Latest NAO Report – Doing Less with Less

The National Audit Office publishes an annual summary of major projects and a commentary on the performance of the Ministry of Defence. 2014 is no different
Type 23 Frigate HMS_Sutherland_(F81)_MoD

The National Audit Office publishes an annual summary of major projects and a commentary on the performance of the Ministry of Defence.

The full report and project sheets are at the link below;

http://www.nao.org.uk/report/major-projects-report-2014-and-the-equipment-plan-2014-to-2024/

The summary of findings from the Head of the NAO, Amyas Morse, was;

Our work on the Equipment Plan reveals a number of positive features, not least the relative stability of forecast project costs and control over in-year variations in approved timings and costs of major projects. The Ministry of Defence has, however, chosen a higher risk approach to managing the affordability of the equipment plan by relying on over-optimistic forecasts of costs and future savings, not all of which might be achievable in reality. The Department will need to be watchful and swift to react if costs start to grow.

The first thing to remember about the Major Projects Report is it is only published after some consultation between the NAO and MoD, inevitably it is slightly out of sync with the very latest developments.

The MoD Equipment Plan is forecast at £1.4 billion less for the 2014-23 period than it was for 2013-14. Over a tend year period this is not massively significant but it is interesting to see a reduced equipment plan cost.

It also describes how £4.1 billion has been removed from the Equipment Support Plan reflecting a reduction in equipment to support and general efficiency savings.

Another view is that by shifting costs from the support plan to the equipment plan is a method by which the politically promise of a net 1% increase in equipment can be maintained.

Of course, that would be a wholly cynical view and is unlikely to be reality.

The underlying tone of the report is so far so good but the MoD is being very optimistic with its assumptions on savings and future costs. I don’t think one needs the wisdom of Methuselah to understand the vast majority of major military equipment projects do not come in under budget. What happens is the budget is extended or a combination of capabilities and quantities reduced.

Seems like business as usual to me but I think the MoD does deserve credit for getting most of the big ticket items under some sort of control, a process that started before SDSR 2010 and continued by successive ministers. Cost forecasts are largely stable across most of the big ticket items.

This comments from the summary is particularly ominous

If this contingency were insufficient, the Department would need to draw on the £9.2 billion set aside to deliver equipment needed for wider defence capability currently outside the core programme.

Another section reports the assumptions on Treasury funding

For the years beyond the current 10-year Equipment Plan the Department has assumed that it will continue to receive an increase in the budget of 1% above inflation, although this has not been formally agreed with HM Treasury. For the non-Equipment Plan element of the budget the Department assumes that funding will match inflation from 2016-17, with no further funding reductions or increases.

The Treasury is in no position to agree anything because there is the small matter of an election, this is the reality. We can all make assumptions but those assumptions cannot be relied upon.

For some reason, the NAO has opted to exclude the £754 million cost increase on the QE carriers it reported in the last report.

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The Army is judged as most vulnerable to capability gaps than the other services unless it can obtain equipment outside the published Equipment Plan. Although 50% of unallocated budget has been provisionally apportioned to the Army this is not enough this will make future negotiation increasingly difficult. The Army simply does not have enough in the Equipment Plan over the next decade, hoping for windfalls and an increasing share of any unallocated budget seems to be the strategy, you can judge for yourself whether this will be successful.

The table below shows the major items forecast cost for those already post main gate.

Major-projects-report-2014 04

Interesting to note that the total allocated to F35, £5.036 billion, Scout , £1.394 billion, Warrior CSP, £1.315 billion and Typhoon, £18.242 billion all in.

Further reading reveals that the F35 cost of just over £5 Billion covers the first 4 demonstrator AND the first squadron, note the singular. A second Squadron will be extra.

To clarify;

The Lightning II Main Gate 4 Business Case (MG4 BC) was endorsed by the Investment Approvals Committee in October 2013 and obtained HM Treasury approval in January 2014. The Lightning II MG4 BC sought approval to procure the aircraft for the first UK Squadron with all associated support equipment and capital spares. The Business Case also approved the procurement of Freedom of Action facilities, and all associated support contracts, which will enable the transition of the aircraft from the US to the UK, delivery of Initial Operating Capability from RAF Marham in December 2018, and permit initial First of Class Flying Trials to take place aboard the new Queen Elizabeth Class Carrier in the same year. The MG4 BC approval provides for the support contracts to cover the period 2015 to 2020. Main Gate 4 set the operational In-Service Date for the UK Lightning II aircraft as 31 December 2018

The key to understand these figures is to understand what the ‘Freedom of Action’ facilities actually are, what support contracts include or don’t include and what is included in Initial Operating Capability. You cannot simply divide £5 Billion by a squadron of 12 aircraft and come up with a unit price. Subsequent squadrons will of course benefit from some of these ‘start-up’ costs.

We also have to be clear about our £2 Billion plus initial investment as a Tier 1 Partner, big rounding to the numbers but the first Squadron of perhaps 12-14 aircraft, fixed assets, flight trials and support contracts is £3 Billion.

It does show what the cost of entry into the F35 club is though.

Expensive is a the word I think we are all searching for !

As ever, the individual project sheets provide a few interesting snippets

A400M will be £514m over budget, 73 months late and supplied with 3 fewer airframes.

Astute, £1.273 Billion over budget and at least 58 months late but at least the top speed risk status has changed from last time

Queen Elizabeth Class Aircraft Carriers, 29 months late and £2.728 Billion over budget

Scout, amusingly, the MoD have sought fit to report completion of garaging for the prototypes as ‘in year progress’, am not even going to say anything about cost and time.

Crowsnest downselect in April this year

Morpheus is the project name for a number of communication and ICT replacement projects including BOWMAN

Successor, the concept and assessment phase is forecast to be a whopping £4.172 Billion and a project that covers both, the Core Production Capability, will be around £1.2 Billion

Brimstone 2 forecast ISD may 2016

FSTA (Voyager) cost just under £480 in PFI charges in 2013/14

Warrior CSP, current affordable fleet is reported as 445 Warrior (different variants) and 65 to ABSV which might make for some interesting organisational challenges and keeping FV432 in service. These numbers will have also no doubt changed in the interim so to be honest, I would not place too much faith in them.

For complex weapons, it has written £1.2 billion worth of savings from the Support Plan, yet how much of this is due to genuine efficiency and how much is due to not bringing equipment into service like the Fire Shadow Loitering Munition that seems to be in some sort of ‘incommunicado’ where everyone seems to think that saying nothing is the best answer in the hope that it will just go away.

So the overall theme of the report is OK so far chaps, but you are being optimistic and if your optimism is misplaced during the next ten years, something will have to give.

This approach is obviously based on making the equipment plan affordable by forecasting savings that the department has very little idea how to make and hoping for the best.

Ten years is a long time isn’t it.

Finally, shifting items from the Support Budget to the Procurement Budget is a completely transparent and cynical method to maintain political pledges on equipment spending.

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