1 Risks to delivering the Equipment
Plan to time and cost
1. On the basis of two reports by the Comptroller
and Auditor General, we took evidence from the Ministry of Defence
(the Department) on progress in delivering major projects, on
the affordability of its Equipment Plan and on the Department's
plan to ensure Defence Equipment and Support (DE&S) has the
skills to deliver military equipment to budget and time. We also
looked at the Department's progress implementing the recommendations
from our earlier report on Army 2020.[1]
2. Since 2012, the Department has published an annual
Statement on the affordability of its 10-year plan to deliver
and support the equipment that the Armed Forces require to meet
the objectives set out in the National Security Strategy. This
year's statement for the 10-year period from 2014 to 2024 was
published in January 2015 and covered a budget of some £163
billion, made up of £69 billion for procurement, £81
billion for equipment support costs, a £4.6 billion central
contingency reserve and an unallocated budget of £9.2 billion
that the Department has not yet committed to specific programmes.
The Plan is £1.4 billion less than last year's Plan for the
period 2013 to 2023. Each year, the Department also presents a
major projects report to Parliament with data on cost, time and
performance of the largest defence projects where the Department
has taken the decision to invest. This year's report was laid
in Parliament in February 2015.[2]
3. For the first time, the National Audit Office
has reported on the robustness of the assumptions underlying the
Department's annual Statement on the affordability of the Equipment
Plan, together with its observations on the underlying in-year
variations to major project cost, time and performance in 2014,
in a single report to Parliament. The NAO selected 17 equipment
projects as the basis for reporting project performance and to
support its review of the affordability position. This sample
had been selected based primarily on value, but also to reflect
the level of project maturity and type of equipment.[3]
4. The majority of the Department's budget is tied-up
on equipment, personnel and infrastructure. The Department told
us that it was assuming funding for its Equipment Plan would increase
by 1% above inflation. This increase, combined with a reduction
in the remainder of the defence budget, would increase the proportion
of its overall budget spent on equipment. The Department is currently
spending 44% of its budget on equipment, above the 41% planned
with the Treasury. The Department told us that it was anticipating
spending on equipment to rise to 47% of its budget by 2019-20.[4]
5. The Department noted that its working assumption
was that forthcoming Comprehensive Spending and Strategic Defence
and Security Reviews would be developed in concert to provide
a coherent overall strategy to meet the UK's defence requirements
from 2016-17. The Department told us that if funding was cut,
or the anticipated 1% Equipment Plan increase did not materialise,
it would expect the Government's defence strategy to be considered
to ensure that the balance between strategy and resources was
maintained. That might mean that the budgets for equipment, personnel
and infrastructure would be rebalanced.[5]
6. The Department's current portfolio of major projects
is relatively mature and stable, where the risk of cost growth
is less. There had only been one new significant project approval
during 2013-14 and no new procurements had been introduced. However,
the Department's semi-independent Cost Assurance and Analysis
Service had reviewed cost forecasts in the Equipment Plan and
it had concluded that procurement costs were understated by £3.2
billion and equipment support costs by £2 billion. The latter
was based on a review of 28% of total equipment support costs
and therefore the understatement could grow as more support costs
were reviewed.[6]
7. The Department accepted that the cost of its 10-year
Equipment Plan was potentially understated.[7]
However, the Department told us that it was more confident than
last year that its contingency budget of £4.6 billion would
cover the risk of project teams understating costs and a planned
programme of activity would be undertaken over the next 12 months
to identify better the risks of cost growth in equipment support
projects.[8] The Department
accepted that there continued to be inconsistencies in the way
DE&S project teams were treating inflation, Value Added Tax
(VAT), and risk. The Department told us that it allowed for risks
at different levels. It wanted some risks to be held by the project
team, which were risks that they could manage. It wanted some
held at the 'portfolio level' such as foreign exchange risks and
some at the departmental level for overall strategic risk against
programmes such as the nuclear programme.[9]
DE&S had recently let contracts to the private sector for
business support. These managed service providers were expected
to improve financial forecasting.[10]
8. The Department noted that addressing issues with
how VAT was accounted for was complex. When setting budgets project
teams took a view on how VAT legislation would apply to the project.
If HMRC interpreted the legislation differently than expected,
the Department could face unexpected project cost growth. The
Department's primary concern was volatility in project costs created
by uncertainty in the level of VAT payments. That could have an
impact on the affordability of the programme and require decisions
on capability at short notice.[11]
9. In addition to the potential £5.2 billion
understatement of project costs, the Department was assuming that
DE&S can deliver a further £6 billion of savings already
taken from existing budgets. The Department told us that it had
agreed with commands, and locked into project budgets, £2.3
billion of the required £4.1 billion savings on equipment
support. It was working on a further £1 billion, leaving
£800 million of savings still to be identified. The savings
to be found on procurement projects from complex weapons and submarine
procurement were proving harder to identify and the Department
had only so far found £400 million of the £2 billion
target. The Department told us that it was more confident of delivering
the submarine savings. There were risks to finding £1 billion
of anticipated savings from complex weapons, but the Department
was confident that it could find these elsewhere.[12]
10. DE&S's failure to deliver projects successfully
to cost and time may result in the £8 billion of unallocated
budget being used to fund cost growth on existing projects. The
Department viewed this unallocated budget as essential to the
achieving its ambitions for transforming defence. It expected
to reassess these ambitions if cost growth was drawing on this
budget and reducing military capability.[13]
1 C&AG's Report, Major Projects Report 2014 and the Equipment Plan 2014 to 2024, Session 2014-15, HC 941-I, 13 January 2015;
C&AG's Report, Reforming defence acquisition, Session 2014-15, HC 946, 26 February 2015;
The Committee of Public Accounts, Army 2020, Eleventh Report of Session 2014-15, HC 104, 5 September 2014 Back
2
C&AG's Report, Major Projects Report 2014 and the Equipment Plan 2014 to 2024, paras 1.1, 2 Back
3
C&AG's Report, Major Projects Report 2014 and the Equipment Plan 2014 to 2024, para 4 Back
4
Qq 3-5 Back
5
Qq 2, 6-11 Back
6
C&AG's Report, Major Projects Report 2014 and the Equipment Plan 2014 to 2024, para 13 Back
7
Qq 12-16 Back
8
Qq 14, 23 Back
9
Q 49 Back
10
Qq 32-33, 49; C&AG's Report Major Projects Report 2014 and the Equipment Plan 2014 to 2024, paras 2.14-2.20 Back
11
Qq 36-48; C&AG's Report Major Projects Report 2014 and the Equipment Plan 2014 to 2024, para 2.16 Back
12
Q 16 Back
13
Qq 51, 52 Back
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