The current defence programme is unaffordable, according to a report from the National Audit Office. The Ministry of Defence has already reduced the deficit between the defence budget and planned expenditure by £15 billion, but a shortfall of between £6 billion and £36 billion remains. The financial crisis means a substantial increase in funding is unlikely, and closing the gap will require bold action as part of the Strategic Defence Review which is expected after the General Election.
To address the deficit the Ministry of Defence has reduced equipment numbers being bought on some projects and taken short-term decisions to slip other projects. This short-term approach to savings will lead to long-term cost increases. In 2008-09, costs on the 15 major defence projects examined by the NAO increased by £1.2 billion, with two thirds of this increase (£733 million) directly due to the decision to slow projects. Attempting to save money in this way does not address the fundamental affordability problems, increases through-life costs and represents poor value for money on the specific projects affected.
One example of a project slowed is the Queen Elizabeth Class aircraft carriers. Although this action is forecast to save £450 million in the next four years, it is forecast to add £1,124 million in costs in subsequent years. This is a net increase in the forecast cost of £674 million. The NAO judges that this is poor value for money.
On some projects, the MOD has taken the decision to reduce the amount of equipment being purchased. For example, the MOD has taken the decision to save £194 million by reducing Lynx Wildcat numbers by 23 per cent, from 80 to 62 helicopters. This has reduced planned flying hours by a third.
These actions make it difficult to conclude on the effectiveness of the delivery of individual projects. Analysis by the NAO suggests signs of improvement in project cost control with innovative decisions being taken to ensure progress. Unless the MOD addresses the underlying budgetary and governance issues it will not consistently deliver value for money nor, vitally, will the operational benefits of expensive new capabilities be available to the Armed Forces in a timely manner or in the numbers originally planned.
As part of its annual review of major defence projects, the National Audit Office has found that the current cost of 15 major military projects has risen by £3.6 billion, compared with the expected costs when the investment decisions were taken. The total slippage, averaged over the 14 major projects with in service dates, is over two years per project.