2 Performance of individual projects
7. The United Kingdom spends around £6.5 billion
annually on the acquisition of some 50 major equipment projects.
Often these projects have been delayed and over budget. In 2005-06,
19 of the major equipment projects (excluding the Typhoon aircraft)
were forecast to cost £27 billion, some 11% over approved
budget, and had been delayed by a further 33 months.7[7]
8. The trend in the Department's performance against
its Key User Requirements is worsening, with only 17 projects
expected to achieve all requirements, one fewer than in 2004-05.
The Department believes that this is because project teams are
taking a deeper look at whether or not there is a risk that any
of the requirements will not be delivered and highlighting areas
where they cannot guarantee delivery, so that appropriate mitigating
action can be taken.8[8]
9. The Department had improved its performance against
planned in-service dates with in-year additional delays reduced
from 144 months four years ago, down to 33 months for 2005-06.
There was also greater consistency across the programme with 14
projects reporting no new delays. If equipment can be accepted
into service on time, cost overruns will also be limited. Of the
36 new projects of £20 million or more in value that the
Department has approved since 2003, 34 are forecast at or under
budget, 33 are expected to beat their predicted in-service date
and 35 should deliver all key user requirements. On the so-called
"toxic legacy" projects,9[9]
however, it is still struggling to manage the consequences
of inadequate contractual arrangements put in place some years
ago.10[10]
10. It is too early to say whether the Department's
confidence in its improved performance is warranted. Historically
delays and cost increases have worsened in the later years. The
cost of the Astute Class submarine project has continued to spiral
and is now £1 billion over the original budget. The Department
now acknowledges that the original deal was flawed. Only one boat
is firmly priced whilst the design and construction costs for
three submarines were calculated without having first appreciated
the requirements for delivery and the likely timescales. The Department
negotiated a new arrangement for a target cost incentive fee for
designing and building the first submarine, but there was still
uncertainty as to whether the arrangements the Department had
put in place would be deliverable.11[11]
HMS Astute is on schedule to enter service late in 2008,
but the need to keep the current boats in service longer than
anticipated creates an additional pressure on the budget.12[12]
11. The Department believed that its overall performance
on acquisition is favourable when compared to its international
counterparts. In 2005 HVR Consulting Services Limited scrutinised
cost and time estimates for 22 major programmes, using information
from the Major Projects Report 2004, and compared them to outcomes
in other nations and historic Departmental projects. Thirteen
of the current projects scrutinised came in at or below the cost
forecasts produced by the model, and 21 projects were expected
to deliver ahead of that modelled from analysis of comparable
programmes.13[13]
Figure 3 below, for example, shows the cost history of
nuclear attack submarine construction in the United Kingdom and
the United States of America. The data (from public domain sources
in 2005) is normalised to 'cost per ton' because submarines of
the United States of America are generally bigger than those used
by the Royal Navy. It shows that, despite large cost overruns,
the Astute Class submarine is below the trend line.14[14]
Figure 3: Historic cost comparisons for nuclear
attack submarines
Source: Ministry of Defence analysis based on
Family of Advanced Cost Estimating Tools model used by HVR Consulting
Services Limited
12. The Department has reconsidered how it will design
and build future submarines in order to keep building costs affordable.
Lessons learned from the Astute project include how to realistically
plan and use Computer-Aided Design; keeping to the required timescale
in the design and build cycle to maintain sufficient skill in
the workforce; and using new methods of construction which were
pioneered in the United States of America. Should the government
decide to invest in a successor to the nuclear deterrent, these
lessons will need to feed into the project. Building a successor
is estimated to cost in the region of £19 billion and take
up to 18 years, and will involve the management of significant
technical and commercial risks. The Director-General Nuclear is
currently working with the defence industry to understand the
technical issues and identify ways to control future costs.15[15]
13. The original Skynet 5 PFI deal, signed in 2003,
relied on the contractor obtaining insurance to mitigate risks
to the satellites during the launch phase and while in orbit.
Within six months of signing the deal the contractor proposed
to restructure the contract to overcome insufficient capacity
in the space insurance market. Restructuring extended the contract
for two years at a cost of £822 million, although there is
no operational need for the additional years' service. The Department
would have been entitled to a 50% share of any gains from a 'refinancing
only' deal if the investors' returns exceeded a predicted rate
of return of 16.45%. During the negotiations, however, the Department's
financial advisers calculated the theoretical gain as a result
of refinancing, and based on their assumptions the Department
would not have been due to receive any share of the gain. The
Department has no ability to check whether the 16.45% threshold
was breached and has had to rely on the contractor's assurance
that it was not owed a share of the gains. Whilst the Department
believes the gain achieved by the contractor, Paradigm, balances
out the increased risk the contractor was taking on, Paradigm
also has two additional years of the annual tariff for the PFI
service and the potential to generate third party revenue from
the excess capacity.16[16]
7 7 C&AG's Report, paras 2, 3; Qq 76-77, 85 Back
8 8
C&AG's Report, para 1.22; Qq 12, 25 Back
9 9
Astute, Nimrod MRA4 aircraft and Type 45 Destroyer Back
1 10 0
Qq 82-83, 124 Back
1 11 1
Committee of Public Accounts, Forty-third Report of Session 2003-04,
Ministry of Defence: Major Projects Report 2005, HC 889;
Qq 8-9, 97 Back
1 12 2
Qq 9, 95 Back
1 13 3
Qq 73, 79 Back
1 14 4
Ev 25 Back
1 15 5
Qq 11, 83, 129-130; Ev 24 Back
1 16 6
C&AG's Report, Appendix 3, paras 17, 19; Ev 22 Back
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