1 Controlling spending through tighter
governance arrangements
1. The Major Projects Report 2009 examines the
Ministry of Defence's (the Department) progress in meeting cost,
time and performance targets for its 15 top-spending military
equipment projects over the past year, representing more than
£60 billion in forecast spend. In the last year, the cost
of these projects has increased by a further £1.2 billion,
which represents over one-quarter of the total cost growth of
£4.5 billion since project development began. Project delays
rose by 93 months in-year—and total slippage per project
now averages 24 months.[3]
2. Progress on individual equipment projects
has been overshadowed this year by fundamental Departmental failings
in managing the overall affordability of the defence budget.[4]
Estimates of the gap between planned budgets and forecast spend
are highly dependent on future funding agreed with the Treasury.[5]
The Department has calculated that if funding were to grow by
2.7% year-on-year,[6] the
deficit would be £6 billion after 10 years.[7]
The National Audit Office has calculated that if cash spending
on defence remains flat then the deficit will rise to £36
billion.[8] But based on
a more pessimistic assumption of a 4% reduction year-on-year for
the next five years, should other budgets such as health be ring-fenced,
then the budget deficit could be as high as £80 billion.[9]
3. The Department's governance arrangements were
not strong enough to prevent this serious imbalance between planned
spending and the defence budget developing,[10]
and have led to the Department taking some short-term savings
measures on projects which reduce their overall value for money.[11]
For example, slipping the first Queen Elizabeth carrier by one
year has raised net costs by £674 million, and postponing
the Astute Class submarines saves £139 million over the next
four years but ultimately increases costs by £539 million.[12]
It is an indictment of the Department's governance and budgetary
arrangements that it has got itself into such a mess that, in
their own words, these decisions represent the 'least bad' option
left open to them.[13]
4. The Department has also been forced to make
cuts to other military capabilities to balance its budget,[14]
and the Committee remains concerned that these have been made
in an arbitrary fashion without proper analysis.[15]
To save money only 30 Merlin helicopters will now be upgraded
to a new standard, and the number of Future Lynx helicopters has
been cut by 23% and planned flying hours reduced by one-third,
without any quantified operational analysis of the military impact
of these measures.[16]
The Committee detects a worrying trend: previous Departmental
witnesses have told us they required 12 Type 45 Destroyers—now
they tell us they can do what they need with six. Similarly, Nimrod
numbers have fallen from 18 to six and yet the Department claims
it can still make do. Either the original estimate is extraordinarily
wrong or there has to be a loss in capability, yet the Department
continues to cut equipment numbers without a proper assessment
of the operational impact.[17]
5. The Treasury has a role to play in challenging
the Department's budgeting assumptions and it told us it had always
known about the imbalance in funding.[18]
The Treasury approach of focusing purely on whether the Department's
books were balanced in each year ignored the long-term affordability
of the programme.[19]
3 Q 10; C&AG's Report, paras 8 and 9 Back
4
Qq 1, 30 and 115 Back
5
Q 29 Back
6
Qq 60-68 Back
7
Qq 71-73; Known as 'Flat Real' Back
8
Qq 73-97; Known as 'Flat Cash' Back
9
Qq 3, 80-81 and 126 Back
10
Q 127 Back
11
Qq 1 and 86 Back
12
Qq 44, 81-84; C&AG's Report, para 4 Back
13
Qq 5 and 27-28 Back
14
Qq 21 and 96 Back
15
Qq 93-95 Back
16
Qq 94-97; C&AG's Report, para 4 Back
17
Q 20 Back
18
Qq 31-34, 43 and 78 Back
19
Qq 12 and 34-35 Back
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