UK defense plans could take major hit from coronavirus fallout

By: Andrew Chuter

LONDON — Britain is facing some “distasteful medicine “ in an upcoming defense review, with question marks around money, allies, the industrial base, Defence Secretary Ben Wallace has warned.

Giving evidence in a virtual session of the Parliamentary Defence Committee April 22, Wallace said there were some difficult issues to be addressed by a post COVID-19 Britain.

“We will have to take some pretty distasteful medicine," he told committee members spread across the country in the first ever virtual session of the committee. "It's not just about sums of money. It is about cultural change — our relationship with our allies, what Britain's ambitions are going to be. Do we want to do everything? Do we want to do less? Do we want to let go of something? Do we want to bank on international consortia every time, or do we want to invest in our industrial base? All those are difficult questions.

The defense secretary, who only recently recovered from COVID-19, said changing the culture is going to be as important as the sums of money made available to the Ministry of Defence in the integrated review.

The government refers to it as an ‘integrated review' as it involves, defense, security, foreign policy and international development departments.

Wallace said that whether the review is uncomfortable or not, his hope is the defense ministry will have a realistic amount of money available to undertake what it recommends.

That's rarely been the case in previous reviews over the last 30 years or so, and few people here are expecting much different this time round.

The issue is already complicated by the never-ending budget pressure at the MoD. According to the National Audit Office, the government's financial watchdog, the MoD already has a financial black hole for its equipment program of between £3 and £13 billion, or as much as $16 billion.

John Louth, an independent defense analyst in the U.K., said one of the big challenges facing the MoD will be putting the procurement roadmap back together post COVID-19.

“One of the real challenges will be re-profiling a schedule for procurement," Louth said. Everything is slipping to the right, and re-profiling is going to be difficult, particuarly as many of the programs are interdependent on other programs. That poses a large and difficult challenge within a restricted budget."

The economic impact of the COVID-19 pandemic is likely to make more difficult allocation of cash to its various departments and ministeries in the next comprehensive spending review.

That's not withstanding the fact that MoD personnel — nearly 3,000 at the last count — have been lauded for their excellent performance assisting the National Health Service and others, carrying out tasks ranging from delivering oxygen to hospitals to setting up and running command and control centers.

In particular the MoD has been widely praised for rapidly constructing several field hospitals for COVID-19 sufferers, including a 4,000 bed facility at the Excel Centre in London. The site is well known to defense contractors, as it's the venue for the DSEI exhibition.

The government announced last week it was pausing the integrated review to focus resources on the COVID-19 fight, without saying when the work would recommence.

Wallace answered that question — twice. First he said the review would recommence next year; later he said the correct date was the end of this year, but he was seeking clarity on the exact timing.

That decision will be taken by the Cabinet Office who are leading the review. They had previously ordered the review, which was initiated after Prime Minister Boris Johnson won the general election last December, be completed by July.

That was a date many analysts and politicians, including the defense committee, thought was risky.

“This [the delay] is welcome news. I want a longer period for the integrated review. I want us to examine our place in the world, especially post COVID. It's going to be a different world,” he said.

Wallace, an ex-British Army officer, said the number one threat is lack of resilience. "I suspect it will be higher up the agenda as a result of the virus,” he said.

The defense secretary said that unlike countries such as France, Britain wasn't bringing forward a number of programs to protect the industrial base.

“We are though speaking to industry to ensure their cash flow is continuing. There is a lot of work on the books that we would like to keep going,” he told the committee.

One industry executive who asked not to be named said, “cash is not an issue yet, but I'm prepared for that to happen. I'm bracing for extended credit being taken by our customers, but I haven't seen it yet.”

The virus has had an impact on a number of major defense programs in the U.K., as people have been ordered to work at home or, if that's not possible, adopt social distancing requirements in the workplace.

The impact that might have on defense suppliers ability to meet their contractual obligations, and subsequently their financial viability and and that of the supply chain, has been recognized by the government .

A series of actions relating to paying suppliers has been in place since late March, with MoD procurement authorities advised to support suppliers in a range of ways to maintain cash flow. This includes forward ordering, payment in advance, interim payments and payment on order rather than receipt.

The scheme has been well received by industry here.

The executive said he applauded the government for its swift action, but acknowledged the challenge remains for protecting employment and cash flow.

The executive did say though that more clarity was needed from the government over the availability of initiatives like the Corona Business Interruption Loan scheme for defense exporters.

Wallace named BAE's F-35 and nuclear submarine activities as programs where the balance between COVID restrictions to keep workers safe and keeping production and cash flow moving were vital.

“It's really important that we continue some work that's absolutely key. We also need to help these firms to get through the process, because cash flow is really important to their survival,” said Wallace.

But it's not easy keeping your distance from colleagues if you are trying to build something like a nuclear submarine. As such, Wallace said submarine building activities in the U.K. had some of the highest absentee rates in the sector.

BAE employs around 9,000 people at its nuclear submarine yard at Barrow in northwest England where it is building Astute-class attack submarines and working on the Dreadnought class of Trident nuclear missile boats.

About 4,000 of the staff are working from home with over 1,100 employees now working on site – up from 800-900 last week.

A BAE spokesperson said the employees were supporting critical work at the yard.

Last week the company reported that HMS Audacious, its latest attack submarine to be built for the Royal Navy, had left the yard and was heading to the submarine base on the Clyde in Scotland.

https://www.defensenews.com/global/europe/2020/04/23/uk-defense-plans-could-take-major-hit-from-coronavirus-fallout/