Select Committee on Public Accounts Forty-Third Report

2 Understanding and managing risk

7. One of the principles underpinning Smart Acquisition is to spend the right amount of time and money to reduce programme risk to an acceptable level before a project commits to the Demonstration and Manufacture Phase. The Assessment Phase is crucial to the successful delivery of the project to time, cost and performance. How much time and money should be committed in the Assessment Phase will vary from project to project depending on factors such as the maturity of the technology being purchased and the proposed procurement strategy (off the shelf; collaborative, non-competitive, PFI or Public Private Partnership). As a broad guideline the Department has stated that up to 15% of the initial procurement cost of a system should be spent in the Assessment Phase. At present the Department is spending on average less than 5% on the Assessment Phase.[17]

8. In some cases, spending more money or time in the Assessment Phase than originally planned may be the correct thing to do if it results in better risk mitigation for the post-Main Gate phase of the project. Figure 3 summarises how the Department is now measuring and controlling risk to provide it with confidence that the Assessment Phase activity is achieving this desired outcome. Several of the measures which we have previously recommended, including Technology Readiness Levels are now in regular use.[18]Figure 3: How the Department assesses risk in the early stages of projects[19]

9. One apparently good example of risk reduction is the Airborne Stand-off Radar aircraft programme which has successfully completed its design stage and is now entering what will be a challenging integration phase. Sir Peter Spencer attributed the success of the programme to date to spending the right amount of time to ensure the available equipment options were understood and the risks fully analysed.[20]

10. Optimism continues to influence the initial appraisal of projects and the Major Projects Report 2003 clearly shows that the Department and industry do not always sufficiently understand risk when the Main Gate investment decision is made. The costs and in-service dates for more than two thirds of projects have drifted away from those planned. In a few cases such as the A400M aircraft and Type 45 destroyer, projects have exceeded the highest acceptable figures agreed at the time they were approved. The Department admitted that the figures showed that some projects had not been properly de-risked in the Assessment Phase and this was an indication that Smart Acquisition was not been applied thoroughly or consistently.[21]

11. Sir Peter Spencer, Chief of Defence Procurement, assured us that he was determined to resolve the problem of de-risking projects fully before approval was given to proceed to demonstrate and manufacture equipment. What was needed was an effective corporate governance system which ensured that forecasts were accurate. There were however still some projects where the damage done by inadequate de-risking had not yet been flushed out, which he was intending to do in the coming financial year.[22]

12. Smart Acquisition principles were not fully applied to the Support Vehicle which is currently predicted to be a year late entering service. The Department decided to proceed without a formal Assessment Phase on the basis of three years work done to examine the suitability of the project for a Private Finance Initiative solution and because potential solutions were already available in the commercial sector. In retrospect, the Department accepts that it made a mistake in omitting the Assessment Phase and that both its and industry's understanding of the requirement was immature.[23]

13. The Department decided against PFI procurement for the Support Vehicle project, concluding that a conventional approach offered better value for money. The principal reasons for this were difficulties in defining an output based specification; the limited opportunity for risk transfer; minimal potential for third party revenue; and little scope for either operational or technical innovation due, in part, to a demanding mobility requirement and operational readiness. The decision not to pursue a PFI solution for this programme did not preclude its use in other combat support areas.[24]

17   C&AG's Report, para 2.3  Back

18   ibid, paras 2.6-2.11 and Appendix 1; Q 284; Ev 41-42  Back

19   Ev 41-42 Back

20   Qq 302-304 Back

21   Qq 239, 246, 275-276  Back

22   Qq 239-245 Back

23   C&AG's Report, Figure 18 and paras 3.38-3.43; Qq 187, 249, 307-314  Back

24   Qq 308, 318; Ev 43-44 Back

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