The Swedish Agency for Public Management

The reform of defence logistics. Interim report 2 (2014:15)

Statskontoret has been commissioned by the Government to monitor the reform and streamlining of defence logistics of the Swedish Armed Forces and the Swedish Defence Material Administration (FMV). This is the second interim report of this commission. Statskontoret will submit a final report to the Government by 14 April 2015 at the latest.

The Swedish Armed Forces and FMV have been tasked with producing a new model for the division of responsibilities and the procurement of materiel and logistics, leading to cost effective solutions within defence logistics. The new work methods should result in fewer and more coordinated orders to FMV by the Swedish Armed Forces. In the new model, which will take effect on 1 January 2015, FMV will additionally have the coordinated responsibility for creating overall solutions for the support of the Swedish Armed Force's materiel and logistics needs. The reform also means that operations will be transferred from the Swedish Armed Forces to FMV. Until now, two operations and 1,700 full-time equivalents have been moved to FMV, which has doubled the number of employees of the agency. The agencies will implement another operational transfer in 2015.

Costs to be reduced by SEK 760 million

According to the resolution of the Government the reorganisation and reform of defence logistics should lead to a reduction of the agencies' costs by a total of SEK 760 million through rationalisations and efficiencies, as soon as it takes effect in 2015. The resources which will be freed up in the process will be used in the operational organisation and unit operations.

The cost reductions will occur within four different areas of operational activity:

  • storage, service and workshop operations, SEK 300 million
  • rationalisation of purchasing, SEK 30 million
  • reduced purchasing costs (lowered prices, not volume), SEK 300 million
  • refinement of roles within procurement and implementation of defence logistics, SEK 130 million

The agencies will not be able to fulfil the cost reduction requirements

The agencies have reported that they will be able to reduce costs by approximately SEK 640 million, but not until the end of 2016. This falls SEK 120 million short of the Government's requirements and in addition, the cost reductions will be fulfilled almost two years too late. The delay affects all four areas. That the cost reductions will not be as comprehensive as planned is essentially because the agencies will not be able to reduce purchasing costs in accordance with the Government's requirements.

Analysis and agreements are needed

When the first operational transfer was implemented on 1 January 2013, the agencies had not agreed upon which cost data their savings calculations and budgeting would be based. The Swedish Armed Forces had not either clearly identified which fixed assets would belong to the transferred operation. Statskontoret has also noted that the agencies need a monitoring system so that they can observe and manage possible passing-on of costs and goal conflicts between the savings initiatives.

Because the above-mentioned consequences of the operational transfers have not been resolved, the agencies have not entirely agreed on how to divide the cost reduction requirements among themselves. This had already been observed by Statskontoret in the interim report which was submitted to the Government in August 2013.

Statskontoret noted that in the analysis the agencies completed before the transfer of operations regarding how they would divide responsibilities and tasks, a clarification of how they intend to implement and monitor the streamlining efforts was not included. This means, among other things, that the agencies have not had a usable analysis and agreement about how to ensure that the savings they implement will lead to lasting cost reductions within the stipulated amount of time. All in all, this has made it difficult for the agencies to implement streamlining efforts in accordance with the Government's requirements. Instead of devoting energy to driving the streamlining efforts forward, the agencies have ended up in a drawn-out negotiation situation. Statskontoret's recommendation is that the agencies come to an agreement as soon as possible about how the cost reductions should be divided among them and how to implement the streamlining efforts.

More risks with the new procurement model

The Swedish Armed Forces and FMV have agreed on the form and function of the new model for purchasing of defence logistics when it will take effect in January 2015. Statskontoret is in the opinion that important components of the model have not yet been defined clearly enough, and there is also a number of other risks which the agencies must take into consideration. For example, it lacks a coordinated description of the goals of the model and which results they seek to achieve. Since the agencies have not produced key ratios for monitoring, it will be difficult to judge to which extent the new working methods produce the desired effect, not least with regards to orders becoming fewer, more coordinated and that the number of renegotiations should be reduced. Statskontoret will submit several proposals whose intention is to reduce the above-mentioned risks in the new model.

Ordering patterns do not follow appropriation structure

In the report, Statskontoret describes how the procurement of materiel and services in the new model is divided into ordering patterns. Which ordering pattern is used by the agencies depends on the purpose of the procurement. The purpose can be to change or maintain a certain capacity, or the procurement can be intended for more overarching or administrative services. The division into various ordering patterns is meant to clarify what the procurement intends to solve from the life cycle perspective of the specific materiel or service. The use of various ordering patterns will also contribute to the procurements occurring at a higher system level than previously. However, Statskontoret notes that the ordering patterns in the new model do not follow the appropriation structure. The procurements will therefore be financed through various appropriations, each of which will comprise various conditions. Consequently, the financial and operational directives will not follow one another, which may hinder both the possibilities to find cost effective solutions as well as control and monitoring in the new model.

Systems support must be adapted to the new model

The Swedish Armed Forces acquired and developed their systems support, PRIO, for their previous operational needs and direction. However, the introduction of the next stage of PRIO involves only a limited adaptation to the new model for defence logistics. In addition, Statskontoret notes that FMV's current systems support has been neglected and that the agency does not intend to introduce PRIO as its principal systems support, but intends only to use it to the extent that the agency deems appropriate. Taken as a whole, this means that the agencies' current systems support is not adapted to the new model. The agencies have not produced a long-term solution for how they will use the systems support within defence logistics.

Statskontoret sees a risk in continued overlapping and thereby cost increasing solutions for systems support. It is in the opinion of Statskontoret that the Swedish Armed Forces should be responsible for adapting PRIO to the new model at the same time that FMV adapts its continued efforts based on the existing and future functionality of PRIO. The agencies should quickly examine the long-term systems support based on the advice of impartial expertise.

Reporting and monitoring must be improved

The cost reductions implemented by the agencies occur in stages and are continually reported to the Government. In practice, the cost reductions occur through a series of individual measures which are not always easy to distinguish, forecast and assess. For example, the Swedish Armed Forces has not created a clear chain of objectives for the savings at various levels. Furthermore, the agency has in several cases gradually lowered these objectives. Statskontoret also notes that the reform costs for the changes within defence logistics are currently forecast to be over SEK 0.5 billion. The lengthy change process has entailed that costs have gradually increased. In addition, there is reason to criticize the agencies for not coordinating the monitoring of procurements of services between the agencies themselves.

It is the overall conclusion of Statskontoret that the agencies are deficient in their coordination and reports of streamlining efforts. This results in an uncertainty regarding the extent to which the implemented and reported savings will lead to lasting cost reductions which can be used in unit operations.