The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:
"Any good progress being made on many individual defence equipment projects has again been overshadowed by the MOD's continuing failure on important major projects.
Unaffordable decisions taken in the short-term lead to inevitable waste of billions of pounds over time. In the wake of the Defence Review the MOD still has to spell out whether and how it has got its defence procurement budget under control. The MOD must demonstrate the same discipline in its defence procurement that our forces demonstrate in the field.
In this one hearing, when we were able to focus on only four projects, we identified over £8 billion of taxpayers' money which has been written off or incurred simply for reasons of delay.
The scale of the budget shortfall has pressurised the MOD into taking the difficult decision to cancel important military capabilities like Nimrod and Sentinel, thereby increasing operational risks and writing off nearly £5 billion.
The Department has also been taking short-term decisions to delay and re-scope individual projects to keep its in-year spending within the voted limits. Such decisions have been taken without a full understanding of the financial implications. The consequence has been hugely damaging – in just one year an increase of over £3 billion in the overall cost of the Department’s major projects.
The MOD does recognise that it must finally tackle the problems which have affected defence procurement for decades and on which our predecessors in the committee have commented extensively. If it does not, the cycle of failure will continue, with badly needed military capabilities suffering delay or being crowded out of the equipment programme by predictable cost increases or deliberate over programming. Progress will require affordability being brought centre stage."
Margaret Hodge was speaking as the committee published its 23rd Report of this Session which, on the basis of evidence from the Ministry of Defence, examined its progress in meeting cost, time and performance targets for its 15 top-spending military equipment projects.
We have reported before that the defence equipment programme is unaffordable with commitments exceeding forecast budgets over a ten year period by £36 billion.
We have also highlighted before the hugely damaging consequences of the Ministry of Defence's (the Department's) short term decisions to keep in year expenditure within voted limits and the need to understand the full cost implications of these decisions.
In this year alone the cost of the Department's major projects rose by £3.3 billion and nearly £5 billion was lost by late cancellations. The scale of problems created by this financial imbalance masks the improved performance of the majority of projects against cost and budget.
In October 2010, the Government published its Strategic Defence and Security Review (SDSR). The SDSR offered the Department an opportunity to bring its plans into balance with the expenditure limits set in the Comprehensive Spending Review.
The Department has now cancelled projects such as the Nimrod MRA4 and Sentinel aircraft, accepting greater operational risks in some areas and writing off nearly £5 billion of taxpayer's money. We will look further at the decision to cancel the Nimrod, which is to be scrapped with £3.6 billion wasted.
Looking beyond these headline decisions, implementing the SDSR will require further decisions and the renegotiation or cancellation of a significant number of existing contracts to make the programme affordable. We will look to the MOD to demonstrate that it is now planning to remain within budget.
The Department has a poor track record in taking such decisions on the well informed basis necessary to optimise value for money. Responsibility and accountability for projects are often eroded by frequent changes of Senior Responsible Owner.
The Department failed to understand fully the financial consequences of the decision taken in December 2008 to delay the Queen Elizabeth Class aircraft carriers. In 2010, the Department reported a further cost increase of £650 million, bringing the total extra cost on the aircraft carriers to £1.6 billion, a new benchmark in poor corporate decision making.
We welcome the Comptroller & Auditor General's (C&AG's) announcement that the National Audit Office will undertake a review of the Carrier project. We plan to take evidence on his report later this year to understand fully the circumstances in which key decisions were made and their consequences for value for money.
In 2004 the Department removed funding for Tranche 3 of its planned procurement of Typhoon aircraft from its budget in the full knowledge of the robust contractual obligations it was under. The decision was based on the highly optimistic assumption that other partner nations would also not wish to purchase the final tranche of aircraft, so the requirement would be waived.
This was another poor decision which led to additional costs for the taxpayer and questionable benefit to our armed services by ordering extra aircraft to which we had become contractually committed. In 2009-10 the Department had to commit an extra £2.7 billion on the Typhoon project, including the purchase of 16 additional aircraft, to honour its commitments. The resultant cost increase has contributed to the £36 billion gap in the defence budget. We will take further evidence on the Typhoon project in the spring.