Conclusions and Recommendations
On managing the defence budget
1. The Department's poor financial management
has led to a severe funding shortfall of up to £36 billion
in defence spending over the next ten years.
Weaknesses in financial planning and management have resulted
in poor value for money from delays, changes to project specifications
and costly contract renegotiations. There is a culture of over-optimism
about the ability to meet financial commitments and senior officials
do not challenge unaffordable decisions about equipment procurement.
All of these factors have contributed to serious budgetary pressures
year after year, with consequent budget cuts being made mid-year
in an unsystematic and ad hoc way, leading to greater costs in
the longer term. We believe this situation is entirely unacceptable.
The Department needs to take immediate steps to sort out its financial
management, and we make several recommendations below directed
at this.
2. The Department has failed to develop a
financial strategy identifying core spending priorities.
This should have been a fundamental part of the Department's business
planning processes. The Department's inability to prioritise individual
elements of the defence programme on a strategic basis means it
cannot easily identify where in-year budget cuts should be made.
As a matter of urgency, the Finance Director should lead the creation
of a realistic financial strategy which identifies and reviews
spending priorities on an annual basis.
3. The Department's senior officials did not
seek ministerial directions to proceed when they had major concerns
about decisions threatening the value for money of defence spending.
In response to a recognition that the overall defence programme
was unaffordable, a series of decisions to delay and change the
scope of defence projects were made which offered poor value for
money. The Accounting Officer did not, however, consider it appropriate
to seek a direction from Ministers to proceed on any of these
individual decisions or in respect of their cumulative effect.
Whilst respecting his view, we recommend that HM Treasury and
the Cabinet Office revisit the issue on seeking ministerial directions
and strongly reiterate to Accounting Officers the importance of
seeking such directions in appropriate circumstances.
4. The Finance Director's role has been undermined
by giving responsibility for long-term financial planning to the
Strategy Director. We welcome the Department's
commitment to give the Finance Director the full range of powers
he needs to perform his job effectively. We urge the Department
to make sure the Finance Director has immediate responsibility
for all financial matters, including strategic financial planning.
5. The recent Strategic Defence and Security
Review was an opportunity to set out how defence spending could
be brought into line with available funding.
However, in the absence of an explicit statement of how the Department
will balance its budgets in the future, it is even more imperative
that the Department gets a firm grip on its strategic financial
management.
On managing the defence estate
6. The Department's decision making about
its estate has been driven almost entirely by a loose judgement
on operational need, with a bias toward keeping sites rather than
releasing them. The
Department must develop a more robust decision making process,
which balances perceived operational need with the cost of holding
and running major assets. It should change the way it takes decisions
on the future of the estate so that it can challenge more robustly
whether the use of the estate is cost effective and efficient
in the light of changing operational needs and reductions in personnel
numbers.
7. The Department has not defined high level
criteria or metrics to judge whether it is using its estate efficiently.
It has not set any high level targets
for estate size and cost, nor has it developed appropriate indicators
of its efficiency. The Department should define the size and type
of estate needed to fulfil the tasks required of it. Within six
months, it should develop a small suite of measures to assess
whether it is successfully reducing the size and cost of its estate,
in line with changes to the size of the armed forces and equipment
fleets. Whilst it should have regard to the views expressed by
operational staff, it needs to establish clear, objective, and
value for money criteria in determining the future of its estate.
8. The Department does not have good central
data to inform decision making about its estate. The
Department recognises it needs to collect better information but
has not set out a timeline to achieve this, and previous attempts
to develop data systems have failed. We recommend the Department
should immediately identify the key data it needs to manage its
estate assets effectively, including data on relative operational
importance, potential sale value, running cost, utilisation and
condition. The Department should have systems in place to collect
this data within 12 months, and certainly well before signing
its next generation of major estates contracts. We expect the
Department to report back to us on the progress it has made within
six months.
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