Assessing Value for Money at the Ministry of Defence
RUSI Analysis, 18 Dec 2009
By Bill Kincaid CBE, Editor, RUSI Defence Systems
The most arresting point made by the latest report from the National Audit Office concerns the slippage of major projects. It reveals that the majority of the increase in project costs is due 'to deliberate decisions to slip projects, taken corporately by the Department as part of a wider package designed to address a gap between estimated funding and the cost of the Defence budget over the next ten years'.
By Bill Kincaid CBE, Editor, RUSI Defence Systems
The annual National Audit Office report on the Ministry of Defence's major projects was published on 15 December 2009, and as usual provides a mass of information which needs a considerable amount of time to digest.
Perhaps the most arresting point it makes - and makes most forcibly - is that the majority of the increase in project costs is due 'to deliberate decisions to slip projects, taken corporately by the Department as part of a wider package designed to address a gap between estimated funding and the cost of the Defence budget over the next ten years'.
Poor Value for Money
Of course, this method of slipping projects to move large amounts of funding out of the ten-year accounting period is not new. Neither is the official line that money is being 'saved' by this process, when all it is doing is wasting money. What is relatively new is the problem caused by the 1998 Strategic Defence Review which from the start was grossly underfunded, so that the unaffordability of the equipment programme quickly built up to new heights.
This so-called 'save now, pay later' approach - or slipping projects to reduce expenditure in the early years - is a misnomer if ever there was one because it increases the total cost of a project: there is no saving, only cost increases. This is illustrated by two examples in the report:
- The decision to slip the two aircraft carriers by one and two years respectively reduced expenditure in the following four years by £450 million, but increased the overall project costs by £1.124 million, giving a net increase of £674 million.
- The decision to slow the rate of production of Astute submarines to save £139 million in the short term will increase overall costs by £400 million.
It does not take many such decisions each year over a decade to place the overall equipment programme in very rough affordability waters. In addition, the coherence of the overall programme is severely strained, the Armed Forces do not get new kit when they need it putting lives at greater risks, and we have to lean ever more heavily on Urgent Operational Requirements, which, though admirable in many ways, has several disadvantages.
The report says that the decisions to slip projects 'represent poor value for money on the specific projects affected.' This only echoes what many acquisition commentators have been saying repeatedly over the last decade.
In the accompanying press release to the report, Amyas Morse, head of the National Audit Office and recently Defence Commercial Director in the Ministry of Defence, is quoted as saying:
'The Ministry of Defence has a multi-billion pound budgetary black hole which it is trying to fix with a 'save now, pay later' approach. This gives a misleadingly negative picture of how well some major projects in MoD are managed, represents poor value for money and heightens the risk that the equipment our Armed Forces require will not be available when it is needed or in the quantities promised.'
Project Management Performance
The report does say that there are 'encouraging signs of improved performance in managing individual projects', and provides a much clearer view on what has driven cost and time increases over the last year. The biggest single cause is, as we have seen, the decisions to slip projects, which is outside the control of project staff. Against this, there is a saving (£510 million) produced by 'project specific factors', although this is largely made up by 'accounting adjustments and redefinitions', whatever that means. As for increased delay, much of it is caused by project specific factors. So until the project summary sheets are examined in detail, we should hesitate before giving even give two cheers for project staff.
Whatever the reasons, costs of the fifteen projects have risen in-year by a total of £1.2 billion and average slippage has increased by a further month. This means that costs of these projects have increased by £15 billion since Main Gate approvals, and considerably more since Initial Gate. This has increased the unaffordability of the equipment programme.
The Multi-Billion Black Hole
The report states that the multi-billion black hole in the budget is between £6 billion and £36 billion depending on future budget assumptions. The lower figure represents a budget increase of 2.7 per cent per year for defence inflation, the higher figure a zero increase in cash terms. Who would bet against the latter? Or even a worse outcome for defence? And these figures are for the next ten years only. If this 'black hole' is to be eliminated, hard decisions on equipment cuts in the short, as well as the long term will have to be taken. Reduction in numbers and slipping projects will not achieve it.
Ideally, these decisions would be made within the process of the coming Strategic Defence Review (SDR), but large cuts will almost certainly be demanded fairly soon after the Election, rather than mid-2011 when the SDR findings are likely to be complete. How will that be handled? More slippage, leading to more overall cost increases, or cuts that may turn out to be at variance with the SDR?
DLODs and TLCM
The form of the report is changing. For the first time this annual report includes an analysis of all Defence Lines of Development (DLODs) for each project - this shows that almost a third are 'At Risk'. This makes for depressing reading. For example, of the eight DLODs for the Nimrod MRA4 all bar one are 'At Risk', while for Watchkeeper five of the eight are similarly 'At Risk'. Indeed for several in-service equipments, such as Hercules, Attack Helicopter and Typhoon, many DLODs are similarly 'At Risk'. It does seem as if more recent projects are in a better position than those in service or those started many years ago. Whether this is because many of the risks with certain of the DLODs do not surface until closer to ISD, or whether it is because later projects are better managed across the DLODs is not clear. It would be nice to think it was the latter.
The report also includes a section on Through-Life Capability Management and the systemic influences that MoD 'needs to address if it is to make TLCM a success'. These include:
- Lack of sufficient, robust and timely information
- Lack of a stable budgetary environment
- Programme Boards cut across MoD's existing budgetary and organisational structures
- Full support from all parts of the Department and its industry partners is required.
A Valuable Report
This year's report appears, at least at first reading, to be more valuable than those of recent years. There is more information, albeit some of it a little sketchy, and there is more useful analysis on causes of cost overruns and delays. Its bottom line is summed up in the following words from the press release:
'Attempting to save money in this way [by slipping projects] does not address the fundamental affordability problems, increases through-life costs and represents poor value for money on the specific projects affected.'
Further Analysis: Defence Policy, Defence Management, UK, Europe, Agenda for the New Government