1 Impact of the Departmental Review
1. In October 2005 the Department undertook a review
of 20 of its largest approved equipment projects because of concerns
about the accuracy of financial forecasts and a potential lack
of corporate control of costs. Four teams studied the projects
in detail. They challenged the inclusion of questionable elements,
and identified areas where commercial arrangements could be strengthened,
where there were trade-offs to mitigate cost growth, and where
accounting treatment was open to question or incorrect .[2]
2. In total the Review process identified 44 individual
ways to reduce the forecast costs of these projects by £781
million, some 3% overall. Of these reductions, however, £91
million represented a rebate and exemption from HM Revenue and
Customs, while a further £448 million did not represent real
savings as the Department transferred this expenditure to other
budgets. Figure 1 sets out these cost transfers .[3]
Figure 1:
Transfers of management responsibility other departmental budget
holders
| Re-allocated to enable more appropriate management
|
| Suppliers' Corporate Cost
| Astute Class Submarine
| £6m | Decontamination and decommissioning of legacy assets/ facilities used for previous programmes (£1m).
Increased industry pension costs not specifically related to the Astute project (£5m).
|
| Nimrod MRA4 aircraft
| £11m | Industry rationalisation costs, which extend beyond the Nimrod project, previously included in overheads.
|
| Re-allocated to other parts of the Department
| Astute Class Submarine
| £86m | Additional overhead charges due to change in work throughput assumptions for the Barrow yard, i.e. naval programmes later than previously planned (£73m). The costs of a periodic safety review (£8m) and the safety case methodology (£5m) to a separate project as these will not deliver benefits to boats 1-3.
|
| Nimrod MRA4 aircraft
| £230m | Reclassification of surplus production assets as Defence Logistics Organisation spares, as a result of the reduction in number of aircraft from 18 to 12 (£211m), and related saving on cost of capital charge. (£7m). Recategorisation of spares to consumable stock (£7m).
RAF Tradesman to perform logistic support work for the aircraft instead of BAE Systems employees (£5m).
|
| | £76m
| Redefinition of the period of beneficial use of the equipment resulted in early delivery of element of project and cost of capital is reduced accordingly (£69m).
Other reductions as a result of cost saving measures (£7m).
|
| | £4m
| Original approval did not include the costs for adaptable aircraft modifications.
|
| Re-allocated to enable more appropriate management
|
| Bowman communications system
| £31m | Original approval did not include the costs for certain requirements (£17m), particularly support activity (£14m). To be accounted for as separate projects.
|
| Trojan and Titan armoured engineer vehicles
| £4m | Costs falling to Defence Logistics Organisation. Reclassification of spares to consumable stock.
|
| Light Forces Anti-Tank Guided Weapon
| £2m | Reassessment of residual risk led to revised cost.
|
| Sting Ray torpedo Life Extension and Upgrade
| £2m | Transfer of costs for Military Aircraft Release Vibration trial, which was not part of the approved requirement, to Insensitive Munitions Warhead programme.
|
| Support Vehicle
| £3m | Reduction by 500 of seating kits purchased as Defence Logistics Organisation has items in stock.
|
| Total |
£448m |
|
Source: Ev 17-21
3. The Department did not claim that the £448
million represented a saving, but that it stemmed from a desire
to make Project Teams more accountable for delivery against an
approved requirement and against costs over which they had direct
control. As a result the Department transferred costs, such as
those related to increased overheads in order to sustain the industrial
base, to facilitate a more corporate approach to their management.
The Department believes that this will lead to more effective
performance in defence acquisition and is a more appropriate and
sensible way to judge the management of individual projects. There
was no intention to use the process to disguise an inability to
control its costs.[4]
4. Although a reasonable action for the Defence Procurement
Agency, there is no overall saving to the Department as a whole
as other budgets will now be hit with charges that they previously
had not planned to cover. Other things being equal, the Department
will have to forgo other—so far unspecified—activities
for which it had previously budgeted. Shuffling money between
budgets halfway through the financial year in this way also makes
it more difficult for the Department as a whole to plan realistically
and to manage budgets in the short-term.[5]
5. The "real savings" achieved by the Departmental
review therefore amount to £242 million and are set out in
Figure 2. Figure
2: Cost-saving measures identified through the Departmental Review
| Re-assessment of quantities required
|
| Guided Multiple Launch Rocket System
| £114m | Reduced numbers of rockets from 6,204 to 4,080
|
| Brimstone missile
| £10m | Anticipated receipt from prospective sale of missiles that are excess to requirements.
|
| Support Vehicle
| £15m | Reduction in number of Recovery Vehicles from 314 to 288 arising from assessment of total fleet requirement.
|
| TOTAL
| £139m |
|
| More appropriate accounting treatment
|
| Precision Guided Bomb
| £1m | Removal of provision for exchange rate fluctuations as corporate policy of Forward Buy contracts will be used.
|
| Nimrod MRA4 aircraft
| £13m | Following the reduction in the number of aircraft, previous provision for spares written off.
|
| Terrier armoured earth moving vehicle
| £3m | Inclusion of accruals resulted in reduction of net assets on Balance Sheet and hence a lower cost of capital charge.
|
| Sting Ray torpedo Life Extension and Upgrade
| £12m | Removal of accrual for potential overhead costs related to delay in starting follow-on project.
|
| Astute Class Submarine
| £3m | Correction of accounting mis-bookings on sunk costs.
|
| TOTAL
| £32m |
|
| Re-definition of some elements of the project
|
| Re-assessment of requirement
| Trojan and Titan armoured engineer vehicles
| £1m | Original approval did not contain requirement to convert prototypes into training vehicles. Requirement for training will be met using 22 production vehicles.
|
| A400M aircraft
| £5m | Requirement for configuration of aircraft to take civil pallets was no longer necessary.
|
| Commercial and contract management
| Astute Class Submarine
| £16m | Shortening of BAE Systems' warranty from three years to one due to changes in support strategy (3) and contractor to forgo any incentive payments on boat 1 (13).
|
| Nimrod MRA4 aircraft
| £22m | Reduced contractor manpower requirements as BAE Systems' designers will be redeployed (17). One per cent saving on fee paid to contractor to be negotiated (5)
|
| Bowman communications system
| £6m | Due to contractor progress assets delivered earlier than planned, resulting in reduced cost of capital charge.
|
| Next Generation Light Anti-Armour Weapon
| £3m | In-year reduction in unit production cost as a result of the Swedish Government exercising an option to purchase the weapon.
|
| Astute Class Submarine
| £7m | Rationalisation of the nuclear safety infrastructure (3); removal of requirement for high integrity alarm (1); internal publication of safety manual (1); retained existing pump designs and altered approach to training (2).
|
| More cost-effective methods of delivery
| Nimrod MRA4 aircraft |
£11m | Reductions on logistics support costs through use of existing data (2) and revised fatigue test strategy (1). Productionisation costing reduction (5).
Cancellation of spares (3).
|
| Total |
£71m |
|
| GRAND TOTAL
| £242m |
|
Source: Ministry of Defence note to Qq 48-52
6. The reduction in the quantity of equipment the
Department has procured in three projects, namely the Guided Multiple
Launch Rocket System, Brimstone anti-armour weapon and Support
Vehicle, has already delivered a saving of £139 million.
Fewer Guided Multiple Launch Rockets were required as tests found
their range to be more accurate than was originally assessed.
Such trade-offs could have the potential to affect military capability.
The Department believes, however, that the additional reduction
of 700 rockets on order (bringing the total reduction to 2124)
creates no risk to operational capability and that the reduction
in the number of Recovery Vehicles from 314 to 288 will not impact
on the ability of the Armed Forces to conduct operations. As the
availability, reliability and capability of the military vehicles
which they support has improved, the nature of the recovery task
has changed and the number of Recovery vehicles required has reduced.6[6]
2 Q 3 Back
3
C&AG's Report, para 3; Q 47 Back
4
Qq 1-4, 15, 17, 108-109 Back
5 5
Qq 42-46 Back
6 6
Qq 6, 13-14, 21, 117-121 Back
|
