WIREDGOV

The Commons Public Accounts Committee publishes its 68th report of Session 2010-12, on the basis of evidence from the Ministry of Defence (MOD).

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

"The total cost of the 15 largest defence projects continued to rise in 2010-11, by almost £500 million.

Decisions to delay or cut programmes to save money in the short term continue to lead to increased costs in the longer term and do not represent good value for money.

We welcome the fact that there are signs of improvement. Projects approved since 2002 have shown significantly lower cost increases and, since 2008, technical issues have not driven up costs.

Cancelling the Nimrod aircraft at such a late stage has resulted in £3.4 billion of taxpayers’ money being wasted and delaying the Astute submarines has increased the cost to the taxpayer by almost £2 billion.

Much of the cost increase over the last decade has been down to the fact that the estimates for large programmes significantly underestimated the real cost.

Rather than the over-optimism which has held sway at the start of major projects, what is needed is realism: about the complexities of projects, the long-term costs of decisions taken today and the implications down the line of short-term budget cuts.

We are also concerned that the Department remains unable to set out openly the extent of the gap between its income and expenditure, and how and by when it will balance this year’s budget. The Department must publish that information urgently. Parliament is also still waiting for the Department’s promised 10-year Equipment Plan so that we can assess whether the Department will live within its means over time.

We think that it is unrealistic for the Department to plan its budget on the basis of a 1% increase in its equipment budget from 2015, in light of current economic conditions."

Margaret Hodge was speaking as the Committee published its 68th Report of this Session which, on the basis of evidence from the Ministry of Defence, examined its progress in delivering its major defence equipment projects.

The Ministry of Defence (the Department) continues to struggle with managing its equipment programme on an affordable basis, resulting in the cancellation or deferral of major projects and a damaging impact on value for money.

In 2010-11 the forecast costs to complete the 15 largest defence projects increased by £466 million. Since their original approvals the estimated costs of these 15 projects have increased by £6.1 billion and now stand at approximately £60 billion (an 11.4% increase). In aggregate these 15 projects are forecast to be completed 322 months later than originally planned.

We acknowledge that on more recently approved projects there have generally been lower cost increases and fewer technical problems. Projects approved since 2002 show significantly lower cost growth than those approved before this date.  In particular we are encouraged by the recent improvements in reducing cost increases arising from project-specific technical issues. Technical issues have not led to increased costs on projects since 2008.

Having allowed its equipment programme to become unaffordable the Department faces unpalatable decisions. Decisions to cancel or slow projects and to reduce equipment numbers have added significant long-term costs to the whole defence programme and to unit costs within the programme. Capability has been affected and this has all resulted in poor value for money. The Department has made a number of decisions to save cash in the short term without a full understanding of long-term costs and the knock-on effect of increased costs in other areas of the defence budget.

Large defence equipment projects have contributed disproportionately to overall cost growth.  In the past, the Department has repeatedly failed to challenge unrealistically low estimates for the largest and most complex equipment projects from suppliers. The Astute submarines have been delayed, leading to increased costs of £1.9 billion. Due to repeated delays, cancelling the Nimrod at this late stage has resulted in £3.4 billion being wasted with no new capability being added. In the case of the Queen Elizabeth aircraft carriers the forecast cost has so far risen by £2.8 billion since they were first approved in 2008.The taxpayer has had to pick up the bill when decisions on these projects were taken.

While we welcome the trajectory of improvement, the Department is still unable to set out openly the extent of the gap between income and expenditure it still faces, and how and by when any shortfall will be resolved. We are concerned that the assumptions the Department is making about its budget in the future may now prove unrealistic. Financial contingency planning by the Department to model the impact of further budget reductions may therefore be needed.

Last year we concluded that the turnover of the Senior Responsible Owners (SROs), who oversee individual projects, was often too great and recommended that SROs remain in post and responsible during key phases of a project's lifecycle. We were also concerned that some individuals were given the impossible task of being the SRO for too many multi-billion pound projects. We are disappointed that there is little evidence of progress in this area.