“We know the Cost of Everything but the Value of Nothing"Oscar Wilde
I begin this article with a health warning. This article is not a lively doctrine discussion, nor a new military history interpretation or weapon lethality debate. It is about the rather dry subject of accounting and finance rules that the Army and all of the Front Line Commands must adhere to.
As all Military Chiefs learn as they reach the higher echelons of their own Service, money matters and money talks. Gaining and maintaining sufficient funding for their military capability intentions is essential. Yet for over 20 years, the financial accounting process that has been forced upon the Ministry of Defence has complicated procurement, derailed major capital programmes and substantially degraded capability. This is especially so for the Army, as I will explain. Few politicians, and for that matter senior military leaders, understand why this is happening. It is time it was exposed and dealt with. It would be better for everyone.
The Great Idea
For the past 20 years, the UK Government has controlled and managed National Spending using ‘Resource Account Budgeting’ (RAB). The purpose of RAB is to improve the efficiency of government spending, reduce waste and to better account for taxpayer’s funding. For many government departments, this makes sense. In practical terms, this means that as well as managing their annual cash account spending (real money), all government departments must account for the resources they accrue annually (i.e., that they actually use/consume in the year, as opposed to when they paid for a resource). In addition, government departments must value their assets and depreciate them accordingly and must pay a cost of ownership fee for all assets owned, encouraging them to sell unwanted assets in the name of efficiencies. Finally, the funding that the Treasury allocates to departments is split into two ‘types of money’ known as Resource Departmental Expenditure Limits (RDEL) and Capital Departmental Expenditure Limits (CDEL). As a rule, RDEL is mostly spent on running costs, such as administration and salaries and in theory this funding must only come from taxation. CDEL can only be spent on capital purchases, which is seen as a national investment and can be justifiably sourced from national borrowing.
These rules allow the government to understand what departments’ actual annual resource expenditure is, prevent departments spending borrowed money on running costs (i.e., stops the country living beyond its means), helps to forecast future spend, and lastly it encourages efficiencies and the reduction of stock and assets that are not required. All of this would appear a sound and effective way for a government to run the various departments of state. However, there is one department, namely the Ministry of Defence, that RAB penalises in ways that actively degrades effectiveness, efficiency, purpose and capability. It has the opposite effect of the efficiencies that it is trying to achieve.
How is Defence Value ‘Measured’ in Terms of Performance (hint: it can’t be…..)
The problem for Defence is that it is impossible to measure the value of what the spend delivers for the nation (quite literally the ‘bang for buck’), because Defence neither runs a profit and loss account, nor can it accurately say what it has achieved in total.
For example, what is the value of a collective training exercise, or having a large, un-mobilised Army Reserve, or large stocks of artillery ammunition, or what influence does a nuclear deterrent buy in international relations? Conversely, using the NHS as an example, it can be measured in number of successful patient outcomes and number of patients treated. HM Treasury can be measured against the amount of tax raised per head. The Home Office for the number of passports delivered or the number of illegal immigrants seized, processed or deported. Although Defence has a number of standing tasks, such as the Continuous at Sea Deterrent (CASD), the protection of Overseas Territories, the commitment to NATO deployments and Ceremonial Duties, for the greater part, much of UK Defence is an insurance policy for the nation. This is demonstrated by having military capability at various states of ‘readiness’ or projecting a global presence, which together produce deterrence. At best, all that can be measured is the training and sustaining cost.
The problem is that this overall readiness is impossible to value its true benefit, it is expensive to maintain and highly subjective. Ready for what exactly? Ready for the known or anticipated threat or ready for a worse threat? Ready with how much extra training and preparation required? How does anyone know when military deterrence has worked? This question is about strategic risk management. There are choices to be made and the less prepared an armed force is, the more it is at risk from being unfit or unready. However, it costs less to produce. The rules of RAB actively encourage the degradation of readiness, so more risk is taken, but not necessarily mitigated. In the longer term, this can cost more than if the MoD could budget and financially account for its capability in a more traditional way.
Lowering Readiness and the Army’s Special Problem with RAB
It is all too easy, in times of relative or perceived peace, to lower readiness levels, such as reducing stocks of ammunition and supplies, selling off unused land and buildings, reduce training levels, deliberately gap personnel in units and delay procurement of new capital equipment. Amongst the Armed Services, the Army has the highest number of personnel and equipment types that are both ‘held in reserve’ and need resourcing and training to deliver readiness. So, the Army suffers disproportionately under the rules of RAB compared to the other Services. It is all too easy to reduce land forces’ training, reduce supply stocks (‘lean management’) and hollow out capability, yet still falsely maintain that there is a credible fighting force ready to deploy, (something demonstrated at the start of the Russia/Ukraine conflict in February 2022). Conversely, for the Royal Navy and Royal Air Force, although they suffer from similar RAB constraints, it is harder to make savings to capabilities such as submarines, ships and aircraft, (i.e., when a ship goes to sea or an aircraft takes off, they are ‘operational’ and need to be air worthy, sea worthy and ready for use. Pilots need a minimum set number of hours to stay ‘current’. Conversely, a tank, artillery system or infantry soldier can either be left in a hanger, or left untrained, and then only brought back to readiness when urgently needed).
RAB’s Role in Gradual Capability Degradation: 2000 – 2022
People often point to Defence cuts, the rising cost of Defence or even poor decision making as reasons as to why the Army has been so hollowed out in recent times. However, although these factors have contributed to some of the decline, (and some of the poor decision making has been caused by the constraints of RAB), it is twenty years of relentless pressure from the RAB approach on the Army that has resulted in the Army’s key military formations, such as armoured divisions and their equipment, being ‘priced out of the budget’, because so much of their running costs (to maintain readiness) must come from RDEL and they are encouraged to stockpile less materiel. Even the newer and high tech equipment procured for campaigns in Iraq and Afghanistan (urgent operational requirements) was mostly discarded after operations were concluded because there was no support costs available to keep them in service. In effect, capital investments (the very thing you want to preserve and use as capability and bought with CDEL) were wiped out by the lack of RDEL.
Another example of where RAB accounting approach would be the cost of ‘track miles’, where armoured vehicles have a cost per mile, which is worked out on the fuel, wear, tear and repair required averagely per mile. The problem is that much of the cost of running an armoured vehicle is irrelevant whether it is driven or not (i.e., there are spares in the system that often go unused, repair contracts from suppliers cost the Army money whether they are used or not). The RAB process ensures that the Army is forced to do the minimum amount of track miles, which reduces training opportunity, which in turn reduces genuine readiness. It could actually drive up costs, with consequences such as a rise in the frequency of vehicle accidents (because troops do not get to train enough), or soldiers that leave the Army because they are unhappy with the limited training they receive (so the Army must recruit and train more), or vehicles that deteriorate because they are left out in the open elements without use or servicing. RAB does not consider the sunk cost of Defence, whether it is used or trained for or not.
Another example would be training ammunition expenditure. The ammunition is paid for in real money up front as part of a contract with the supplier, irrespective of when or if it is fired. It may only be expended five years later, or worse still, perhaps never. In the latter case, there is then a real money charge placed on Defence for getting rid of the ammunition, when instead, if they had not been prevented from firing the ammunition because of RAB at the time, they could have avoided the real cost and gained training experience. The same is true for other consumable items. Some readers will be aware of stories of thousands of out of date ration packs, which have not been used because training has been reduced (to save money), then have an additional disposal cost when they become unfit for human consumption.
Another example would be the consequences of RAB’s encouragement to sell off MoD land and buildings just because they are not being used currently (thus reducing the capital cost of ‘ownership’). This leaves less flexibility for contingency and unexpected MoD tasks, where real estate may be needed. Fundamentally, the Army and the MoD are there for contingency tasks yet are expected to behave as though world events are predictable.
The introduction of RAB has also meant that there are now new layers of budget holders and managers, who are given quarterly budgets to fund their department’s activities. The divisions of financial responsibility create bad practices where departments work in stovepipes, protecting ‘what is theirs’ and not looking to the bigger picture of Defence capability. ‘Department Underspend’ is another ridiculous money wasting concept not helped by RAB, where departments suddenly find that close to the end of the financial year, they have huge amounts of funding, which they either cannot consume/do/use (due to shortness of time). Alternatively, departments must use the excess on only things that can be procured rapidly. This is an inefficient way to fund the Army and Defence, and this piecemeal manner encourages further bad practices and habits, (i.e., relying on an unpromised underspend, or procuring equipment in batches that are below that of the genuine intended capability).
The Problem with RDEL and Procurement
RAB worsens for the Army’s capital expenditure programme (e.g., the procurement of weapons, armoured vehicles and C4ISTAR). On the one hand, the Army has followed Cabinet Office and Treasury guidance to ensure the smart procurement process is adhered to, which directs the Army to invest heavily in the concept, assessment and development stages. During these stages, most of the funding is designated as RDEL as it is not delivering physical capability for the Army, rather it is investigating, developing, competing and trialling prototypes and ideas. This is vital to the success of any major capital equipment’s approvals process, yet there is never enough RDEL provided to deliver the early stages of any major project or programme. Furthermore, early years money of RDEL is constantly changing and shifting, depending on what funding is overall available to the Army (and Defence). This results in programmes, projects and industrial partners being messed around, unable to plan or forecast what funding will be available for this early part of procurement. The result is that procurement of physical capabilities either cost more than are planned, are delayed, or sometimes cancelled and often delivered at a reduced capability. Staff officers in procurement learn, in effect, to play a game where they are given the task of trying to deliver capability with ever changing and restricted access to the vital concept and assessment funds they need to deliver their programmes. There has to be a better way for the Army and Defence to manage their funding and budgets, whilst also accounting for their budgets responsibly.
A Government definition of what constitutes RDEL is “Money that is spent on day-to-day resources and administration costs.” However, the concept, assessment and demonstration phases of the procurement cycle, where normally the Army is not purchasing the capital product (e.g., a new tank) but is investigating and trialling options to mitigate risks and develop the best product) is mostly viewed as RDEL. The point is that although many of these costs look like administration (because they are paying the salaries of the staff involved in procurement and things like trails and prototypes) they are in fact part of the capital investment and should be regarded as mostly CDEL. This can be justified in the sense that this initial activity in the procurement process is an investment that aims to deliver the best capability at the best price (i.e., best value for the Treasury). Yet it is not, and project after programme is put at risk because RDEL is much harder to secure than CDEL and is much more likely to be withdrawn at short notice. The RDEL changes and limitations in early year’s funding also increase the final cost for any procurement programme because the industry supplier will have had to absorb additional costs, such as keeping on specialised workers and staff whilst the delays, caused by RDEL changes. This is no way to run a military in either peacetime or war. It should be seen for what it really is, which is a short-term way for the Treasury to limit early years funding and a longer term way of delaying capital programmes. This comes at little cost to the reputation of the Treasury and in the short term, there is financial benefit to be gained. The point here being that it is not the Treasury that is subsequently blamed for Army procurement disasters. That blame is placed on the MoD and on the Army.
A Better Way to Fund the Army and all the Armed Forces, and Account for Investment
By adhering to the Government’s RAB system, the Army is costing the taxpayer more money than it should and at the same time it is being forced to deliver a lower level of capability and readiness. However, few in the Military understand this conundrum, or if they do, feel that there is no way of changing the system. A new way for the Army and all of Defence to account for its expenditure is urgently required. This approach would require the Treasury to view the Armed Services differently from other Government Departments. It would involve the Army and Defence dropping the use of RAB and returning to the more traditional way of accounting for their spending, where they pay for goods, supplies, ammunition, employment, stocks and procurement when they are bought, not when consumed. Concept and analysis work on capital programmes should be considered part of the capital investment and not a ‘business as usual’ running cost. The MoD also need to stop treating their assets, such as buildings and land as ‘costs’ and treat them as assets that will be needed one day in the future in an ever more unpredictable world. They also need to start using a single DEL and drop RDEL and CDEL. This would have the benefits of:
- Discouraging the MoD from selling off or getting rid of capital assets just because they do not currently form a role or service for Defence. This would include unused land, facilities and buildings. Defence, by dint of its nature (unpredictable) needs surplus, it needs flexibility, it needs reserves for when the Government might call upon them.
- Making Army and Defence procurement more efficient and delivering more capable systems in shorter time frames and with more flexibility. This would include allowing a much improved concept, assessment and development stage of any programme.
- Allow the Army and the other services to build up stocks such as rations, ammunition, clothing, defence stores, vehicles and weapon systems, without worrying about the charge paid for capital assets.
- Reduce the amount of time, resource and personnel involved in military financial management and budgeting and in procurement.
- Allow the Army to train more effectively and efficiently and deliver improved readiness levels, (this would also improve personnel retention and in the long term provide improved resilience).
- Prevent wastage by allowing formations and units to use resources that have been procured over time and are available (and likely to have a given shelf life) and also reduce the cost of disposal.
- In the longer term, deliver far greater value for money for the Treasury, taxpayer and the UK.
- Strengthen the Defence and Security of the UK.
Summary – “There’s Nothing as Expensive as Cheap Insurance.”
There is little doubt that RAB is an effective way for the Government to manage and account for much of the Nation’s public spending. However, as explained in this paper, it does not work for Defence and in particular, it degrades Army capability the most. The UK’s MoD and all its Services and departments, for the most part, are a national insurance policy that needs to be ready to adapt to whatever threat is placed upon it. RAB accounting actively discourages stockpiling, flexibility and agility, encourages less training, encourages bad behaviours for Defence procurement and ties up too much time and resource in the management of MoD finance.
A move away from RAB will not solve all the Army’s funding requirements and there will still be difficult decisions and choices to make and funding gaps. Defence must continue to be accountable to the Treasury and to the country, but the policy of RAB is slowly and surely hollowing out and weakening the UK’s Armed Forces unnecessarily. The MoD has enough to contend with, without an unsuitable accounting system that calculates the cost of everything, but the value of nothing.(first published on the Wavell Room, March 1, 2023)