By February 2012, the estimated cost of converting the aircraft carrier for the carrier variant of the JSF, requiring the ship to be fitted with catapults and arrestor gear (‘cats and traps’), had increased by 150 per cent: from £800 million to about £2 billion.  As a result, the Department estimated that, over the next ten years, the STOVL option would be £1.2 billion cheaper than the carrier variant. This difference halves to £600 million over 30 years.

Another key factor was that the carrier variant option of the JSF could also not be delivered until 2023, three years later than the planned date of 2020. The Chief of Defence Staff judged that, in the emerging security environment, such a gap in capability would be undesirable. When the Department reverted to the STOVL option, it announced that it would deliver the Carrier Strike by 2020. However, a week later, it delayed investment in Crowsnest, the helicopter based radar system making up the third element of Carrier Strike, meaning that the system is not now scheduled to be fully operational until 2022, two years later than the carriers and aircraft.

Resolving the future of the Carrier Strike programme (comprising the Queen Elizabeth class aircraft carriers, the Joint Strike Fighter aircraft operating from them and Crowsnest) was central to the Department’s efforts to balance its ten-year equipment budget. When the implications of the 2010 decision became clear, the Department acted quickly to put in place a unique, streamlined approvals structure, with focused attention from senior officials. This was crucial to the pace of decision-making.

The Department expects to write off £74 million as a result of the reversion decision; but this cost could have been ten times higher if the decision had been made after May 2012.

Successful delivery will require the Department to manage significant affordability and technical risks. There are cost, schedule and technical risks across the JSF programme over which the Department has limited control. The highest risk phases of carrier construction and integration are yet to come and the Department must successfully conclude complicated negotiations with commercial partners.

Today’s report notes that the carrier variant of the JSF has a greater range and payload than the STOVL variant and would have provided a more effective strike capability. However, STOVL creates the option to operate Carrier Strike from two carriers, providing continuous capability. By contrast, the carrier variant could operate from only the one carrier installed with cats and traps and therefore could provide capability for only 70 per cent of the time.

The crucial test will be whether the Department is able to deliver the Equipment Plan within planned expenditure limits, supported by the existence of a substantial contingency provision, over the next few years. If such a track record is established, which can only happen over time, the Department will be able to demonstrate it has really turned a corner.

Report summary

The MOD’s ten-year Equipment Plan sets out its forecast expenditure plans to deliver and support the equipment the Armed Forces require to meet the objectives set out in the National Security Strategy over the ten years from 1 April 2012 to 31 March 2022. The Plan covers a budget of £159 billion. The Department has committed to publishing a Statement to Parliament each year on the cost and affordability of the Equipment Plan. The first Statement was published in January 2013. At the Department’s invitation, the NAO has reviewed the assumptions which the Department has used to compile the Equipment Plan. The NAO performed this work to assist Parliament in evaluating the confidence it can take from the Statement of affordability of the Equipment Plan as presented by the Department. Full details of the audit procedures undertaken by the NAO are given in Appendix One of the report.

Since the beginning of 2011 the Department has substantially revised the way it compiles and manages the Equipment Plan, and is now approaching the task on a more prudent basis. It has taken difficult decisions to address what was estimated to be a £74 billion gap between the Department’s forecast funding and cost of the defence programme as a whole and to try to bring the Equipment Plan itself into balance. These include cutting unaffordable expenditure and revising the way it compiles and manages the Equipment Plan to include greater contingency and provide greater protection to a core of prioritised projects, which will allow it to better manage cost variability.

The Equipment Plan is based on forecasts of costs and funding, representing the position at the end of the Department’s year-long planning process known as Planning Round 12. The Plan will inevitably change over time as economic and operational priorities evolve and as short-term affordability or urgent requirements cause the Department to flex its plans. For this reason, this report does not, and future reports will not, offer a definitive view on the affordability of the Equipment Plan. Rather, the NAO has constructed an affordability assessment model that breaks the Department’s assertions down into assumptions covering costs and funding against which the spending watchdog can test the realism of the Department’s approach.  Of necessity, some time must elapse before performance against these matrices can be properly assessed. To increase confidence in the realism of its assumptions and the consistency with which its forecasts are calculated, the Department will need to demonstrate their reasonableness over a period of years. The Department does not yet have in place all of the necessary measures to do this. The NAO has set out in more detail the type of measures it would expect to see, in Appendix Two of the report.

This is the first year the NAO has undertaken this engagement and it was aware from the beginning of issues, detailed in the findings of this report, which would limit the confidence that could be taken from the Department’s Statement. In future years, as the Department’s approach to producing the Equipment Plan matures, the NAO intends to extend the scope of our work to cover progressively more elements of and assumptions included within the Equipment Plan.  Notably, in agreement with the Department, this year the NAO has not performed any review of the Equipment Support costs, which make up just over half the Equipment Plan cost by value: £86 billion (54 per cent) of the total ten-year cost.   This is because in preparing the Equipment Plan 2012-2022 the Department focused on increasing the robustness of its procurement costings, and has yet to apply the same level of challenge and review to the support costs element, although it plans to do so for the Equipment Plan 2013.

The report, which gives a progress review of the 16 largest defence projects, shows that in the last year there has been a total forecast slippage of 139 months and increase in costs of £468 million. This means that, since the projects were approved, costs have increased by £6.6 billion (around 12 per cent more than the planned cost) and the projects have been delayed by 468 months, taking almost a third longer than originally expected.

In some cases, such as fuel price inflation of £336 million on the Future Strategic Tanker Aircraft, MOD has only limited control. On the Queen Elizabeth aircraft carrier, cost growth is due to MOD and industry having greater understanding of the costs and not being able to fully deliver agreed cost reduction opportunities. It would be unrealistic to expect MOD and industry to identify every risk at the start of technically challenging projects. However, the continuing problems indicate that MOD has more to learn from historic performance and, in particular, set realistic timescales, although it believes it has started to do so in some cases.

The MOD is accepting the capability risk and some wider costs resulting from these project delays and is having to make difficult decisions about long-term capabilities. For example, the version of the Falcon communications system being developed for use in Afghanistan, at a cost of £32 million, will now not be deployed to theatre. This is partly owing to development delays and it means that there will need to be reliance on legacy systems for a longer period.

The MOD has made a significant investment in new and upgraded helicopters to address the shortfall identified in the NAO’s 2004 report. The MOD has spent nearly a billion pounds enhancing existing helicopters to support current operations, and has taken steps to increase the flying hours of its Chinook fleet by 30 per cent. The MOD has also spent £787 million on air transport and air-to-air refuelling aircraft to support current operations and address capability gaps, such as those caused by the previously reported delays to the A400M transport aircraft. However, capability gaps remain: at times up to 2017 there will be shortages in both air transport and air-to-air refuelling aircraft. From 2022 there will be approximately a one-third short-fall in tactical transport aircraft..

While the Department has improved its recording of the equipment and supplies it holds in its warehouse and stock systems, the C&AG has not been provided with sufficient evidence to support MOD’s valuation of military equipment in the form of inventory worth £3 billion and capital spares worth £7 billion.

The Department has not yet obtained the necessary approvals for the remuneration package of the Chief of Defence Materiel. Consequently, the C&AG has reported on the absence of this authorisation.

The C&AG has also qualified his audit opinion because the Department has not complied with the accounting requirements, introduced under International Financial Reporting Standards, for determining whether a contract contains a lease. The Department has therefore omitted a material value of assets and liabilities from its Statement of Financial Position for the third year running. The C&AG cannot quantify the impact of this on the accounts with certainty because, as a result of its accounting policies, the Department has not maintained the records, or obtained the information required.

The Ministry of Defence, under pressure to make rapid financial savings, is significantly reducing the size of its workforce, by over 54,000 personnel. A report today by the National Audit Office has found that these reductions are happening in advance of the Department’s fully understanding how it will operate with significantly fewer staff.

Today’s report points out that the MOD has acted decisively to put in place a redundancy programme which so far is running well. The Department’s approach to reducing its headcount has been largely in accordance with good practice and, up to now, it has acted in a way that is consistent with value for money. However, the urgent need for the Department to cut costs means it is having to cut its headcount in advance of planning in detail how it will operate in the future, thereby risking making current skills shortages worse.

The Department plans to cut its civilian workforce by 29,000 and its armed forces by 25,000. To meet these targets, the MOD has started a redundancy programme and a Voluntary Early Release Scheme, both of which run in several tranches. The most recent estimates by the Department are that the process will cost £0.9 billion and produce £4.1 billion in cost reductions (just over £3 billion net).

The potential savings fluctuate with the timing of the redundancy tranches (a delay of three months to the second military tranche has reduced savings from this tranche alone by an estimated £100 million to £138 million to 2015). The Department now has to reduce the numbers in the Army by a further 5,000 by 2015 but has not worked out in detail how it will do this. Delays to the process erode the level of potential savings as the Department continues to pay salaries, benefits and contributions to pensions.

The MOD will need to make profound changes to how it works in order to continue with its current level of activity with fewer staff. But the NAO has not, so far, seen enough detail to determine whether the Department is making sufficiently substantial changes to how it works. Without real changes to ways of working, cutting headcount is likely to result in the Department’s doing less with fewer people or, alternatively, trying to do the same with greater risk.

The significant reduction in headcount also creates a risk that current skills gaps will worsen. The MOD is continuing to recruit albeit at significantly lower levels. But, because recruitment, particularly in the military, tends to bring in younger people, the Department will struggle to maintain skills levels. It has taken some steps to retain critical skills, but there is still a risk that some of the skills it needs now and in the future may be lost.

As a result of its examination of this documentation, the NAO has revised the relevant part of its original value for money conclusion on the project, concluding now that the strategic policy decision to refocus investment in both the carriers and the linked combat aircraft was well-informed.

Today’s report notes that it will become apparent whether the Ministry of Defence can secure value for money in implementing the strategic policy decision only when the Department fully develops and costs detailed delivery plans to support robust investment decisions, probably in late 2012.

The NAO had been denied access to the briefing papers when preparing its first report on the project (published in July 2011). Following concerns raised by the Committee of Public Accounts and in Parliament more generally, the Secretary to the Cabinet wrote to the NAO in September agreeing that it should have access to four key National Security papers relating to the Strategic Defence and Security Review decisions on Carrier Strike. The papers examined the implications for affordability, military capability and interoperability with allies of each option and were supported by detailed analyses of the industrial implications and the choice between retaining Harrier or Tornado aircraft.

For the third successive year, central planning decisions taken by the Department, including delaying the Astute submarine project, have had the biggest impact on cost growth, accounting for £237 million of the increase. Of this, £113 million relates to decisions to enhance capability. Macro-economic factors, such as adverse foreign exchange rates, accounted for £176 million of the increase. Cost overruns from project-specific technical issues accounted for £53 million.

The Strategic Defence and Security Review delayed the Successor nuclear deterrent submarine in-service date to 2028. To avoid a production gap in the submarine construction industry, and to further save costs in the short term, the Astute programme was slowed. This has added £200 million to the forecast cost in 2011, and delayed the introduction of the Astute submarines by an average of 28 months. Submarines will now take over a decade each to complete.

During 2010-11, there was a total increase of 30 months (with an average two months per project) in the forecast time to complete these projects and bring them into service. This brings the total delay on all 15 projects to 26.8 years. The most significant changes were a 12-month delay in the timetable for the Watchkeeper unmanned aerial vehicle project, which was largely due to the contractor’s failing to deliver against the agreed schedule, and a 13 month delay on the Astute project.

Long-term cost analysis by the NAO has shown that the difference between the approved and forecast costs of all projects which have had their main investment decision approved since 2000 is £10.6 billion (an 11.4 per cent increase). Additional costs have been avoided by reducing the amount of equipment the Department originally planned to buy. Had the Department not reduced equipment numbers, cost growth could have been between £18.2 billion and £19.4 billion (approximately 20 per cent) above the approved costs.

The audit opinion has been qualified for the second year following the implementation of International Financial Reporting Standards because the Department has not complied with the accounting requirements for determining whether a contract contains a lease. The Department has therefore omitted a material value of assets and liabilities from its Statement of Financial Position. The Comptroller and Auditor General cannot quantify the impact of this on the accounts with certainty because, as a result of its accounting policies, the Department has not maintained the records, or obtained the information required.

The C&AG has also limited the scope of his audit opinion on the grounds of the inability of the Department to provide sufficient evidence to support the accounting for military equipment in the form of BOWMAN radios (£0.1 billion); certain inventory and capital spares (£5.2 billion); and a further, unquantifiable amount of inventory and capital spares where the associated asset platforms have been taken out of service, and for which inadequate assessment of impairment has been made.

Improvements in the Department’s asset verification processes mean the C&AG has not had to limit the scope of his audit opinion in respect of certain grouped military equipment assets worth £0.6bn. These assets were subject to a scope limitation in the 2008-09 and 2009-10 accounts.

The SDSR decision, in October 2010, was for the MOD to build two carriers but operate only one, pending the next SDSR. This ship will be converted, using catapults and arrestor gear, to fly a different, more capable, version of the JSF to the one previously planned. This carrier will be available at sea only for an average of 150-200 days each year and fewer of the carrier version of the aircraft will operate from the carrier initially, reducing the number of possible daily sorties by more than two-thirds. A decision whether to convert the other carrier will be taken in the next SDSR, planned for 2015.

The decision to fit catapults and arrestor gear to the carrier means that the introduction of Carrier Strike will be delayed by two years, to 2020. Given the decision to retire the Harrier aircraft and the existing aircraft carrier immediately, there will be a decade-long gap without aircraft carrier capability. The changes will save some £3.4 billion over ten years.

Today’s report highlights the complex inter-relationship between the various cost, short-term affordability, military and industrial factors involved in the Carrier Strike decision. From the papers it saw, the National Audit Office could not understand how those factors were brought together to enable the MOD to reach a judgement on value for money.

The NAO identifies two principal risks to value for money on Carrier Strike. First, the SDSR is unaffordable unless there is a real terms increase in defence funding from 2015 onwards. The National Audit Office is worried that the continuing difficulties the MoD is facing in balancing its budget leaves Carrier Strike vulnerable to further change.

Secondly, the SDSR decision has introduced more technical, cost and schedule uncertainty. Thinking on the way the carriers will be used in operation is still evolving; and there are major risks reconstituting Carrier Strike capability after a decade without it.

The suspension and cancellation of a number of key armoured vehicle projects since the 1998 defence review has resulted in the Armed Forces facing a significant shortage in the principal armoured vehicles they require, until at least 2024-2025.

Today’s National Audit Office report found that the Department’s standard acquisition process has been undermined by a combination of over-ambitious requirements and unstable financial planning. Despite the commitment of considerable resources, since 1998, the MOD has received only a fraction of the armoured vehicles it has set out to buy through its standard acquisition process.

The Department’s reluctance to compromise in setting technologically demanding requirements under its standard acquisition process has put the timely and cost-effective delivery of the equipment at risk. Unwieldy procurement processes have not coped well with rapid changes to equipment requirements in the light of operational experience, resulting in a number of armoured vehicle projects being delayed or abandoned.

Armoured Vehicle projects have also suffered from unstable budgets and continual changes to financial plans. As the NAO reported in its Strategic Financial Management of the Defence Budget report, the cycle of unrealistic planning followed by cost overruns has led to a need to find additional short-term savings on a regular basis. Spending to date includes £321 million on cancelled or suspended projects and a further £397 million funding on-going, but delayed, projects. Without significant additional investment sustained over time, the Department will have a shortfall in the armoured vehicles it says it needs until at least 2024-2025.

To address shortfalls in equipment for current operations, such as in Afghanistan, the Department has placed greater reliance on the Urgent Operational Requirements (UORs) since 2003, at an additional cost of £2.8 billion. This has been more successful and has significantly improved protection levels for UK forces against today’s threats. The UOR process is not a sustainable substitute for the standard acquisition process. While some UOR vehicles may be taken into the core fleet, the Department does not expect these vehicles to offer a long-term solution to its armoured vehicle needs.