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.

This briefing is based on an online consultation of over 1,000 Armed Forces personnel and their families carried out by the National Audit Office. The purpose of the consultation was to gain insight into how the Covenant is working ‘on the ground’. The consultation provides an illustrative (rather than representative) picture of the education experiences of Service children.

April 2013

This briefing is based on an online consultation of over 200 Armed Forces personnel and their spouses/partners carried out by the National Audit Office. The purpose of the consultation was to gain insight into how the Covenant is working ‘on the ground’ through first-hand experiences and views. The consultation provides an illustrative (rather than representative) picture of Service education experiences.

April 2013

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..

In late 2011, the NAO began an examination of the core MOD approvals process. This examination found that the Investment Approvals Committee (IAC) is an authoritative body and the approvals process is largely independent, although there are risks arising from perceived conflicts of interest.

The IAC is supported by staff with good expertise. It is producing more probing scrutiny reports which are improving the evidence base for the IAC’s decisions. However, more could be done to understand and mitigate the burden of multiple review processes.

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.

Our examination of the data systems used to report performance for this department involved a detailed review of the processes and controls governing:

• the selection, collection, processing and analysis of data;
• the match between the department’s stated objectives and the indicators it has chosen; and
• the reporting of results.

Our conclusions are summarised in the form of a score between 0 and 4. The ratings are based on the extent to which departments have:

• put in place and operated internal controls over the data systems that are effective and proportionate to the risks involved; and
• explained clearly any limitations in the quality of its data systems to Parliament and the public.

Our assessment does not provide a conclusion on the accuracy of the outturn figures included in the Department’s public performance statements. This is because sound data systems reduce but do not eliminate the possibility of error in reported data.

2011-12 is the first year in a rolling programme which will present a complete picture over the next three years.

November 2012

At this hearing, the Committee discussed the transformation plans with senior officials from the Department.

February 2012