The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:
"The Ministry of Defence has made a good start in trying to get to grips with its budget but its deep-seated problems cannot be solved overnight, and we do not yet have confidence that its Equipment Plan is affordable.
This will depend on the Treasury delivering on its commitment to a 1% annual increase in the equipment budget in the next Spending Review.
It also depends on savings in the wider defence budget, including cutting staff numbers, and on future capability requirements that remain uncertain.
The Department was unclear about the potential capability gaps it is facing, and how these are being addressed. This includes delays to transport aircraft and a two year gap in helicopter capability after the Sea King goes out of service.
£8 billion of unallocated budget has been set aside for new equipment to improve capability, but the cost of bringing back equipment from Afghanistan may be between £1 billion and £2 billion. If some of the £8 billion is used to fund this, then there will be much less to spend on new kit.
The Department claims to have contingency plans in place but there is a lack of transparency that prevents the Committee’s full understanding on this issue. We believe that, subject to genuine national security concerns, the Department should detail its plans in its annual Affordability Statement, along with the level of capability risk.
The Department needs to make sure it proactively addresses risks to affordability, through scenario planning and having other options to cut costs if its budget assumptions turn out, as they so often do, to be over-optimistic.
The Department also needs to act as a more intelligent customer, in order to ensure industry delivers projects to agreed timescales. Delay is particularly a problem in the case of software development, leading to higher costs in a number of equipment projects this year."
Margaret Hodge was speaking as the Committee published its 1st Report of this Session which, on the basis of evidence from the Ministry of Defence, examined the affordability of its Equipment Plan 2012-22 and the performance of its major projects in 2012.
Cost effective procurement of major defence projects that are both affordable and delivered as planned is at the heart of providing for the nation’s armed forces. The Ministry of Defence (the Department) has now reported to Parliament on the affordability of its ten-year forward plan to purchase and support military equipment (the Equipment Plan) totalling some £159 billion, as well as its progress on delivering its largest projects in 2012. Taken together, this gives us both an over-arching and a detailed view of Defence procurement.
We welcome the steps the Department has taken in setting out the affordability of its Equipment Plan. The Department has made a good start but the deep seated problems cannot be fixed overnight. In particular, our concerns about over-optimistic assumptions, the completeness and robustness of support cost estimates, and risks to capability mean that we cannot yet have confidence that the Equipment Plan is affordable.
The affordability of the Equipment Plan is highly sensitive to the Department’s assumptions around the funding it will receive from HM Treasury and how successfully it will be able to reduce the non-equipment parts of its budget. The affordability of the Plan is based on an agreement between the Department and HM Treasury that it will receive a one per cent annual increase in its equipment budget over the period from 2015-16 to 2020-21. If this is now not achieved in the current fiscal circumstances then the current plan may well be unaffordable.
The addition of a contingency provision of £4.8 billion is a positive step, given the history of cost growth on Defence projects. We remain concerned, however, that the provision, which amounts to just 3% of the budget, may not be sufficient to absorb cost growth. The provision needs to be able to cover costs arising from under-costing of projects or from problems which emerge during project development. In addition, the Department lacks a robust understanding of the support costs, which represents more than half the Equipment Plan budget, and the associated risks, including the size of the budget that may be required to recover equipment from Afghanistan.
The Department faces a particular challenge in delivering projects to agreed timescales. This is especially true for software-intensive projects, and we are concerned the Department lacks the necessary expertise to monitor industry’s progress and hold them to account. Ultimately, the Department bears the risk of these delays in terms of military capability and we need greater transparency on these risks and how they are mitigated. This includes the Department being clear to us on the impact on capability if the £8 billion that is currently unallocated in the budget cannot be used for purchasing new equipment because it is needed to absorb cost growth.