Conclusions and recommendations
1. The defence budget is unaffordable by between
£6 billion and £36 billion. The deficit is a reflection
of shortcomings in the Department's governance and budgeting arrangements.
The implications of the failings are not just about increasing
costs and poor value for money on individual projects but, vitally,
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 Defence Green Paper
and the Strategy for Acquisition Reform,[2]
both published in February 2010, are a start at addressing the
issues but do not tackle the fundamental unaffordability of the
defence budget. Looking forward, the Department will undoubtedly
need to take difficult decisions, including possibly cancelling
projects.
2. HM Treasury did not act sufficiently quickly
to challenge the growing unaffordability of the defence budget.
The Treasury should seek greater assurance over the affordability
of new projects in the context of the overall defence budget.
The Treasury should also work with the Department to agree how
the expertise available in both organisations can be harnessed
to work together to ensure future defence equipment plans are
constructed and managed on a realistic basis.
3. In future, the Department and HM Treasury
will agree a 10 year planning horizon for the Equipment Plan.
This is a step in the right direction but by itself will not be
enough. The Department must learn from
past experience to ensure its future equipment planning reflects
the risk that cost increases in other, less flexible elements
of the defence budget such as pay, pensions and PFI deals may
'squeeze' the funding available for equipment.
4. The Department hasn't done enough to understand
what effect changes in the availability of funding, cost growth
on existing projects, or urgent new demands may have on the future
equipment budget. The Department should
analyse the effects of changes in funding assumptions and combine
this with an analysis of its past track record to ensure there
is sufficient contingency in the Equipment Plan to deal with possible
cost growth and meet emerging operational needs.
5. The Department does not have good information
on the overall costs and risks of its programmes.
The Department should develop common measures of risk across its
top 50 projects, which should include assessments of its commercial
skills, the maturity of new technology, and knowledge of the systems
used to integrate equipments. Taking into account other key variables
(such as defence sector inflation and exposure to exchange rates)
these assessments should then be aggregated so that the Department
can take a balanced view on the scale of the risks to the delivery
of military capability in its portfolio of equipment projects.
6. Delaying projects once they have started
increases costs, postpones the delivery of military capability
and puts the Department at a disadvantage as it tries to secure
value from its commercial partners. In
future the Department must ensure that decisions to accelerate
or slow down projects, or change the numbers or capabilities of
equipments, are supported by quantified operational and financial
analyses to enable the full costs and benefits to be identified
and compared on a like-for-like basis.
2 Ministry of Defence Green Paper, Adaptability
and Partnership: Issues for a Strategic Defence Review, 3
February 2010, (Cm 7794); Ministry of Defence Report, The Defence
Strategy for Acquisition Reform, 2 February 2010, (Cm 7796) Back
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