Recent publicity around the Qatari purchase of a second batch of 24 Typhoon jets, plus 9 Hawk trainers and associated support packages, for £6 billion reminds us once again, if indeed we need reminding, of the fearsome costs involved in buying sophisticated military equipment.
Closer to home, the £7.6 billion expended on the UK aircraft carriers HM S Queen Elizabeth and HMS Prince of Wales has made a significant dent in the UK defence budget with more of the same in the offing with the Dreadnought class SSBNs on the way. Whichever way you look at it, defence doesn’t come cheap.
This article was submitted by Stuart Crawford, a regular officer in the Royal Tank Regiment for twenty years, retiring in the rank of Lieutenant Colonel in 1999. Crawford, a former SNP defence spokesman, now works as a political, media, and defence and security consultant in Edinburgh and is a regular commentator and contributor on military and defence topics in online and other media, including the UK Defence Journal and Thinkscotland.org.
I am no expert in the financial aspects of defence equipment procurement, but I remember the far off days when I was a staff officer tasked with massaging procurement programmes to ensure defence budgets could be met. Usually this seemed to involve extending the periods over which equipment was delivered to lower annual expenditure even although this ultimately meant that the overall cost was higher.
Possibly instead of purchasing defence equipment, therefore, we should consider more carefully the alternative of leasing? A lease is, according, to International Accounting Standard, “an agreement whereby the lessor conveys to the lessee, in return for a payment or series of payments, the right to use an asset for an agreed period of time”. It is a solution potentially relevant for any kind of fixed asset, but not obviously for consumables like ammunition or fuel, for example.
It can, perhaps, be described as a “pay-per-use” service mode whereby the cost of designing, building and procuring a given capability, and the associated risks, are shifted to the private sector in return for a payment for the use of the capability. Risk is transferred at the price of loss of ownership while control and access are determined by contractual terms.
Leasing has been applied in the defence sector in various forms, perhaps most notably for gaining access to strategic transportation – sealift and airlift. Examples include the ARK and SALIS arrangements which deal with each of these respectively. In the case of ARK, the German Ministry of Defence and the Ministry of Defence of Denmark cooperates as Partners of the ARK Project based on a MoU. The project charters sealift capacity from commercial companies and is able to re-charter (sub-lease) the share that exceeds its needs to other parties or the commercial market at conditions that continuously ensures the necessary readiness.
SALIS is a multinational agreement signed between NATO and two companies aimed at filling the existing capability gaps for strategic air lift for outsized cargo. The contract is a pay-per-use one whereby participating nations acquire flying hours on an annual basis for their national use, with a minimum number of hours guaranteed to the contractor. Additional hours can be purchased on an as required basis on fixed conditions but not assured access. SALIS was planned as a temporary solution put in place while A400M aircraft was deployed and was put in place because alternatives (including leasing from the US) could not provide assured access.
Other examples include Germany leasing Israeli Heron 1 drones from March 2010 in Afghanistan, the Czech Republic’s $750 million deal in 2004 for 14 SAAB/BAE Gripen fighter planes leased for 10 years initially, and of course the UK MoD’s seven year “lease and support” contract with Boeing and the USAF for four C-17 Globemaster strategic transport planes in 2000. In this latter case, rather than taking an option to extend the C-17 lease by two years the MoD bought the initial four aircraft in 2006 and subsequently purchased four more.
So what are the main advantages and disadvantages of leasing military equipment? The main rationale for using leasing arrangements is to avoid heavy upfront expenditure. Capability can be provided at relatively short notice, especially in the case of something like chartering of sea or airlift. It can also be used to fill temporary capability gaps and offers “operational convenience” in that the purchase procedures are fulfilled by the lessor. On the down side, it usually means that life-cycle cost of the capability can be higher than if purchased/developed from the outset with public funds. Furthermore, the MoD may not have a full control over the leased assets and there is always the risk of being locked in a long-term commitment with limited possibilities of adapting. Much of this depends, of course, on the wording of the contract.
These are but a few of the benefits and penalties which might arise via leasing but space does not permit further discussion in this article. Nonetheless, it seems that leasing rather than purchasing is an option worth pursuing. And, whilst there are a plethora of arrangements and contracts that might be applicable, perhaps a quick look at a basic, first principles (not to say simplistic) example based on car purchase might illustrate the idea. As any fule kno, the three most popular ways of buying a car these days are the personal contract plan (PCP), personal contract hire (PCH), and hire purchase (HP). The basic difference is that under PCP you have the option to either buy the vehicle at the end of the contract or enter a new arrangement (or walk away), under HP you end up owning the vehicle, and with PCH you only rent the vehicle and never own it.
So, let’s put all of this together and look at a very simplistic model for UK AFV procurement. Challenger 2 (CR2) is our ageing MBT and we have 408 of them – 227 currently in service, 59 used for training and the remainder in storage. Depending on which source you choose to believe it looks like the various iterations of the CR2 Life Extension Programme (LEP) might only be available to 150 of them because of budget constraints. To be honest, the upgrade programme now has all the signs of a classic British compromise – too little, too late, and too expensive for what is essentially a short-term solution.
Most serious British tank men, if given the choice, would plump for the German Leopard 2A7 as the replacement for/instead of CR2 LEP. Yes, there are questions about direct protection levels but in terms of firepower (especially commonality of NATO tank ammunition), mobility, availability and economies of scale it’s clearly the best option for the UK. And yes, I know we rejected it in favour of CR2 30-odd years ago but we should learn from past mistakes.
It is difficult to get an agreed cost for one Leo 2A7 as there are so many variables, but just for argument’s sake let’s assume a unit price of £5 million and that we would want 400 of them (wishful thinking). A total expenditure of £2 billion over, say, a four year introduction into service would have a significant impact on the UK annual defence budget of £500 million per annum. Leasing them instead might present a more acceptable financial profile. If we add 10% to the upfront cost for interest and depreciation and then divide the total by a typical MBT lifecycle of 20 years (not including upgrades), then we get a bill of £110 million per annum which might be much more manageable.
Now I am the first to admit that this example is simplistic in the extreme and does not include support and training packages, spares, improvements and upgrades and the like. But I think it illustrates the idea sufficiently for further exploration and debate. For those who wish to delve deeper there are a number of articles available online written by real experts who, unlike me, really know what they’re talking about.
There are clearly some procurement projects which don’t lend themselves to the leasing idea, for example the carrier programme or indeed the new SSBN project. For many others, though, it just might be appropriate. Perhaps we should consider it more thoroughly and not just continue to follow traditional defence equipment procurement in the UK?
At the end of the day, its all down to the quality of the civil servant in getting the best deal for the country
Farouk, Unfortunately UK MOD Procurement do not seem to be able to recruit the level of expertise in Procurement to be able to achieve the best value deals required of them. In addition MOD Contract Managment skills are negligible so even if by some chance Procurement have done a really good job the lack of contract management will often lead to ‘scope creep’, lead-time extensions because decisions required in defined timescales take much longer by the MOD,Also iincreased costs due to scope creep and variations to scope that are nice to haves but not essential to performance (sometimes called gold plating the specification). The result is that Contractors who are much more commercially astute than the MOD people run circles around them all the time and you end up with over priced over specified equipment delivered years after it was required and that no longers meets the 3 Fs – Fit Form and Function. The article above does a good job of examining the options, however I regard leasing as a commercial minefield you only have took at the HMS Clyde lease from BAE to realise that despite the MOD / RN assertions in writing to me that HMS Clyde was too worn out to justify them paying BAE a fairly nominal sum at the end of lease and reurbish then redeploy in UK waters as part of Fisheries Protection squadron etc. it was reurbished and then sold by BAE to Bahrain. HMS Clyde is now the RBNS Al Zubara!
You are talking about a Civil servant earning if he or she is lucky £30k per year, taking on a company like BAEs lawers that are there to find a hole.UKGovs procurement follows a strict paperwork procedure, hit this paperwork exercise and the process is compliant. regardless if the end product is a paper plane. UK MOD suppliers have exploited this many times, price low and compliant but caveat every option and request a variation order on any issue. BAEs used this process on the Nimrod programme and when the money was stopped threw the entire UK Harrier force into the pot and removed all extended flight hours from the UKs airframes. UKGOVs turned round and cancelled and scrapped the nimrod fleet, to prevent future BAEs costs on the airframes. Typhoon built by separate partners, BAEs are no longer considered for the main MOD contract unless they are a partner, BAEs supaglue boltheads, failed engine systems. and other issues. Boeing you can still order wing spars for B17s and know what a bread n butter is to its industry.
Precisely MOD will not and cannot pay for people with real world experience in Procurement. It becomes an paperwork and spreadsheet shuffling exercise in futility as is all UK Government and public sector procurement IMO. A friend of mine was on the team that wrote the regulations to comply with EU directives. Later he admitted to e that although they were an accurate reflection they were no fit for purpose!
Or even the UK leasing The Hermes 450 from Israel for use in Afghanistan
I look at it in simplistic terms like a personal lease car. Ideal for short/mid-term need, with known end date and fixed/understood requirement (ie, no upgrades required or change of scope.) As soon as either of those 2 rules are broken then buy is more efficient.
forgot to add that this would only make it suitable for a small minority and exceptional cases for UK MOD.
One possible advantage of leasing is the opportunity to acquire improved equipment? If the leasing companies can allow fair amortisation of costs the chance might be there to up-spec, where conventional purchase prohibits on pure unit cost / volume ratio.
Leasing Typhoon could be one way to continue production with the manufacture supplying a steady flow of new planes and either selling or reducing for spares older airframes? The title page C17 is one type of aircraft that would make eminent sense to lease, thus expanding the fleet, say, to ten?
A huge percentage of automobiles are now leased and if it works in such a competitive market, then I see no reason why it can’t be rolled out across the MOD. I believe the UK’s Oshkosh tank transporter fleet is based on a lease basis?
I can see the argument for leasing transports, search and rescue etc. I’m not sure any company is going to lease kit that’s potentially coming back in pieces if at all.
In essence, the decision to lease or buy should not affect the utility or even the cost of any item . There are many ways of structuring both. I should imagine that in the case of a front line asset such as a Typhoon there would be an onerous clause in the event of despatch to combat-I would not think that scenario would allow the item to be insured(!) but if outright purchased by the MoD then they would bear the full risk of losses in any event.
Obviously, there would be rigorous insurance measures to cover total loss but that’s nothing new in leasing. Typhoon would be a good case study and integrated into future fighter manufacturing in the UK, could prove to be a worthy candidate? Even if ‘Tempest’ becomes a truly living project it will be many years before Typhoon is struck off, thus leasing new airframes may just hold out a hand of hope to Warton and other UK sites in the meantime?
Expect having to pay for the ‘broken’ stuff would be pricey too. These companies aren’t leasing stuff out the goodness of their hearts.
Also using the car example as per above, there can be limitations on mileage etc too, if for example the leasing company restricts the hours of use then that’s an other factor that would have to be considered.
For me, leasing is more of a necessary evil than the ideal way to do it.
I can’t find the article, but I remember that the NAO was scathing on the lease deal for 4 C-17. Leasing them, then buying them, cost £450-465 million more than buying them outright. That is 2+ free C-17, the RAF could have had extra for the same money.
A writer in the Times, a week or so ago, pointed out that buying a new civil PWR nuclear power plant costs £5 billion per reactor. Yet the UK Gov arms length way of getting the private sector to do it for them, doubles the cost. All those fat City fees & padded contracts.
When base rate is 0.1%, it is far cheaper to buy major, long lasting kit/infrastructure outright, than pay through the nose for private financing.
Post Brexit, I think the UK should join this new tank venture Italy, Poland & others are forming.
Having seen first hand the problems that lease hire have had in the UK military, I would have to state that for the Armed Forces in general it is a very bad idea. On the face of it, it seem like a quick, easy and cheap option for new and up to date equipment.
However, using the C17 as an example. Up to the year 2000 we we hiring Antanov An124s through Heavylift etc. These were used to transport all kinds of heavy equipment from JCBs to Chinooks. It was costing a fortune, so the MoD looked for a organic heavy lift solution. We had decided to be a joint partner in the A400M project. This aircraft had the ability of taking oversized loads. However, it was delayed, so the MoD needed and interim solution.
The MoD decided to lease 3 C17s then an additional 1 in 2000 on a 7 year lease and support agreement with Boeing and the USAF, for the period of 2001 to 2007, with an option for an additional extension to 9 years. During this period the UK was now operating in Iraq and Afghanistan. The aircraft could do the trip in one hop and carry a heavy load. Due to the weight it could carry, it was in continuous demand, almost 24/7. It was soon racking up the flying hours significantly faster than forecasted. In fact in the first 2 1/2 years it had surpassed the number of hours that it was supposed to do in 7. This incurred a massive financial penalty on the MoD. What was worse is that the contract did not allow the aircraft to be modified in any way. So they had no defensive countermeasures or armour.
Due to the very high flying hours neither Boeing or the USAF would take the aircraft back early. The MoD had to keep extending the penalty yearly, until it became publicised after a defence committee report. After spending nearly £500 million on penalties, the Government finally bit the bullet and bought all four aircraft. Now that the aircraft was owned it could be modified. Because the aircraft is so good at its role, the UK decided to buy an additional 4 aircraft. If it had the choice the RAF would buy even more.
The problem with the contract was that it was inflexible and the penalty for terminating it early was too high. Therefore, it couldn’t take into account the changing World situation that the UK faced. If an aircraft was lost to an attack, the UK would be bound to pay the full cost. We nearly had a number of C17s lost, as there were numerous occasions where they were bracketed by mortar and unguided rocket fire at Baghdad and Kandahar.
To me, this was the main crux of the problem. The contract and contracts in general cannot be cancelled or amended quickly enough, as soon as contract lawyers get involved, the situation rapidly goes downhill and costs sky rocket.
It is possible to have rolling upgrade programs for existing equipment that are scheduled and properly forecasted. It is just that DE7S have had to penny pinch by continuous demands from the Treasury to save money. Therefore, the first thing that goes are planned upgrades. Challenger 2 is an excellent example, how many times has the mid life upgrade been cancelled or the life extension program pushed further to the right.
By the way, a number of mates who are tankies wouldn’t swap their Ch2s for Leopards, especially as they don’t have a toilet or a brew vessel.
Leasing makes sense for people or companies as it aids cash flow. It doesn’t make sense for the Government, because the Government can lend itself money at a rate far lower then any private company (0.285% over ten years currently). So it makes sense for the government to pay for everything up front and lend to itself, rather than pay commercial rates to borrow money. PFI was just to prevent debt going on our ledger, but seeing as we £2TN of debt its a moot point these days.
Furthermore, if the government took a strategic view and lent themselves money to develop kit which could also be brought and used by other countries, then its highly likely the Government would get a better return on Investment then 0.285% over ten years. Say the government spent £3bn on replacing the Challenger 2s with something new, designed and made in the UK; it would cost £3bn (spread over however long you like) but £2bn would go back into the economy. Then we sell another £2bn worth to the Saudies and the Government would get back £4bn for its £3bn investment.
Compare this to leasing some Leopards, which would cost £3bn and its a far better deal!
i always looked at defence procurement as too many chiefs and no indians because so much money is wasted on vanity projects that end up being cancelled,we pay companies stupid sums of money to design something that never even gets of the paper it’s designed on,if designed at all,what happened to the days when for example we want a tank the firms would go out build a tank to the mod specs at there own expense and then a winner is picked depending on cost etc,seems we have gone backwards rather than forwards,but i do know we have less firms in the defence industry because the government allowed them to be all swallowed up by one company,who then screw us over when we want equipment,which does not help at all..
BAE is hard to love, but no company can build on time, quality & budget, if the customer launches a project before knowing fully what it wants, then keeps changing, numbers, specs & delivery dates.
Interesting article however having read Mr Crawford’s article on the nuclear deterrent and his child like reasoning and political direction/narrative it’s hard to see his conclusions as real and none partisan…..and having spoke to serving tankies they are quite happy with chally 2! Cheers all stay safe.
I agree , if writing articles at least try and make it read a little less biased, I think his political beliefs are colouring his military thoughts
I am always u dear the impression, from experience and chatting with others that leasing can be a double edged sword. In peacetime logistics is manageable and routine, however things cannot be managable with combat arms where the asset security and future cannot be guaranteed?
U dear….bloody hell…. under!
I’m totally against leasing myself.
The UK should own its assets.
Leasing stuff like sealift, Point class for example, I can see why. If they aren’t often used then may as well, having half a dozen large ships just sitting about in case they’re needed is expensive. Maybe engineering equipment too, if you need a quick temporary boost in capability or something.
But leasing tanks? May as well just buy them if you’re keeping them for 20+ years. Though if I was being unkind I could say this is just another killing off of the UK’s armaments industry.
Do a Blackwater establish a private company and lease weapons and soldiers to nations and then when the time is ripe use them to conquer the WORLD . Will of course have my self as chief executive of the WORLD and i assure you i am not at all magnanimous or above petty retribution for both real and perceived insults so some of this forum will be off to re-education camps and some will be made examples of when i am ruler of the WORLD .
Whether leased or bought outright, somebody still has to pay the initial capital costs. Yes, a lease could see that cost spread, but then interest and profit has to be factored in.
Outright purchase is always less expensive (in the long term) than any other option.
Look around any MOD Camp or base there are very few mobile units as most are held in store and called off as and when they’re required. MBT how would an MBT defend the UK on home soil. German Leopard is hardly young and can be killed by an IED. so in a modern world, do we need a TANK.
The joys of MOD procurement. One consolation is at least it is not as bad as India’s.
As we used to say in the RN about MOD procurement
I want a dog
Sorry cant afford a dog
Have a cat with a mod kit.
It’s similar
Leasing is essentially a ‘pay day loan’ excercise writ large. The only advantages accrue to the lessor. If it doesn’t make tyo money, why do it?. What many of us have done to lease a car short term just won’t scale to fit military requirements. The issue with new tanks for old isn’t financial, it’s planning. Since 1945 how many conflicts have we fought with M.B.T.’s? What are the chances? One cannot de-couple this question of finance from planning, one that plans for a realistic defence posture. Do we have one of those? Sometimes it is not money so much as brains that is in short supply.
Its all very well doing leasing, but you have to keep your eye on the ball and also ensure the contract is favourable for both parties.
Leasing of Point RORO’s seemed to be one that worked, but that was a call off contract and I believe the ships were crewed and operated by civilians.
PFI contract for Engr plant equipment seemed like a good idea, but on return from use, like some of the less reputable car hire companies, some of the items picked up, requiring the MOD to pay more, often seemed a bit over the top.
When I worked for MAN, we did offer to supply Light Equipment Transports (low loaders for plant and wheeled wheels etc) on a Repair and Maintenance Lease contract, but sadly MOD having no experience of this type turned it down. It is a standard type in the trucking industry, between manufacturers and operators but appears “to difficult” for MOD