Ministry of Defence (UK): The Major Projects Report 2011 - Public Accounts Committee
Summary
The Ministry of Defence (the Department) continues to struggle with managing its equipment programme on an affordable basis, resulting in the cancellation or deferral of major projects and a damaging impact on value for money.
In 2010-11 the forecast costs to complete the 15 largest defence projects increased by £466 million. Since their original approvals the estimated costs of these 15 projects have increased by £6.1 billion and now stand at approximately £60 billion (an 11.4% increase). In aggregate these 15 projects are forecast to be completed 322 months later than originally planned.
We acknowledge that on more recently approved projects there have generally been lower cost increases and fewer technical problems. Projects approved since 2002 show significantly lower cost growth than those approved before this date. In particular we are encouraged by the recent improvements in reducing cost increases arising from project-specific technical issues. Technical issues have not led to increased costs on projects since 2008.
Having allowed its equipment programme to become unaffordable the Department faces unpalatable decisions. Decisions to cancel or slow projects and to reduce equipment numbers have added significant long-term costs to the whole defence programme and to unit costs within the programme. Capability has been affected and this has all resulted in poor value for money. The Department has made a number of decisions to save cash in the short term without a full understanding of long-term costs and the knock-on effect of increased costs in other areas of the defence budget.
Large defence equipment projects have contributed disproportionately to overall cost growth. In the past, the Department has repeatedly failed to challenge unrealistically low estimates for the largest and most complex equipment projects from suppliers. The Astute submarines have been delayed, leading to increased costs of £1.9 billion. Due to repeated delays, cancelling the Nimrod at this late stage has resulted in £3.4 billion being wasted with no new capability being added. In the case of the Queen Elizabeth aircraft carriers the forecast cost has so far risen by £2.8 billion since they were first approved in 2008.The taxpayer has had to pick up the bill when decisions on these projects were taken.
While we welcome the trajectory of improvement, the Department is still unable to set out openly the extent of the gap between income and expenditure it still faces, and how and by when any shortfall will be resolved. We are concerned that the assumptions the Department is making about its budget in the future may prove unrealistic. Financial contingency planning by the Department to model the impact of further budget reductions may therefore be needed.
Last year we concluded that the turnover of the Senior Responsible Owners (SROs), who oversee individual projects, was often too great and recommended that SROs remain in post and responsible during key phases of a project's lifecycle. We were also concerned that some individuals were given the impossible task of being the SRO for too many multi-billion pound projects. We are disappointed that there is little evidence of progress in this area.
On the basis of a Report by the Comptroller and Auditor General, we took evidence from the Ministry of Defence on its progress in delivering its major defence equipment projects.
Conclusions and recommendations
1. We welcome the Department's better performance in controlling project-level cost increases, but remain concerned that total costs of the top 15 projects continue to rise for other reasons each year.
Projects approved since 2002 have shown significantly lower overall cost growth than those approved before this date and since 2008 there has been no overall cost increase from project-specific technical issues. However, in 2010-11 the forecast costs to complete the 15 largest defence projects still increased by £466 million overall, and the Department continues to struggle to live within its means. The recommendations that follow are intended to help the Department establish a culture of realism and transparency in the way it manages its equipment programme.
2. Decisions to save cash in the short term - deferring spending and reducing equipment numbers - have added significant long-term costs to the defence programme and so represent poor value for money.
Taking decisions to save money in the short term invariably lead to greater costs in the longer term. Changing requirements once a contract has been signed usually leads to delay, increased unit costs, and significantly more expense over time. The Department also made decisions to cut programmes, such as the Nimrod aircraft, without a full and complete knowledge of the cost implications. As well as ensuring realistic cost assessments at the start, all requests for new defence equipment should include measures that can be taken to cut costs if budgets have to be reduced later. The Department must take account of the long-term cost and capability implications of all the decisions it takes, including the impact on other areas of the defence budget.
3. Despite the Strategic Defence and Security Review and two subsequent exercises to find more savings, the defence budget only remains 'broadly in balance'.
It is unacceptable that the Department still cannot identify the extent of the current gap between resources and expenditure. The Department must urgently publish information on how and by when it will balance this year's budget. The Department has committed to publishing a 10-year Equipment Plan on which the National Audit Office (NAO) will conduct an 'affordability audit'. Although the Department told us it was in discussions with the NAO on the Equipment Plan, it is yet to provide it to the NAO to review. It should do so urgently so that the NAO can assess whether the Department will live within its means.
4. The Department is basing its current 10-year Equipment Plan on Treasury planning assumptions that are now likely to prove over-optimistic.
The Department was told at the time of the Comprehensive Spending Review settlement that it could expect 1% real terms equipment budget increases from 2015. It is planning its budget on this basis, but in the light of current economic conditions that assumption may be unrealistic. To better understand the implications for defence of further budget cuts the Department should work with the Treasury to consider and assess the impact of a range of lower funding assumptions.
5. On very large projects the taxpayer has too often had to pick up the bill when the risk, complexities and therefore costs have been underestimated.
Supplier cost estimates for both the Nimrod aircraft and the Astute submarine programmes, approved in the 1990s through open competition, significantly underestimated the risks and complexities involved. These large projects have accounted for most of the cost increases over the past decade. Overall, we accept that there are some signs of improvement; however the Department will also have to manage a £2.8 billion cost increase on the Queen Elizabeth carriers and given the technical complexities of the new programme these costs could also escalate. The Department needs to be much better in managing its contracts by identifying and managing risks. The Department should better understand their contractors' costing assumptions to ensure a sufficiently robust challenge to those assumptions.
6. The Department has still not properly addressed our previous concerns about the high turnover and multiple responsibilities of Senior Responsible Owners (SROs).
The Department has yet to make formal changes to ensure that SROs remain in post during key phases of a project lifecycle. We have heard evidence that some SROs still have responsibility for too many multi-billion pound projects, and are concerned that SROs are not sufficiently empowered or have the necessary authority and status. In future, we expect the Department to be able to show us that the turnover of SROs has slowed and that it is increasingly rare for an SRO to oversee too many projects
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