The Major Projects Report 2010 - Public Accounts Committee Contents


Conclusions and Recommendations


1.  The structural imbalance between commitments to purchase equipment and the available budget has obliged the Department to take tough decisions to manage its in-year expenditure by delaying and re-scoping individual projects. Such decisions are the root cause of the £3.3 billion in-year cost increase in the 2010 Major Projects Report. The Strategic Defence and Security Review (SDSR) provided the Department with an opportunity to re-examine its commitments and make them affordable within the available budget. The scale of the budget shortfall has meant the Department has had to take difficult decisions to dispose of both the Nimrod MRA4 anti-submarine aircraft and the Sentinel surveillance aircraft, writing off nearly £5 billion in taxpayer's money and losing two important military capabilities. Such decisions are never desirable. The fact that the Department has been pressured to make them offers a compelling argument why it must address the problems which have affected defence procurement for decades and on which our predecessors have commented extensively. If it does not, the cycle of failure will continue, with badly needed capabilities being delivered later than planned and cost increases crowding other capabilities out of the equipment programme.

2.  A balanced and affordable defence programme is vital to achieving value for money from defence acquisition. It is an area where the Department has failed to deliver, with adverse affects on value for money and military capability. The Treasury agrees with us that affordability is a vital concept in any Accounting Officer's duties. The new Accounting Officer must at all times have affordability at the forefront of her mind and be prepared to act decisively if she sees it is threatened.

3.  Senior Responsible Owners (SROs) for major defence projects typically move post every two to three years, eroding accountability. It also seems common for the Department to appoint a single individual to be responsible for a wide range of different major projects - a task no one person can properly fulfil. "Responsible" means that such individuals should be held to account for delivering the project within an agreed budget and should have the authority to direct those involved in delivering the project. Neither is true in Defence. The Department should ensure that SROs remain in post during key phases of a project lifecycle. It should consider, as part of the work of the Defence Reform Unit, how to give them the authority and information they need to manage the delivery of the equipment for which they are accountable.

4.  Implementing the Strategic Defence and Security Review (SDSR) will require the Department to make further difficult decisions, including cancelling projects or re-negotiating contracts, as it works out what more it needs to do to balance the defence budget. The Department has already started to re-negotiate a large number of contracts. Transparency will be important to reassure Parliament, taxpayers and the Armed Forces that the Department is achieving value for money in making and implementing these tough decisions. We note that the Department has already committed to provide Parliament with an annual statement of the affordability of the equipment plan on which the C&AG will provide a commentary. The statement is an important step in the right direction but will only give part of the picture. The Department should write to us with a note by the end of April 2011 setting out in detail its forecasts of the costs of implementing the SDSR, the status of contract cancellations and renegotiations and how it has assessed the value for money of the decisions it is taking.

5.  When the Department signed the contract for the aircraft carriers, it was aware that the overall defence budget was unaffordable. The decision is a compelling example of the Department's failure to exercise adequate governance and control over its expenditure programme. In future, before entering into new contracts, the Defence Board should consider the effects of decisions on the affordability of the overall defence budget. The Treasury also has an important role here to keep the Department honest and should offer a more robust challenge to the affordability and value of such decisions.

6.  Just seven months after it signed the Carrier contract, the Department made a decision in distress in an attempt to balance the defence budget and delayed the project without understanding the £1.6 billion cost implications. That such an important decision was taken based on inadequate information about the longer term costs and consequences points to an organisational culture in which there is a lack of clarity about accountability and responsibility. The Department should make all key decisions - about entering into, cancelling or deferring equipment acquisitions - based on a complete analysis of the financial and operational consequences. The need for such analysis becomes more, not less, vital when decisions are made under pressure.

7.  The Department is in the process of carrying out detailed costings, but the decision to fly a different type of aircraft off the carriers was not based on a full understanding of the costs. The Department was confident that the additional costs incurred in fitting catapults and arrester wires to the carriers would be more than offset by procuring lower-cost aircraft. An inadequate understanding of costs is indicative of more deep rooted problems in the way the Department takes decisions. If not addressed, this will jeopardise the chances of delivering better value for money from the defence budget than has been achieved to date. In future the Department, working closely with the Treasury, should only take key decisions when it has sufficient financial and other management information to demonstrate the actions it chooses to take are both affordable and represent value for money.

8.  The 2004 decision to remove the £1 billion of funding for the third tranche of Typhoon combat aircraft was a high risk decision based on over-optimism, which cost the taxpayer dear. It did not reflect the reality that the Department would incur significant costs whatever course of action it chose to pursue. In 2009, the Department committed a further £2.7 billion to buy 16 additional aircraft, a significant contributor to the £36 billion "black hole" in the defence budget. At our hearing, officials found it difficult to justify this decision on military capability grounds. At present the Department does not hold any budgetary contingency to enable it to manage the cost implications of risks such as that which transpired on the Typhoon project. As it gets its budget back into balance, the Department should take a corporate view of risks to affordability and delivery across its equipment programme and establish, in consultation with the Treasury, a tightly controlled financial contingency to deal with the risks which emerge.

9.  In an uncertain strategic environment and with a constrained budget, the Department is right to think in terms of delivering the so-called "80% solution" quickly. The Department has a history of altering the planned numbers and capabilities of the equipment it requires, which delays when equipment becomes operational. These factors often lead to significant cost increases, in part due to the rigidness of the contracts, and an increased risk that the equipment, particularly when introduced late into service, will become obsolete. Instead, procurement should deliver rapid and cost-effective equipment, enabling the Department to respond with more agility to changing operational needs, while retaining the flexibility to develop the capability further should it be required. The Defence Board is the key decision-making body in the Department and it should test every proposal it receives to make sure it is not "gold plated", does not have undue risk, is affordable within likely spending constraints and has sufficient flexibility to adapt if required.



 
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Prepared 22 February 2011