s recent call for greater transparency transparency around the total cost of the Lightning II jets.

Recommendation: The Department must develop its estimate of the costs of supporting and operating Carrier Strike and we will expect more detailed estimates when we undertake a follow-up inquiry.

The Department is exposed to significant cost pressures in the event of changes in foreign exchange rates. Buying the jets in US dollars means that they are sensitive to fluctuations in the exchange rate. The Department’s current estimate of the cost of the programme is based on a rate of $1.55 to £1, although in October 2017 the rate was $1.32 to £1. The Department has sought greater certainty on the cost of the programme by using a three-year programme of forward purchase currency contracts with the Bank of England.  The previous Committee recommended that the Department works with Treasury to resolve whether it was required to fill a funding gap created by differences in exchange rates, or if Treasury would provide relief. We heard that discussions with the Treasury were still ongoing and that, to date, the Department is managing costs pressures within its programme budget. 

Recommendation: The Department should urgently resolve ongoing discussions with the Treasury regarding current forward contracts. Given the Department’s tight financial position, the Department should establish with Treasury if relief can be provided, and write to the Committee with an update.

In line with the Government’s new Industrial Strategy, the Department must continue to improve its commercial capabilities so that it is well placed to secure additional support contracts and bring high tech and skilled jobs to the UK. UK industry is set to benefit from a 15% share of build of the jets, the largest share of any partner after the US. This is estimated to be worth some £13 billion to British companies. The UK economy will also benefit from securing international contracts let by the Joint Program Office to support the jets worldwide. The UK has already been successful, securing a contract to be a global repair hub providing maintenance, overhaul and upgrade services for F-35 avionic and aircraft components for European-based aircraft. Further opportunities are expected which could bring additional high tech and skilled jobs to the UK. The UK’s chances of winning future contracts will be strengthened by the successful completion of DE&S transformation. The outgoing Chief Executive told us that DE&S was improving its skills and capabilities, but he also recognised that it will take time to complete transformation. DE&S will need to build on recent improvements on the terms secured in contracts and encourage competition and innovation wherever possible, as well as fill gaps in key roles such as programme managers and other commercial staff.

Recommendation: The Committee will in future hold the Department and Defence Equipment and Support Organisation to account for its progress on improving skills and capabilities, including how they are making the most of DE&S’s bespoke trading agency status to recruit and retain the staff it needs. 

The full text of the Committee’s Conclusions and Recommendations is included in the Report attached to this email.