Saturday, 23 April 2011

Public Accounts Committee - Thirtieth Report Management of the Typhoon Project

Summary


Typhoon is a multi-role aircraft capable of both air defence and ground attack. The Ministry of Defence (the Department) entered into a contract for the first 53 aircraft in 1998, and is buying Typhoon in collaboration with Germany, Italy and Spain. The total cost to the United Kingdom of buying the aircraft and supporting them in service over the next 20 years is estimated to be £37 billion.

Typhoon is a highly capable air defence fighter and is now being used to defend United Kingdom and Falkland Islands airspace, as well as being part of recent efforts to impose a no fly zone in Libya. However, Typhoon was commissioned during the Cold War and it took 20 years, and a higher budget, from the start of development to the aircraft being deployed operationally.

The Department originally planned to buy 232 aircraft. However, in light of changed operational requirements and significant funding constraints arising from the pressures of the defence budget, it is now ordering 160 aircraft and will retire the 53 oldest aircraft by 2019, leaving a long-term fleet of 107 aircraft. It is unclear as to whether the acquisition of the third phase in this contract, for the last 16 aircraft, was driven by contractual obligations or by operational need.

The project began in the 1980s and the Department was over-optimistic on costs. In particular, it failed to anticipate significant cost increases and delays from the rigid and complex collaborative arrangements. Overall, it is costing the Department £20.2 billion, £3.5 billion more than it first expected, to buy a third fewer aircraft. This is equivalent to the purchase cost of each aircraft rising by 75%, from £72 million to £126 million.

In 2004, the Department decided to retire the ground attack Jaguar aircraft early and to spend £119 million to install ground attack upgrades on early Typhoons to cover the resulting capability gap. These upgrades were ready for use by 2008. A year later, the Department decided to retire the air defence Tornado F3 aircraft early to save money and therefore re-prioritised Typhoon away from ground attack missions to air defence tasks. It is now not using Typhoon's ground attack capability.

Problems with the availability of spares mean that Typhoons are not flying the hours required and the Department is forced to cannibalise parts from other aircraft to maximise the number of aircraft available on a given day. As a result, it is not fully training all its pilots, and only eight of the 48 Typhoon pilots were capable of undertaking ground attack missions on Typhoon. In addition, the Department had to ground five pilots temporarily in 2010. The problem is likely to be exacerbated as the number of Typhoons in-service increases and they are used in a wider range of operational roles.

Support costs are budgeted at £13.1 billion, but reviews by the Department have suggested costs could be as high as £16.6 billion across the life of the aircraft. The Department has identified potential savings of £3.5 billion to keep support costs within budget, albeit that this budget was meant to cover 232 aircraft not the 160 now being bought. We are concerned that the Department has budgeted for cuts to meet overall expenditure targets and that, over time, the costs will creep up again. To ensure good value from this expenditure, the Department will need to both reduce the cost and increase the timeliness of future collaborative spares and repairs contracts. At present, the contracts do little to incentivise better industry performance and to penalise failure.

The Department has appointed a Senior Responsible Owner (SRO) to be the person accountable for delivering each major procurement project. However the SRO on Typhoon has limited decision making powers and merely co-ordinates activity. That is not good enough.

On the basis of a report by the Comptroller and Auditor General, we took evidence from witnesses from the Ministry of Defence on the past decisions taken on Typhoon, and on the improvements that the Department can make to the delivery model to get more from industry in terms of reduced costs and better performance in the future.

Conclusions and recommendations

1. Despite buying 30% fewer Typhoons than originally planned, the cost of production and development has risen to £20.2 billion, £3.5 billion more than the Department first expected. This reflects the accumulated effect of over optimism on costs. We have commented on this issue in previous reports. Typhoon will be in-service for another twenty years and, given the Department's assurance that it has learned the lessons, our recommendations in this report focus on how the Department can secure best value on the project going forward. Good decisions are based on good information. If the Department is to make more realistic and achievable investment decisions in future, it needs to have a comprehensive understanding of the balance between costs, number of aircraft kept in service and the operational capability which the aircraft provide.

2. The Department's calculation of unit cost per aircraft does not include all relevant costs. The Department calculates a unit cost of £73 million, based on production costs alone. However, the inclusion of development costs and the cost of capital take the total unit cost to £126 million. In order to provide a full picture of costs and enable comparison across projects, the Department should calculate and report its unit cost on a basis that includes all expenditure, including development and production costs.

3. The Department was not able to demonstrate that it had conducted a thorough cost- benefit analysis to support its original decision to equip Typhoon with ground attack capability, or its subsequent decision not to use it. The Department spent £119 million giving Typhoon a ground attack capability to replace the capability previously provided by the Jaguar aircraft. However, in 2009 the Department decided to retire the air defence Tornado F3 aircraft early to save costs and re-prioritised Typhoon in air defence roles. This has meant that Typhoon's ground attack capability is not being used. This is an all too familiar pattern of decision making, reflecting the overall failure to control defence spending; balancing the books in the short term without taking into account long term value for money. The Department should treat decisions about major changes to the operational use of key equipment most seriously and conduct thorough cost-benefit analyses to ensure value for money is achieved.

4. In settling on the number of aircraft to be ordered, the Department had to make difficult judgements on the balance between affordability and operational risk. The net result will be the number of aircraft being bought falling from the planned 232 to 160 and 53 of these aircraft being taken out of use by 2019; leaving a fleet size of 107. It is also unclear whether the third phase of acquisitions was determined by contractual commitments as opposed to operational imperatives. In future we expect the Department to offer us a clearer explanation as to why it has reached such judgements on individual capabilities and for these judgements to be underpinned by robust cost and operational analyses.

5. Major defence procurement contracts are often lengthy and therefore carry an inherent risk that elements become obsolete before projects are completed and operational. The risk of obsolescence was exacerbated in the case of Typhoon, which was not operational until two decades after the project started. The Department needs to find ways to actively manage this risk to achieve best value for money. It should consider, for example, how to oblige contractors to manage the risk of obsolescence throughout the life of a project, which might include in-built flexibility for aircraft and other equipment to accommodate upgrades.

6. The Department relies on a small group of key industrial suppliers who have the technical and design capability to build, upgrade and support Typhoon. In the absence of competition, the Department needs to demonstrate it is achieving value for money from its single source supply contracts but did not supply specific evidence that it is doing so. We expect the Department to generate robust cost and performance data, potentially drawing on its independent United Kingdom support contracts with BAE Systems and Rolls Royce, to assess the value for money of future contracts.

7. Problems with the availability of spare parts have meant that Typhoons are not flying as many hours as the Department requires. As a result, the RAF only had eight of its 48 Typhoon pilots capable of undertaking ground attack missions. This has also led to five pilots being grounded and the Department regularly taking parts from some aircraft to ensure it has a sufficient number to meet immediate operational needs.

a) The Department must negotiate future contracts so that industry delivers spare parts on time; and

b) A limited amount of 'cannibalisation', for example, from aircraft undergoing maintenance, may be better than incurring the additional cost of purchasing and storing large amounts of spares, but we question whether it can be cost effective to have three planes with a total value of £ 378 million sitting on the ground. The Department should undertake more robust analysis to determine the most cost effective balance between cannibalising aircraft, buying more spares and accepting increased operational risks.

8. The Senior Responsible Owner (SRO) on Typhoon is not involved in key decisions, for example, those related to exports of the aircraft. Good practice suggests there should be one person with full responsibility leading the delivery of key capabilities such as Typhoon. The SRO role as applied by the Department on capabilities like Typhoon does not have appropriate responsibilities and cannot therefore be held to proper account. The Department should consider, as part of the work of the Defence Reform Unit, how to give SRO's the authority they need to manage the delivery of the equipment for which they are accountable.

9. The form of collaboration underpinning the Typhoon project has added cost growth and delay to the project. Decision making within the collaboration is a lengthy process and it can take several years for key upgrades to be agreed and delivered. The arrangements were agreed in the 1980s and driven by political considerations rather than by commercial or military imperatives. Done well, collaboration offers significant potential benefits from sharing costs and developing common capabilities with allies. To enable it to make the most of on-going and potential new collaborative opportunities, the Department should evaluate its portfolio of collaborative projects to establish what has worked well, or failed, and why this has happened.