Executive Summary
Report jointly prepared by the National Audit Office and the
Wales Audit Office
1. Red Dragon
was a project between the Ministry of Defence (MoD) and the Welsh
Authorities for the development of the St Athan site in
South Wales. The original plan comprised the following
elements, with a cost of some £134 million excluding payments from
the Welsh Authorities to MoD:
- the construction of a state-of-the-art aircraft maintenance
facility (super-hangar) able to accommodate up to 48 Tornado jets
for the Defence Aviation and Repair Agency (DARA), costing
£107 million;
- the rationalisation of MoD’s requirement for infrastructure at
St Athan, at a cost of some £5 million; and
- the acquisition of a premium head lease on 725 acres of
the St Athan site by the Welsh Authorities and redevelopment
of the site, with a view to securing DARA’s continued presence and
developing an aerospace park in the longer‑term, at a cost to the
Welsh Authorities of £34 million (of which £12 million
was paid to MoD for the land and airfield).
Work on site preparation for the super-hangar
commenced in February 2003. In March 2003 MoD signed an
agreement with the Welsh Development Agency, which committed MoD to
the rationalisation of the site and the land deal. The super-hangar
was finished to approved time and budget by December 2004 and
in the following month DARA began to move into its new repair
facility.
2. Meanwhile, in January
2003, MoD commissioned a strategic review of aircraft support
, which reported in July. The findings of this
End-to-End Logistics Review eventually led to announcements in
March and September 2004 that DARA’s fast jet repair business for
the Harrier jump jet and Tornado bomber at St Athan would
close and the repair work would be moved to one main operating base
for each fleet. These announcements undermined the Red Dragon
project. In November 2005 MoD announced that all DARA
St Athan’s fast jet repair business would close by April 2007,
so the super-hangar was no longer needed for its intended
purpose.
3. Our examination of the Red
Dragon project considered whether MoD and the Welsh Authorities
worked well together to secure a good outcome from expenditure on
the St Athan site. Our detailed methods are set out in Appendix
1.
4. We found that MoD and the
Welsh Authorities did not work together sufficiently closely
throughout the Red Dragon project, although there were examples of
effective collaboration to address key issues of shared MoD and WDA
interest. MoD and the Welsh Authorities had significantly differing
perspectives on the longer term prospects for the St Athan site,
because the transaction was initially regarded as commercial in
nature, rather than as a joint project between two Government
bodies. This basis for the project resulted in MoD and the
Welsh Authorities being unsighted on the other’s key assumptions on
DARA’s viability for commercial repair work. MoD’s decision to
transfer fast jet repair to frontline Royal Air Force bases was
based on the prospect of greater savings for defence than those
which would flow from St Athan rationalisation but the Welsh
Authorities were not told as early as they might have been about
the likely impact of proposed changes to the way in which fast jets
were repaired. As a result of MoD’s decision, neither MoD nor the
Welsh Authorities have achieved the benefits intended from the Red
Dragon project, although there are plans underway to use the site
and the facilities for defence training and a smaller than
intended aerospace park. Our specific findings are set out in
the following paragraphs.
5. There was no common purpose for
the Red Dragon project though MoD and the Welsh Authorities had
complementary objectives for the site.
a. MoD’s objective for the
project was to make its fast jet repair activity more efficient. By
setting up DARA as a Trading Fund, MoD intended that DARA compete
with industry for previous MoD business and hence become more
competitive as a result. Construction of the super-hangar gave DARA
the best prospect to be more competitive through rationalising its
estate and allowing more efficient repair under one roof.
b. The Welsh Authorities’
objective for the project was economic development in this part of
South Wales. They wanted to safeguard DARA jobs and the South Wales
aerospace cluster leading in the longer-term to the development of
an aerospace park.
c. Both parties agreed that
their objectives were complementary and that they would both
benefit from expenditure on the St Athan site which would improve
DARA’s competitiveness. MoD’s objective of efficient aircraft
repair, however, was only complementary to the Welsh Authorities’
objectives as long as DARA St Athan remained the best option for
fast jet repair.
6. MoD and the Welsh Authorities did
not have a shared understanding about the assumptions underpinning
their respective decisions on the future of the St Athan
site.
a. MoD and the Welsh Authorities
produced separate business cases and investment appraisals on which
to base their decisions.
b. MoD estimated savings from
the Red Dragon project of £263 million over 15 years, compared with
savings in the region of £40 million if DARA St Athan were run down
as military aircraft fleets were retired from service.
c. The Welsh Authorities
estimated that they could create up to 4,000 jobs over 15 years if
they developed an aerospace park at St Athan. They commissioned
economic and market appraisals showing that such a project could
generate a positive return over 25 years. Because they were buying
land and assets at market value, their financial exposure would be
limited, although recovery of their expenditure in a worst case
scenario would depend on the successful sale of the site leases,
and resale of the additional land purchased outside of the
St Athan site.
d. The Welsh Authorities’ plans
for the aerospace park revolved around DARA as an anchor tenant
which they expected would be in a position to undertake both
military and civil aircraft repair. For MoD, the reason for DARA
undertaking civil aircraft repair would have been to increase
efficiency and reduce overhead costs, hence making UK military
repair cheaper. Indeed, MoD’s investment appraisal for the Red
Dragon project made no reference to civil aircraft repair.
Sufficient flexibility was included in the design of the
super-hangar to enable DARA to increase the rate of repair of fast
jets if needed in support of military operations, and to
accommodate large military aircraft and therefore equivalent-sized
civil aircraft. The Welsh Authorities did not have access to DARA’s
business plans to assess the likelihood of DARA securing future
work.
e. Given that MoD would continue
to face pressure to reduce its logistics support costs, it wished
to retain flexibility concerning use of the St Athan site should
the assumptions in the Red Dragon business case change. In July
2002 it secured an option under which it could require the Welsh
Authorities to purchase an interest in the super-hangar after five
years. MoD had calculated that the efficiency savings achieved by
the five year break point would outweigh its expenditure.
Subsequently, and just before the final approval for Red Dragon,
MoD commissioned a wider review of aircraft support which could
have a longer term impact on DARA St Athan.
f. The Welsh Authorities
recognised the risk that MoD could close DARA’s fast jets business
after five years, but considered that MoD’s financial commitment
was such that it would not do so. They did not interpret the five
year break point as implying that MoD had calculated it could exit
without financial loss, although this was the case. Instead, they
took verbal assurances from MoD officials, as well as comfort from
the Minister’s announcement in July 2002 that work would
commence on the super-hangar later in the year, as evidence of
MoD’s commitment to the Red Dragon project.
7. MoD’s vision for defence aircraft
support was evolving when the commitment to St Athan
was made.
a. In making the decision to
invest in St Athan, MoD had yet to reconcile its position on the
right balance of logistics support for the RAF between provision at
RAF bases, DARA and industry.
b. MoD itself had not decided
whether it would need to award DARA some aircraft repair contracts
after April 2004 to meet a strategic need, to protect security
interests or maintain alternative capacity.
c. DARA was assuming that it
would win all its previous Royal Air Force fast jet business, which
would enable it, as some of these aircraft were retired from
2011-12, to secure other new military repair contracts.
d. MoD found it difficult
to reconcile effectively its roles as owner of DARA, where it had
to support the business, and its role as principal purchaser of
military aircraft repair services, where the imperative was to
achieve the most efficient support for aircraft. The need to
deliver efficiency savings in the short‑term meant MoD did not
assess the financial impact of delaying the super-hangar.
8. MoD’s decision to transfer fast
jet repair away from St Athan was based on the prospect of greater
savings for defence, but the Welsh Authorities were not told about
the impact as early as they might have been.
a. MoD closed the Red Dragon
deal before the recommendations of the review of rotary and
fixed-wing aircraft support were published.
b. The outcome of the review was
a recommendation – subject to further work – to transfer repair to
main military operating bases on the basis that each aircraft fleet
would be maintained at a single location (Figure 1 , not available in this version of
the Executive Summary). The review estimated that
this rationalisation would save the Royal Air Force in excess of
£150 million a year, the majority of which would come from the fast
jet fleets, compared with average savings of around
£18 million a year from Red Dragon.
c. MoD told the Welsh
Authorities that the further work following the review could lead
to the rationalisation of repair for each aircraft fleet, either at
frontline bases or at DARA. But it was made less clear than it
might have been that, even if the further work resulted in fast jet
work remaining at St Athan, there would be a significant reduction
in the number of civilian jobs there. Once MoD had taken the
decision to transfer fast jet repair away from St Athan it informed
the Welsh Authorities, and subsequently announced that it would
work with them to explore alternative uses for the site.
9. The originally intended benefits
of the Red Dragon project have not been realised, but joint working
has been, and is being, undertaken to secure a viable future for
the St Athan site, centred around defence training.
Significant cost savings have separately been made in fast jets
support by transferring repair to main Royal Air Force operating
bases.
a. The net cost to the taxpayer
of the Red Dragon project is in the region of £113 million. MoD and
the Welsh Authorities will have spent some £134 million
directly on the Red Dragon over the life of the project, excluding
the payments from the Welsh Authorities to MoD totalling £12
million. Although there is some uncertainty around the figures, MoD
has achieved efficiency savings from the Red Dragon project of
around £57 million compared with an anticipated £263 million, and
there have been costs of £36 million for redundancy, removal
and reorganisation of its other tenants at the site. The Welsh
Authorities have achieved rental income of around £0.6 million from
non-MoD tenants located at the site.
b. Both parties have assets
which may have significant value on the open market in the future.
The super‑hangar could generate up to £60 million for MoD, based on
rental income between 2005 and 2018. The Welsh Authorities have
acquired land and buildings (most of it suitable for development)
with an estimated value of around £44 million after infrastructure
costs. The super-hangar and a substantial proportion of the St
Athan site are expected to be used eventually for the Defence
Training Academy from 2013.
c. MoD has not realised the
anticipated efficiency savings from the Red Dragon project.
However, it has reduced the costs of contracts for logistics
support for fast jets by around £1.4 billion over a six year
period from April 2001 by transferring
repair to main Royal Air Force operating bases. These savings
significantly outweigh the expenditure of £107 million on the
construction of the super‑hangar and the costs of the early closure
of DARA’s fast jets business at St Athan.
d. The Welsh Authorities have
not realised the intended benefits from their investment. Following
MoD’s decision to transfer the bulk of DARA’s expected workload
away from the St Athan site, around 1,900 DARA jobs have been lost.
As a result of MoD’s decision, the Welsh Authorities reviewed their
immediate plans for the aerospace park. They focused in the short
term on letting existing buildings and supporting efforts to
attract the Defence Training Academy to the St Athan site, while
continuing their marketing and developing revised plans for the
aerospace park.
e. The Welsh Authorities
and MoD have cooperated on marketing the St Athan site but have
attracted only four companies which have continued to be located
there, with just 45 jobs. Nevertheless, the Welsh Authorities
expect significant economic benefits from the Defence Training
Academy at St Athan. Based on estimates from the consortium that is
developing the Academy, they believe as many as 5,500 jobs could be
created on site and in the wider economy, although around a third
of the posts are likely to be filled by people relocating from
elsewhere in the UK. They also expect that the Defence Training
Academy will provide an impetus for current plans for an aerospace
park, potentially creating around 2,000 additional jobs in the
smaller area of land that is now available.
Recommendations
10. MoD and the Welsh
Authorities had complementary objectives but did not have a common
purpose for the Red Dragon project. They concentrated on formal
procurement and the contracts for the super-hangar and site
rationalisation. They did not develop a sufficiently strong,
long-term relationship and were reactive when
problems arose.
For large, complex projects
crossing organisational and devolved boundaries, government
departments and agencies should develop mutual objectives, problem
resolution processes, key performance indicators and an ethos of
openness and information sharing. This ‘partnering’
approach should be underpinned by a formal project document to
align objectives, which expresses intended business outcomes and
sets out the principles and attitudes that will characterise the
arrangement. The project should be run by an integrated project
team with a mixture of staff from the parties, with clear roles and
responsibilities and agreed operating practices using a shared risk
register, dataset and assumptions. The project should be overseen
by a formal ‘strategic’ steering group, with senior engagement from
all parties.
11. There was no integrated
and coherent strategy for military aircraft support when MoD
committed to the Red Dragon project.
In reviewing business cases for
major investment, departments should identify all relevant business
interests lying within their responsibility. They
should prioritise and as far as possible align those interests
before decisions are taken or commitments made.
Footnotes
- The Welsh Development Agency and the Welsh Assembly
Government are collectively referred to in this Report as the Welsh
Authorities. In April 2006, the Welsh Development Agency
was merged into the Welsh Assembly Government. Back from Footnote 1.
- Streamlining End to End Air and Land Logistics,
Ministry of Defence, 1 July 2003. Back from Footnote 2.
- C&AG’s Report, Transforming logistics
support to fast jets, HC 825, Session 2006-07. Back from Footnote 3.