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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