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The Major Projects Report 2009 is the latest in a long running series of reports examining the record of the Ministry of Defence (the Department) in meeting cost, time and performance targets for its top military equipment projects which are expected to cost more than £60 billion.
Our hearing identified the serious consequences of failings in the Department's governance and budgetary processes. Even using the Department's own, over-optimistic estimates the defence budget is unaffordable by some £6 billion. The exact size of the gap is dependent on the assumptions one makes about future funding, but the gap could easily be £36 billion and potentially even more.
Intentional decisions to delay some projects have increased total procurement costs and represent economies of the short term, and overall are poor value for money on the specific projects affected. The decisions were taken by the Department as part of a wider package to try to make the defence programme affordable over the next few years. They account for two thirds of the £1 billion of cost increases on projects in the last year. Crucially, they mean the Armed Forces will not get the operational benefits of new capabilities as quickly as expected and some equipments will only be delivered in reduced numbers.
The decisions to delay projects, change requirements and reduce the numbers of equipments being procured adversely affect the Department's ability to secure value for money from its commercial partners. Yet the Department continues to do so. The Department is in the strongest negotiating position with industry before it places a contract. Slowing projects down once started almost inevitably increases their costs and takes pressure off contractors to become more efficient.
After years of reporting on the poor performance of individual projects, we note that this year there are some tentative signs that projects are better managing the costs over which they have control. In practice, the programming decisions taken to deliberately slip projects make it difficult to assess the performance of individual projects and we will be looking for evidence that the improvements can be sustained in future years.
On the basis of the annual report from the Comptroller and Auditor General,[1] we examined whether the Department's governance and budgeting arrangements were fit for purpose and whether it understood the serious implications of re-prioritising projects after committing to them.
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