CALCULATING THE COST OF OVERRUNS
30. In its response to our 2004 Defence Procurement
Report, MoD stated:
The Department accepts that problems on four
legacy projects (Typhoon, Astute, Nimrod and Brimstone) led to
serious delays and cost increases. But around 40% of these cost
increases were internal interest on capital charges, which were
offset by reduced capital charges and depreciation elsewhere in
the defence budget. This has limited effect on the affordability
of our plans.[21]
The cost increases on the four legacy projects represented
£2.7 billion of the total overrun of £3.1 billion in
2002-03. Around £1.1 billion of that total was incurred as
interest on capital charges. We do not have a similar breakdown
for 2003-04, for which the total overrun was £1.7 billion,
but it is unlikely that such charges represented a greater proportion
of that year's overrun. On which basis it would seem that some
£3.5 billion of the total overrun of £4.8 billion in
the two years 2002-03 and 2003-04 were not incurred as interest
on capital charges.
31. We appreciate that resource accounting creates
charges on assets and capital which in some senses do not represent
real expenditure. Nonetheless they have to be managed within overall
limits set by the Treasury. In-year increases in one area need
to be off-set by decreases elsewhere. And, as we understand it,
if they cannot be, 'real' money must be found to make up the difference.
MoD appears to be arguing that operational commands saved depreciation
costs because they did not have the equipment which through continuing
delay was still stuck on DPA's books and thereby giving rise to
some of the cost increases identified by the NAO. In this area
at least the introduction of Resource Accounting and Budgeting
(RAB) has not increased transparency. Although RAB may capture
more information in total, it makes tracking individual items
of expenditure between years on a comparable basis considerably
more difficult. But whatever accounting practices are applied
to these overruns, in the end, they will translate into real increases
in the total lifetime costs of defence equipment. So both the
transfers in the Winter Supplementary Estimates and that proportion
of the total procurement overruns which are charges on capital
may be seen as illustrative of the cost to MoD (and more pertinently
the Armed Forces) of the DPA's failure to provide equipment on
time. The consequences may have a limited effect on affordability,
but they still represent a poor use of tax-payers' money.
32. However, the greater part of the overruns (on
our estimation around £3.5 billion in 2002-03 and 2003-04)
must have a more direct impact on the programmes themselves. Lieutenant
General Fulton, Deputy Chief of Defence Staff (Equipment Capability)
explained to the Committee of Public Accounts how these impacts
might be managed:
There is not a one-to-one relationship between
the change in one programme and the effect because there is a
range of impacts that it will have. The first thing that we need
to do is to trade performance within a project and therefore we
might in a particular programme reduce either the capability or
reduce the numbers of that. Next we might build the capability
rather more slowly, so that we profile it over time. Next, we
might contain it within a group of projects so that, for example,
cost or time overrun within one intelligence gathering system
might be offset by capabilities in other parts of the capability…
we are very well aware of the need also to take account of the
need to run on old equipment so as to fill the gap if there is
a delay because that is the other way we can fill that gap.[22]
These are all real impacts on real programmes intended
to deliver real capabilities to the Armed Forces.
33. MoD must press ahead with the full implementation
of its plans to re-invigorate the Smart Procurement initiative,
which it continues to maintain will deliver equipment projects
to time and cost. Only if these plans are successful will it be
able to exploit the forecast savings from reductions in existing
equipment. MoD must also ensure that its efficiency programme
delivers its targets as useable additional funding. Those funds
will be needed to deliver the ambitious programme of transformation
set out in Future Capabilities within the proposed
timescales.
Service accommodation
34. Future Capabilities projected that total
Armed Forces personnel would be reduced by about 10,000 over the
period to April 2008.[23]
Over the same period the MoD's civilian workforce is expected
to be reduced by a similar figure. There are approximately 300,000
people in the MoD and the Armed Forces combined. A reduction of
20,000 would be a little under seven per cent of that total. According
to the Secretary of State the proportion of the budget spent on
equipment 'will remain roughly consistent in the years ahead'.[24]
If the operational tempo in the future remains broadly similar
to that of the recent past (as is foreseen in Delivering Security
and Future Capabilities), there should be greater opportunity
to allocate funds to other areas, such as accommodation, which
have not received the attention they deserve.
35. On our recent visit to Cyprus we saw examples
of very poor married quarters housing. We were told that Commanding
Officers' budgets did not include provision for their refurbishment
and that, in some cases, essential repairs (for example to make
houses water-tight) could only be afforded by delaying statutorily
required works, such as water supply and drains maintenance. The
Secretary of State admitted that one of the factors which would
determine when the arms plot (see paragraphs 66-74 below) could
be ended was the need to bring Army accommodation up to an acceptable
standard.[25] Future
Capabilities also proposes that the RAF will concentrate onto
fewer larger bases.
36. We regularly heard about (and were shown) poor
accommodation during visits in connection with our Duty of Care
inquiry. In some cases, funds for refurbishment or improvement
promised at the start of the financial year had subsequently been
withdrawn. Although the primary focus should be on operational
needs, we should not lose sight of the drip down effect that poor
accommodation will have on morale, state of training and discipline,
and hence operational effectiveness. Service accommodation
across the defence estate is too frequently of a poor standard.
Although the Future Capabilities proposals focus on operational
needs, MoD must not lose sight of the necessity to find funds
to bring accommodation for all service personnel up to an acceptable
modern standard. We recommend that MoD commits itself to a clear
timetable within which the necessary improvements will be made.
14 HC Deb, 21 July 2004, c 343 Back
15
Q 504 Back
16
National Audit Office-Ministry of Defence: Major Projects Report
2004. HC 1159-I. Session 2003-2004. Para 2.4. Back
17
Q 711 Back
18
There was also an increase of a little under £38 million
in the budget of the Chief of Joint Operations, leaving a net
decrease to the front line of some £800 million. Back
19
Ev 180 Back
20
Ev 180 Back
21
The Government's Response to the House of Commons Defence Committee's
Sixth Report of Session 2003-04 on Defence Procurement, para 12.
Cm 6338. Back
22
Committee of Public Accounts, Ministry of Defence: Major Projects
Report 2004, Minutes of Evidence, Session 2004-05, HC 294-i,
Q 18 Back
23
Cm 6269, p 12. This calculation includes a reduction of about
1,500 in the Army. See eg Q 4. Back
24
Q 710 Back
25
Q 23 Back
