Michael Fallon – 2015 Speech on Reforming Defence

Below is the text of the speech made by Michael Fallon, the Secretary of State for Defence, at the Institute for Government in London on 28 January 2015.

This last year has seen huge upheaval across the world.

We’ve seen sponsored aggression by Russia in Crimea and Ukraine.

We’ve seen non-state actors like ISIL and Boko Haram attempting to usurp existing territory.

We’ve seen Islamist terrorists striking in Canada, Australia, Pakistan, Brussels and Paris.

These uncertain times underline why the defence of the realm is the first duty of government.

And that agile, well equipped, armed forces, properly funded, are not a luxury but a necessity.

But, defence is better placed to respond to the threats we face now because over the past four and half years we have delivered one of the biggest defence transformation programmes undertaken in the western world.

And because of our economic plan, as you can only have strong defence with a strong economy.

Today I want to look at what we’ve achieved so far in transformation, the lessons we’ve learned from it, and how we must keep greater efficiency as a continuous process.

Scale of the problem

First we need to go back to 2010 and the chaotic legacy we inherited. Not just the £38 billion black hole, not just contracts like the carrier where the penalty for going over budget was largely to be shouldered by the taxpayer.

But a culture beset by an inability to take tough, timely decisions and an institutional focus on short-term affordability at the expense of longer term planning, exacerbated by self-defeating competition between the three services for resources.

As Lord Levene’s original report indicated MOD was reaching breaking point.

Making savings

So we had to act decisively to sort out this mess.

We had to scrap much-loved capabilities such as the Harriers and HMS Ark Royal.

We cancelled out of control procurement programmes like Nimrod.

We’ve sorted out the rebasing of our troops.

And yes, we’ve made some tough choices about the size of the armed forces.

Although we did so in a way that has preserved our front line clout.

Maximising assets

Making short-term savings was tough.

But a tougher challenge was finding new ways to maximise our assets.

Until I became Defence Secretary last July I certainly didn’t fully appreciate the sheer scale of MOD.

We own 1% of the UK landmass, our budget is £34 billion, we have assets worth £120 billion, we have a quarter of a million strong workforce and more than 4,000 separate sites.

If the MOD were a listed company it would easily be placed towards the top of the FTSE 100.

But the diversity of our portfolio:

– having to provide armed forces able to conduct campaigns across the world

– managing scientific establishments, police and fire services

– providing specialist medical care and pensions

Puts the MOD in a league of one in the UK.

And we recognised that if the department was to provide the military capability our country needs it had to become both more effective and more efficient. That meant adopting a bold approach more commonly associated with the best of the private sector to get the most of our valuable assets.

Our more strategic Defence Board, including the Chief and Vice Chief of the Defence Staff, civilian officials as well as now 4 highly experienced non-executives from business, provided the necessary leadership, while Lord Levene’s blueprint was a guide as we drove through a clear strategy based on three imperatives that I want to share with you this morning

Making MOD an intelligent customer

First, it was about turning MOD into a more intelligent customer.

You get more out of people, of course, by giving them more responsibility, yet, in MOD, the centre held on too tightly to the reigns of financial power.

So we devolved budgets to frontline commands, meaning the service chiefs effectively became chief executives of multi-billion pound organisations. Three of them now based with their commands rather than at head office.

And with far greater control over spending and how they meet their outputs they now have a vested interest in knowing the cost and the value of everything.

We’ve seen just this week how the new Chief of the General Staff has the freedom to propose structural changes to the army command.

We created Joint Forces Command as the glue that binds the capabilities of the single services together.

That’s an organisation of 20,000 people and annual budget of over £4 billion run by a headquarters of around 300 people.

Similarly we’ve created a more strategic head office, with 25% fewer posts than we had in 2010

We’ve cut the red tape that can bog down any large organisation.

250,000 computer users used to have to print out and re-sign a form every year to use the IT system.

No longer.

We’re also giving staff better tools to do their job.

We’ve improved our management information.

It was staggering that such a large organisation could fail to produce such a single version of the truth…

Before every Board meeting now I have a comprehensive report on my desk…with an exhaustive overview of what’s going on including the readiness of each of our ships, aircraft and units.

Commissioning services

Making MOD a more intelligent customer was only half the battle.

Some areas of activity, such as the delivery of military force, are kept within the public sector for good reason.

But it is often more effective, more cost-effective, to draw on the private sector to support our core activities.

Our long deployment in Afghanistan…where, at their peak, contractors accounted for 40% of the UK force deployed …provides a prime example.

So instead of accepting the status quo we asked whether another organisation could do a better job?

We brought in a strategic partner to get to grips with the sprawling defence property estate.

This innovative contract will save a total of £3 billion over its ten year lifetime.

We’re already seeing wholesale changes to the way we occupy space. We’ve collapsed 3 buildings in London into one, savings millions in running costs and releasing the Old War Office for redevelopment.

And we’re not immune in Main Building from this since we now plan to share part of the 626 thousand square feet of MOD’s main building with other parts of government.

By concentrating resources around a significantly smaller estate we can deliver improvements as well as releasing land and buildings for housing and commercial use.

The strategic partner option wasn’t the only approach to commissioning services.

We’ve also looked at what each service can learn from each other. Why did the army still repair and overhaul much its fleet of vehicles, through the Defence Support Group, when the RAF and the Royal Navy had already outsourced this activity? There was no good reason for that, so this month we sold the Defence Support Group for £140 million.

A 10 year contract with the buyers will generate savings to the army of around £500 million.

Now if there was one area where private sector expertise was really needed it was, of course, in procurement.

We’ve been trying to get this right since the days of Samuel Pepys, the Chief Secretary of the Admiralty in the 1670s.

Procurement accounts for around 40% of our spend.

Yet Bernard Gray’s 2009 review of acquisition and Defence Equipment and Support (DE&S) highlighted a toxic cocktail of problems:

– equipment ordered without any idea of how to pay for it

– a lack of clear boundaries between the military customer and Defence Equipment and Support

– and programmes that on average overran by 80% with cost increases of 40%

So we turned DE&S into a bespoke central government trading entity.

It now has its own board with a chief executive…as well as significant flexibilities, agreed with the Treasury and Cabinet Office, to recruit, reward, and manage staff along more commercial lines.

The new organisation not only has a far more business-like relationship with its military customers but it’s a more effective counterpart to industry as well.

One area I am focused on is where we have to award contracts without competition either for national security reasons or because there is essentially only one supplier. We spent around £6 billion a year in this way.

That’s why we’ve now set up the Single Source Regulations Office as an independent regulator to implement the legal framework that came into force in December to ensure that our contracts do deliver value for money. And I will be setting out further thoughts on how to encourage companies to think of themselves as partners rather than suppliers in the coming weeks.

3. Getting more out of the whole force

Thirdly, how do we get more out of our whole force.

Reform relies on professional, adaptable and committed people.

In defence we don’t just depend on excellent military and civilian personnel but a whole force of Reserves, contractors and industry.

And we knew we could do more to integrate this wider defence community.

Our fleet of voyagers provides a good case study of excellent practice.

The most modern tanker and strategic personnel transport on the market:

– is owned by a private contractor

– it is tasked by the MOD

– it is operated by the RAF

– alongside civilian crews who can then become sponsored Reserves if required

– with a contract that’s overseen by MOD civilians and the RAF

A truly collaborative framework.

We’re also making better use of the whole force by aligning our interests.

By working with 3 main prime contractors we’re committed to delivering £900 million of savings over the next 10 years on our submarine programme.

On Apache helicopters, we have a 5 year support contract that will generate savings of £149 million.

Our three new naval basing contracts signed last October not only support, manage and maintain our bases and warships but will deliver savings totalling £350 million over the next 5 years.

And an innovative approach to complex weapons, land and maritime anti air missiles, and future anti-surface guided missiles, is putting us on track to yield financial benefits of £1.2 billion from the period between 2010 to 2019.

Results

So the results of that reform programme, I suggest to you, speak for themselves.

Four and a half years ago we were in a dire financial situation.

Today we have earned a strong reputation across Whitehall for competence.

We get rid of old property that we don’t need.

Whether it’s an old barracks, a country house, polo fields in Edinburgh, or Brompton Road tube station sold for £53 million.

That approach has generated nearly £380 million.

We’ve taken the same tack with equipment including selling, for example, 123 surplus armoured vehicles to the Latvian army, bringing in almost £40 million and strengthening friendship with a critical NATO ally.

Our reforms have put us on track to deliver the £4.3 billion of efficiencies agreed in the 2010 spending review…as well as a further £1.1 billion agreed in the 2013 spending review.

A recent NAO report showed we have reduced costs by almost £400 million in our major projects, our best performance on cost since 2005 and our best performance on time since 2001.

As a result, the Treasury has granted us the largest delegated budget of any Whitehall department.

According to Lord Levene in his 2014 report, and I quote > MOD is now a very different animal from that which I left some 20 years ago, especially in terms of showing that they can be trusted to manage the money. A leopard really can change its spots.

Equipment

But the truest measure of our success for me is what it means for the frontline.

Our 10-year £163 billion equipment plan is now allowing us to invest in every domain.

From the Queen Elizabeth carriers to the F35s that will fly off them

From the highly advanced Scout armoured vehicles, the biggest army order in a generation, to hunter killer submarines as sophisticated as the space shuttle.

Such investments augment the utility of our armed forces.

They create highly skilled jobs across our country.

Becoming permanently fit

So we have replaced chaos with competence. Where there was a deficit, there is now a balanced budget; where there were cost overruns, there are now cost savings; and where equipment programmes were late and over-budget, they are now overwhelmingly on time.

And there is more to come.

We’re looking to bring in commercial partners this year to run our military port Marchwood and are selling the government pipeline and storage system.

We plan to announce the preferred bidders by the end of March.

We’re also reforming our logistics and supplies organisation so that those who performed the Herculean task of drawing down equipment in Afghanistan won’t find themselves bogged down by aging infrastructure and IT.

There’s an in-house and two industry delivery partner proposals on the table.

And next month, I will announce the outcome.

That’s three more privatisations before the end of this Parliament.

But the job is far from over.

With continuing demands on our resources, with the cost of manpower and equipment rising, with competition from emerging nations increasing, efficiency in defence cannot be a one-off.

As in any big, mature, organisation MOD must not merely be match-fit. For any spending review it must be permanently fit.

Every year we should be looking to take out unnecessary cost, to improve productivity, to sweat our assets so that we can better support the frontline.

And not every contract or programme has or will be successful, so we must act decisively where there are failings or contracting models that aren’t working.

But we’re in a better place, we understand how to drive efficiency.

Whether that means maximising our property portfolio while supporting the target of 150,000 homes over the next Parliament.

Whether that means giving greater freedom to service chiefs to incentivise innovation and deliver the structures to achieve military results.

Whether that means benchmarking to ensure that our military productivity matches up to that of other countries.

Or whether ensuring we are focused on maximising our assets. The private sector pays interest on the capital it borrows to invest. That’s a pretty strong incentive not to hoard assets. Regardless of whether something similar is appropriate for the public sector, for a department with assets worth around £120 billion, managing the balance sheet should be as important as hitting the annual budget.

For example:

– do we need 57 separate sites within the M25?

– what’s the right number of airfields?

– what lessons can we learn from consolidating the number of submarine bases to one?

– how many cars and vehicles does the MOD and the armed forces really need?

– And does MOD really need to own 15 golf courses?

Conclusion

So as we work towards the next Strategic defence and security review we will do so neither as victims resigned to further budget cuts; nor as fanatics opposed to any reforms at all. But as a large, mature, properly run organisation that is up for the challenge.

Over the past four and a half years we have shaken up the system, we’ve made big savings, and we’ve delivered new capabilities.

All this while meeting NATO’s 2% and 20% targets.

So we’ve proved efficiency is nothing to fear.

Whatever the challenges we now face we do so from a position of strength with the confidence and the agility to respond.

Today defence is fighting fit with a balanced budget able to invest in the kit and people that we need to keep Britain safe.

Unlike the chaotic mess left by the last administration, that is a legacy for everyone in defence to be proud of.