Report

by the Comptroller
and Auditor General

Ministry of Defence

The Defence Nuclear Enterprise: a landscape review

HC 1003 Session 2017–2019 22 May 2018

Our vision is to help the nation spend wisely.

Our public audit perspective helps Parliament hold government to account and improve public services.

The National Audit Office scrutinises public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Sir Amyas Morse KCB, is an Officer of the House of Commons and leads the NAO. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund, nationally and locally, have used their resources efficiently, effectively, and with economy. The C&AG does this through a range of outputs including value-for-money reports on matters of public interest; investigations to establish the underlying facts in circumstances where concerns have been raised by others or observed through our wider work; landscape reviews to aid transparency; and good-practice guides. Our work ensures that those responsible for the use of public money are held to account and helps government to improve public services, leading to audited savings of £734 million in 2016.

Report by the Comptroller and Auditor General

Ordered by the House of Commons
to be printed on 21 May 2018

This report has been prepared under Section 6 of the National Audit Act 1983 for presentation to the House of Commons in accordance with Section 9 of the Act

Sir Amyas Morse KCB
Comptroller and Auditor General
National Audit Office

18 May 2018

This landscape report was prepared to help Parliament better understand one of government’s most complex and costly programmes.

© National Audit Office 2018

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The National Audit Office study team consisted of:
Kaye Dunnet, Greg Hannah and Emma Willson, under the direction of Jeremy Lonsdale.

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Key facts

Summary

1 The Ministry of Defence (the Department) maintains a submarine-based nuclear deterrent to support the government’s national security policy. It currently operates four nuclear-armed deterrent submarines: the Vanguard class. To do this, the Department relies on a network of programmes, equipment and people, often referred to as the Nuclear Enterprise (the Enterprise). Its work includes designing, producing and maintaining submarines and nuclear warheads, and providing the necessary estate, people and support.

2 In 2008, we reported on the future nuclear deterrent. We concluded that, despite early progress, value-for-money risks relating to costs, decision-making and governance needed to be managed. This landscape report looks at the Enterprise more broadly than our 2008 report. It aims to help Parliament better understand the complexities of the Enterprise by describing how the Department needs to bring together its programmes, including production of the new deterrent submarines, to provide a continuous at sea deterrent. In particular, we describe:

the component parts of the Enterprise (Part One);

its governance and accountability (Part Two); and

the management of specific aspects of the Enterprise (Part Three).

We have not evaluated the value for money of the Enterprise or commented on the overarching policy.

Key findings

Components of the Enterprise

3 The government’s policy is to maintain a nuclear deterrent as part of its national security strategy. Since April 1969 the Department has carried out this policy, which it assesses as one of its highest priorities, through having at least one nuclear-armed submarine on patrol at any given time. This is often termed the ‘continuous at sea deterrent’. In 2006, the government announced its intention to maintain the deterrent. Parliament last endorsed this decision in July 2016 when it voted to start constructing new nuclear-armed submarines, the Dreadnought class (paragraphs 1.2 to 1.5).

4 To maintain the deterrent, the Department coordinates a range of programmes and organisations, often termed the ‘Enterprise’. This includes submarines, the nuclear propulsion systems used to power the submarines, and the missiles and warheads that arm them. It also brings together the design, build, operation, maintenance and support of these elements, which involves numerous partners. The United Kingdom (UK) and the United States (US) cooperate closely including on elements of both the Trident and nuclear propulsion systems (paragraphs 1.7 to 1.19).

5 In 2018-19, the Department forecasts to spend £5.2 billion across the Enterprise. This sum represents 14% of its overall budget. It includes £1.8 billion on procuring and supporting submarines, £1.4 billion on the missiles and warheads, £790 million on the propulsion systems, and £220 million on managing the Enterprise (paragraph 1.6).

Governance and accountability of the Enterprise

6 The Department is held to account for providing the Enterprise in a number of ways. It is responsible for delivering the requirements set out by the Prime Minister’s policy intent. On occasions, Parliament, the National Audit Office, and the Infrastructure and Projects Authority examine different aspects of the Enterprise. Regulators hold the Department to account for its safe management (paragraphs 2.2 to 2.7).

7 In the last two years, the Department has reorganised how it manages the Enterprise. The Strategic Defence and Security Review (SDSR) 2015 set out the Department’s commitment to making governance and decision-making for the Enterprise clearer, as this had become fragmented under the Department’s devolved model. The Department has implemented most of its commitments by establishing a single point of accountability for the Enterprise and creating two new organisations: the Defence Nuclear Organisation (DNO) and the Submarine Delivery Agency (SDA) (Figure 1) (paragraphs 2.8 to 2.13).

8 After announcing revised arrangements in SDSR 2015, the Department introduced them over an 18-month period, during which time it also had to make key commercial decisions. Both the DNO and the SDA are now recruiting to fill recognised skills gaps, including to some senior finance and commercial positions. As the Department established these new bodies, it also had to agree critical submarine production contracts. Having made these decisions, the Department has said it will now focus on building up the new organisations (paragraphs 2.14 to 2.16).

Managing the Enterprise

9 The Department has had to cut costs, identify efficiency savings and re-programme work to keep the Enterprise affordable. This includes committing to realising £3 billion of efficiency savings over the next 10 years and delaying by two years the development of an Astute-class submarine replacement. For 2018-19, the Department also agreed with HM Treasury it could access up to £600 million from the £10 billion Dreadnought programme contingency announced in SDSR 2015, to ensure it can deliver the programme within its 2015 cost forecast of £31 billion (paragraphs 3.4, 3.6 to 3.8).

10 The Department is under continuing cost pressure from the Enterprise. Looking beyond a £200 million gap in 2018-19, the Department still needs to manage a further £2.7 billion affordability gap across its equipment and support programmes. The Modernising Defence Programme will allow further consideration of programme options and how the £1.1 billion departmental contingency can be used. The Department will need to agree with HM Treasury under what conditions it can access the remaining £9.4 billion of Dreadnought-specific contingency that can be used across the programme lifetime. As we have previously reported, problems with the affordability of the Enterprise could destabilise the Department’s overall Equipment Plan given that around a quarter of its planned spend on equipment relates to nuclear programmes (paragraphs 3.8 to 3.10).

11 The Department uses four main contractors for 97% of its Enterprise-related contracts. These contractors in turn use hundreds of sub-contractors, many of which are small and specialist. The SDA is now seeking to better understand these relationships. The Department must also meet its own contractual responsibilities for providing, for example, nuclear reactor components to its main submarine production contractor (paragraphs 3.14 to 3.15 and 3.17).

12 The Department has introduced new ways of working with its contractors to try to address past poor performance. The Department recognises that contractors’ performance has been poor across its nuclear-related contracts. From 1 April 2018, BAE Systems, Rolls-Royce and the SDA will act together on the Dreadnought build to set joint costs and schedules. The Department hopes this will improve performance in delivering Dreadnought through a combination of improved project controls, stronger collaboration and information sharing, and more rigorous oversight (paragraphs 3.16, 3.18 to 3.20).

13 Delivering and operating programmes across the Enterprise requires a wide range of military and civilian skills that are in short supply nationally. The Department acknowledges that it does not have enough suitably qualified and experienced personnel, including across seven military nuclear specialisms. This has resulted from the intermittent nature of the nuclear build programme, which led to skills being lost. There is also growing demand for nuclear skills in other parts of the economy, including the civil nuclear industry. In response, the Department has developed skills programmes and is consolidating submarine-related training at its Naval Base in Scotland (paragraphs 3.21 to 3.28).

14 The complexity of the Enterprise means the Department must coordinate around 75 programmes, and manage knock-on effects between programmes. For example, the timeframe for bringing into service future submarines could be affected by delays with those currently in production. This will in turn influence the support and maintenance requirements for in-service submarines. Given the limited space available, the Department also needs to coordinate plans for its estate to ensure it has the facilities to maintain its submarines, and also to decommission and dismantle those submarines leaving service (paragraphs 3.29 to 3.35).

Concluding remarks

15 Our 2008 report on the nuclear deterrent recommended that the Department address significant risks, particularly around costs, skills, commercial relationships and delivery to schedule. Some of these risks remain 10 years later. In the last 18 months, the Department has made some positive changes to the way it manages the Enterprise and has agreed commercial arrangements designed to improve cost and performance. However, the coming years are crucial. As the Department invests heavily in the Dreadnought-class submarines and more widely across the Enterprise, it needs to ensure that the new structures, processes and its workforce operate effectively together to maintain the nuclear deterrent. We plan to review aspects of the Enterprise further as these arrangements evolve.

Part One

Background

1.1 For almost 50 years, the Ministry of Defence (the Department) has retained a submarine-based nuclear deterrent. This part outlines the importance and scale of the Department’s nuclear-related programmes, together described as the Nuclear Enterprise (the Enterprise).

UK government policy

1.2 To support national security requirements, the government’s policy is to retain an independent nuclear deterrent. The Treaty on the Non-Proliferation of Nuclear Weapons, signed every five years, recognises the United Kingdom (UK) as a nuclear weapons holding state alongside the United States (US), France, China and Russia. The government knows or suspects that other states also hold nuclear weapons. It recognises that states might use their weapons to threaten the UK, constrain the UK government’s decision-making, or sponsor nuclear terrorism. The government has stated its commitment to maintaining the minimum amount of destructive power to deter any aggressor.

1.3 Since 1969, the Department has met the government’s deterrence policy by having at least one nuclear-armed submarine on patrol at any given time. This is commonly known as the ‘continuous at sea deterrent’. Maintaining the deterrent is one of the Department’s highest military priorities, as set out in the Strategic Defence and Security Review (SDSR) 2015.

1.4 In 2006, the government stated its intention to renew the deterrent in a White Paper, which Parliament endorsed in 2007. This stated that:

Steps must be taken to sustain a credible nuclear deterrent in the 2020s and beyond.

This should be achieved by retaining a submarine-based system, with new submarines in service by 2024 to maintain continuous deterrent patrols. Although they would later be refined, procurement costs for the submarine, support infrastructure and warhead, if needed, were estimated to be £15–£20 billion (2006-07 prices).

The UK needed to decide whether to participate in the US’s Trident D5 missile life extension programme by 2007 if it wanted to continue using the Trident D5 missiles beyond 2020.

The Trident warhead design was expected to last into the 2020s.

1.5 The new Dreadnought-class submarines will gradually replace the in-service Vanguard-class submarines from the early 2030s. SDSR 2015 restated these plans, which were endorsed by Parliament in July 2016. In October 2016, the Department announced the start of construction for the first Dreadnought-class submarine. Figure 2 summarises the main developments between 2000 and 2040.

The Enterprise

1.6 In 2018-19, the Department plans to spend £5.2 billion on the Enterprise (Figure 3). This sum includes £4.9 billion on procurement and support programmes, and £220 million on running the Enterprise. This represents around 14% of the Department’s £37 billion defence budget.

1.7 To maintain the deterrent, the Department coordinates programmes and organisations across the Enterprise (Figure 4). The complexity, scale and inter-generational timescale of these programmes make it difficult to draw a boundary around them all, but understanding them is important for identifying and managing interdependencies and costs.

1.8 In bringing together the programmes, the Department works with organisations and teams inside and outside the Department, within the commercial sector and in allied countries (Figure 5). International relationships include those with the following:

The US

Since the 1950s, the US has played a major role in the UK’s nuclear programmes. The 1958 Mutual Defence Agreement provides the basis for UK–US cooperation on nuclear weapon and reactor technologies. A 2014 amendment to the Agreement sets out how the US can provide nuclear propulsion plants and parts, including spare parts, replacement cores and fuel elements, alongside information necessary for the design, manufacture and operation of submarine nuclear propulsion plants. In addition, the 1963 Polaris Sales Agreement enables the UK to acquire and operate the US Trident missile system.

France

Cooperation includes a 2010 programme, known as ‘Teutates’, to develop testing facilities for new technologies designed to ensure that nuclear stockpiles are maintained safely and effectively. Since 2014, the UK has operated a UK development centre at Aldermaston. At the French facility in Valduc, UK personnel supervise the construction of test facilities and carry out preparatory work for experiments.

Nuclear-powered submarines

1.9 The submarine fleet currently includes four nuclear-armed submarines (the Vanguard class), which carry the nuclear warhead armed Trident missile. They came into service between 1993 and 1999, and are now expected to remain in service until the 2030s. There is at least one nuclear-armed submarine on patrol at any one time, typically for around three months.1 The remaining nuclear-armed submarines could be undertaking training exercises or undergoing maintenance.

1.10 As the Vanguard-class submarines reach the end of their service lives, they will be replaced by the Dreadnought class from the early 2030s. The Department still expects that designing and building four Dreadnought-class submarines will cost £31 billion, in line with the forecast in SDSR 2015, with £10 billion of contingency funds available.2 Following early work on the concept, in May 2011, the Department announced the start of a five-year assessment phase to refine the submarines’ design and capture the associated costs. Following Parliament’s endorsement of the programme in July 2016, the Department approved the costs and BAE Systems announced the start of construction at its Barrow shipyard on 1 October 2016.

1.11 Alongside the four nuclear-armed submarines, the Department currently operates six attack submarines (Figure 6). They are three Trafalgar-class submarines and three newer Astute-class submarines. At present, the Department expects to decommission the Trafalgar-class submarines in the early 2020s, as it brings into service four more Astute-class submarines. It will then operate a fleet of seven attack submarines. As at March 2018, the Department expects these submarines to be in service for 32 years, and is currently considering their replacement. There has been cost growth on all Astute-class submarines due to delays, the re-assessment of future requirements, changes to technical scope and contract discussions.

Nuclear propulsion

1.12 The Department’s 10 submarines are powered by two different types of nuclear reactor, containing different nuclear cores, called Pressurised Water Reactors (PWRs). The three in-service Trafalgar-class submarines use an earlier version (PWR1) to that used in the Vanguard and Astute-class submarines (PWR2). The UK designs and builds the nuclear reactors. Rolls-Royce is the only UK commercial contractor able to undertake this work.

1.13 When it approved the Dreadnought programme in 2011, the Department had to decide whether to use PWR2 or a new PWR. The Department recognised, as recommended by the regulators, that PWR2, or an updated version of PWR2 would not be acceptable going forward. As such, it decided to develop a new reactor, PWR3. This decision, and HM Treasury’s challenge of it, delayed approval of the initial Dreadnought business case.

1.14 In 2012, during its on-shore testing, the Department identified a fault with a prototype of PWR2. It had been running the prototype at a nuclear reactor testing centre to identify any potential engineering issues. As a precautionary measure, the Department installed a new nuclear core in HMS Vanguard, at an estimated cost of £270 million.

1.15 In April 2012, the Department started a 16-year programme to regenerate and replace the nuclear core production facilities at the Rolls-Royce site in Raynesway, sustain the required capabilities, and develop and manufacture the nuclear reactor cores for Dreadnought. As a result of scope changes, including the decision to retain existing facilities to produce an additional reactor core for HMS Vanguard, in 2017 the Department forecast the programme would exceed the initial approved budget. The programme is currently being reviewed to reflect its revised scope, which includes new commercial arrangements. Following approval of an increase in programme spend, the Infrastructure and Projects Authority (IPA), which previously had concerns following the change in scope, expects the programme to deliver the new facilities on time.

Missiles and warhead

1.16 Decisions about the use of nuclear weapons remain entirely sovereign to the UK. Only the Prime Minister, and those to whom the Prime Minister has delegated responsibility, can authorise the launch of a nuclear weapon. The UK’s nuclear weapons consist of the following:

Trident D5 missile

Manufactured by Lockheed Martin in the US, the missile carries warheads with an effective range of about 4,000 nautical miles when fully armed. Under agreement with the US, the UK can access a shared missile pool held at a US naval base. The UK contributes approximately £12 million a year to maintaining this facility. To minimise the risk of obsolescence, the US is undertaking a missile life extension programme, in which the UK participates, and which is expected to cost the Department £352 million over the project’s lifetime. The UK also continues to participate in other US-led programmes to extend the service life of missile components and spares.

Mk4 warhead

The Department plans to reduce its warhead stockpile to around no more than 180 by the mid-2020s. The UK’s nuclear warheads are designed, produced and maintained by the Atomic Weapons Establishment. It is currently refurbishing the UK’s warheads in order to replace obsolescent non-nuclear parts, using some components provided by the US. In the early 2020s, the government will decide whether to obtain a new warhead model. The Department has funded a 20-year nuclear warhead capability programme, currently forecast to cost £20 billion. This programme will be delivered by the Atomic Weapons Establishment, and will both develop an appropriately skilled workforce and improve infrastructure by the mid-2020s.

Supporting capabilities

1.17 Maintaining a nuclear-armed submarine, its systems and its weapons requires a broad range of in-service support and capabilities. This includes having the right people and infrastructure to build, operate, maintain and dispose of the submarines, nuclear reactors and warheads. In 2018-19, the Department forecasts to spend £772 million across support programmes. It estimates that the in-year service cost for the Dreadnought submarines will be similar to operating the Vanguard-class submarines.

People

1.18 Organisations across the Enterprise need to recruit, train and retain a large, and often specialist, workforce. The Department has stated that maintaining and supporting the Enterprise results in over 30,000 UK jobs. These jobs are spread across the UK with around 7,000 at Her Majesty’s Naval Base (HMNB) Clyde in Scotland and 7,000 in Barrow. The total includes:

submariners, provided by the Royal Navy, some of whom are nuclear and naval engineers;

non-military staff, provided by the Department and contractors, with commercial, programme management and financial management expertise; and

technical staff, both departmental and contractors, ranging from nuclear-qualified welders to submarine designers.

Estate

1.19 The Enterprise is spread across 13 UK sites, with one in the US (Figure 7). The Department owns and manages nine sites, while its contractors manage four.3 They include:

HMNB Clyde, located in Faslane near Glasgow, the base for most of the Department’s submarines and shortly the Department’s Submarine Centre of Excellence;

Royal Navy Armaments Deport Coulport, near Faslane, where nuclear weapons are loaded into, and unloaded from, submarines;

Devonport Royal Dockyard, owned and operated by Babcock International, which is the UK’s main site for deep maintenance, refuelling and overhaul of submarines. It houses 13 of the Department’s 20 decommissioned submarines, with the remainder at Rosyth;

Barrow Shipyard, owned by BAE Systems, which is currently the only UK shipyard licensed to build nuclear submarines; and

Atomic Weapons Establishment (AWE) sites at Aldermaston, Burghfield and Black Nest – these Department-owned sites design, manufacture, maintain and support nuclear warheads.

1.20 The age and condition of the estate and facilities across the Enterprise vary. Some facilities, such as at Faslane, were significantly redeveloped in the 1980s and early 1990s and will be needed for at least 50 years to support the new Dreadnought submarines. Since 2014-15, the Defence Nuclear Safety Regulator has reported that facilities used to build and support the Vanguard class, and intended to support Dreadnought, will require upgrades so they can be used for longer. This includes the ship lift at HMNB Clyde that needs to be available at short notice.

1.21 The Department has identified 52 programmes (initially valued at £4.9 billion over their lifetime) currently under way to upgrade and renew the estate and facilities (Figure 8). It is considering a further 45 programmes, which include a £4 billion upgrade to facilities at HMNB Clyde. A number of these programmes have experienced delays or cost increases, which add to risks associated with using existing facilities. Delays include those to the upgrade to the AWE warhead assembly facility, which is six years late with costs increasing 146% from the £734 million 2011 approved cost to £1.8 billion, and to the nuclear core facilities in Raynesway.

Decommissioning and disposal

1.22 As with all defence equipment, nuclear submarines, sites and warheads have finite service lives. The AWE decommissions and disposes of nuclear warheads. The UK has not yet fully disposed of any nuclear submarines. At the time of our report, the Department held 20 decommissioned nuclear submarines in different stages of disassembly, with nine still carrying fuel. Due to regulatory requirements, the submarines have incurred maintenance and storage costs averaging a total of £2.5 million a year over the last 10 years. In 2016-17, the Department held a £3.3 billion provision for the storage and disposal of these 20 submarines and a further seven Trafalgar and Vanguard-class submarines.

1.23 The Department manages two programmes to decommission and dispose of its submarines. These relate to the following:

defueling submarines

Following an Office for Nuclear Regulation review, in 2004 the Department suspended its defueling of decommissioned submarines in order to upgrade its Devonport facilities to meet regulatory requirements. It initially expected to provide defueling facilities from December 2017, but in late 2016 the Defence Board deferred wider infrastructure upgrades at Devonport which impacted the defueling programme. The Department is now developing a more integrated plan for the Devonport estate, and renegotiating the defueling contracts.

dismantling submarines

In 2000, the Department began to consider how to dismantle its decommissioned submarines. In August 2016, it approved £15 million for the first phase of a three–year programme. This includes the removal of all radioactive waste from HMS Swiftsure, the first submarine to be dismantled. In 2016, the Department told the House of Commons Defence Committee that it could not accelerate the programme given affordability pressures.

1 Ministry of Defence, The United Kingdom’s future nuclear deterrent: the submarine. Initial Gate Parliamentary Report, May 2011.

2 Cost figures included in SDSR 2015 cannot be compared with those included in the 2006 White Paper.

3 Devonport Royal Dockyard, which is part Crown-owned, has been shown as contractor-owned.

Part Two

Governance and accountability in the Enterprise

2.1 The Ministry of Defence (the Department) has overall responsibility for the Nuclear Enterprise (the Enterprise). It must have confidence that its governance structures allow it to provide the deterrent, and handle nuclear materials and weapons safely. This part describes the structures in place. Past National Audit Office work has highlighted the importance for successful programme outcomes of:

clear accountability arrangements (including being clear about objectives, roles and responsibilities and spending commitments);

rigorous decision-making structures; and

comprehensive assurance arrangements.4

Accountability for the Enterprise

2.2 The National Security Council, a ministerial committee chaired by the Prime Minister, provides the government with a forum to discuss national security. One of its four sub-committees focuses on nuclear deterrence and security, and includes the Defence Secretary, the Foreign Secretary and the Chancellor of the Exchequer. The Department delivers the requirements set out by the National Security Council.

2.3 The Department is held to account in a number of ways. Within the constraints of national security, Parliament has occasionally examined aspects of the Enterprise (Figure 9). The Department’s nuclear programmes have often been the subject of Parliamentary questions. The Department answered 373 written questions between June 2014 and March 2018.

2.4 The Comptroller and Auditor General audits Enterprise expenditure as part of his statutory annual financial audits. He also considers selected nuclear programmes in his annual report on the Department’s Equipment Plan, and last specifically reported on the Enterprise in 2008. This work has been examined in open hearings of the Committee of Public Accounts.

2.5 The Infrastructure and Projects Authority (IPA) scrutinises and assures all major projects across government, including Enterprise programmes, reporting to the Cabinet Office and HM Treasury. It provides senior responsible owners with assessments of project risk and confidence in delivery. In its 2016-17 Annual Report, the IPA assessed the successful delivery of both the Dreadnought and Astute-class submarine programmes as being in doubt (Figure 10).

2.6 The Defence Secretary is accountable for all activities carried out by the Department and the Armed Forces. As part of this arrangement, the Defence Nuclear Enterprise operates within a unique regulatory environment. Many of the Department’s nuclear programmes fall outside the scope of the UK’s civil nuclear regulatory legislation. However, the Department has a long-standing policy of trying to achieve outcomes that are, as far as reasonably practicable, as least as good as those required by UK legislation across the civil sector.

2.7 The Enterprise is regulated as follows:

The Office for Nuclear Regulation regulates the contractor-owned and operated sites where nuclear-related activities are undertaken. It ensures that the nuclear industry controls its hazards effectively, continually improves its practices and maintains high standards. It oversees the transportation of certain nuclear materials and the design, build, operation and decommissioning of nuclear facilities.

The Defence Nuclear Safety Regulator regulates nuclear activities and facilities at Department-owned and operated sites. It reports independently to the Defence Secretary and regulates the Department’s nuclear propulsion programmes, nuclear weapons programmes and the transport of defence nuclear materials. Until 2015-16, the Regulator published an annual report on its findings, although it has not done so more recently for national security reasons.

Establishing effective decision-making arrangements

2.8 The Department’s governance of the Enterprise has evolved. In 2008, we reported that a senior responsible owner (SRO) covered the Dreadnought programme, as it is now known, rather than the whole Enterprise. The SRO had to work within complex structures, and did not have authority over the programmes required for the deterrent. Following a 2011 internal review, the Department introduced a devolved model that proposed a strong centre providing strategic direction, and business areas running their activities in line with that strategic direction and within set budgets.5 The Department’s Strategic Programmes team retained financial control over significant nuclear programmes, but the SRO role for the Dreadnought programme transferred to Defence Equipment & Support (DE&S). Other nuclear responsibilities were shared across two senior staff in the Department’s Head Office.

2.9 Since 2014, the Department has increasingly recognised that the governance of the Enterprise needed to be improved. A 2015 review concluded that moving responsibility for the Dreadnought programme had undermined the separation of responsibilities between the customer (Head Office) and supplier (DE&S). It also recognised that having three senior nuclear-related roles in Head Office had fragmented responsibility and accountability for the Enterprise.

2.10 In response, the Department reorganised how it made decisions across the Enterprise in order to focus more on nuclear programmes and attract people with the required skills. In particular, it created two bodies:

The Defence Nuclear Organisation (DNO)

The DNO provides a single point of accountability for the Enterprise. It is headed by the Director General Nuclear (DG Nuclear) who reports to, and is held to account by, the Defence Nuclear Executive Board. He is responsible for providing the Secretary of State, through the Board, with a coherent and comprehensive view of the Enterprise and its risks. The DNO was set up in April 2016 and became a top-level budget in April 2017.6

The Submarine Delivery Agency (SDA)

The SDA has been an executive agency since April 2018, after operating in shadow form alongside DE&S from April 2017. It manages 51 Enterprise-related procurement and support programmes on behalf of the DNO and the Navy, its customers. Although separate, it depends on DE&S for certain administrative functions and procuring spare parts. For example, some 75% of submarine spare parts are provided through DE&S.

2.11 The DNO sponsors the SDA, with DG Nuclear chairing periodic sponsor review meetings. For 2018-19, the SDA will manage equipment and support programmes worth £2.8 billion and has been given £165 million by DNO to operate. The DNO will hold the SDA to account for:

corporate performance: ensuring that the SDA is achieving the anticipated benefits of establishing a dedicated submarine delivery organisation;

acquisition and support performance: providing confidence in the SDA’s ability to deliver the Enterprise’s procurement and support programmes to agreed quality, time and cost;

the supply chain: assuring the SDA’s relationship with industry and the supply chain to achieve cost-efficient delivery and maintain future capability; and

safety and security: ensuring that the SDA achieves continuous improvement in safety and security.

2.12 The Royal Navy (the Navy) operates the submarines and provides the people and training needed for in-service submarines. The SDA manages the contracts to support in-service submarines on the Navy’s behalf, although it uses DE&S to source most of the required parts. The Submarine Acquisition and Support Plans (SASPs) set out the programme of work and funding for the SDA. The DNO and Navy Command hold the SDA to account for their agreed SASPs through monthly reviews.

2.13 The DNO, SDA and Navy work together through a series of boards and committees within the Department’s overall governance structure (Figure 11). The Defence Board, chaired by the Secretary of State, holds the Permanent Secretary to account across all defence matters, and considers the strategic Enterprise risks. A sub-committee of the Board, the Defence Nuclear Executive Board, jointly chaired by the Permanent Secretary and Vice Chief of Defence Staff, focuses on nuclear issues. This Board provides strategic oversight of the deterrent and the Enterprise, and advises the Defence Board on the overall health of the Enterprise.

2.14 The revised governance arrangements, which the Department began to develop in 2014, took 18 months to introduce after they were announced in SDSR 2015. During this period, the Department developed a new organisational structure and considered the financial delegations, flexibilities and relationships needed so the new organisations could work together. It took some time for the Department to make senior leadership appointments. For example, it first advertised the DG Nuclear role in March 2016, before it was withdrawn and re-advertised in October 2016. The post was filled in May 2017.

2.15 When it was setting up the new organisations, the Department had to make significant commercial decisions, by April 2018, to maintain a continuous at sea deterrent. These decisions included approving the second delivery phase of the Dreadnought programme, which involved entering new contractual commitments worth £960 million and agreeing to make further commitments over the next three years. It also agreed to establish a £1.5 billion contract for the seventh and final Astute-class submarine over eight years and developed new ways of working with its Dreadnought contractors.

2.16 Those we interviewed within the Department and external bodies were broadly positive about the revised governance arrangements. In particular, they considered that roles and responsibilities were now more clearly defined and the changes were a positive step towards greater trust and transparency, both internally and with contractors. However, they also recognised considerable further work was required in some areas to:

Increase capacity, including among senior leadership. Both the DNO and SDA need to increase staff numbers in line with their requirements. As at February 2018, 56 of the DNO’s required 184 posts (31%) were vacant. In 2017, the DNO paused recruitment to non-critical positions pending a review of its staffing requirements. As at March 2018, the SDA had 1,193 full-time equivalent staff and was reviewing its staffing requirements. It expects to increase staff numbers during 2018-19.

Clarify ways of working where there are two customers. Where both the DNO and Navy are SDA customers, difficult decisions on prioritising work are needed to support the whole Enterprise.

Embed cultural change. By bringing in senior staff from outside to run the new organisations, the Department aimed to introduce cultural change and encourage greater transparency and collaborative working. Those we spoke to were positive that the new leadership had begun to instil these values. The Department recognises that it needs to do more and avoid relying on a few senior individuals. Senior staff at the SDA and DNO told us that developing their organisations will be a priority for 2018.

Assurance arrangements and information within the Department

2.17 Programmes within the Enterprise are subject to the same internal scrutiny as other areas of the Department’s work. For example, the Investment Approvals Committee (IAC), chaired by the Department’s Director General Finance, considers all major investment proposals on behalf of the Defence Board. The IAC considered the highest-value and most contentious aspects of the Enterprise 120 times in the five years between 2013-14 and 2017-18. This is just over half of maritime-related submissions.7 The IAC has iteratively reviewed programmes by considering 55 programme updates, 37 notifications of past decisions being exceeded and 28 formal business cases for their approval. In some cases, the IAC requested further information before making a decision; for example on Dreadnought and Astute-class submarine production before approving the proposals in March 2018. It does not collect data on how often this occurs.

2.18 The Department uses other assurance mechanisms across the Enterprise. These include:

Defence Internal Audit (DIA)

Since 2012, the DIA has produced three reports on the Enterprise. It has developed a three-year audit plan with 16 proposed DNO audits (five on individual contracts) and 11 SDA audits.

Cost Analysis and Assurance Service (CAAS)

CAAS provides expertise to support teams in pricing work and challenges teams’ forecast cost estimates. In 2017-18, CAAS produced independent cost estimates for 13 SDA equipment and support programmes, covering 90% of its programme costs.

Directorate of Financial Planning and Scrutiny

This Directorate scrutinises and advises on, for example, the business cases for major procurement and support programmes.

Directorate of Operational Capability

This military team audits defence capabilities to identify lessons from operations and training. It last assessed the Enterprise in 2015.

4 Comptroller and Auditor General, Accountability to Parliament for taxpayers’ money, Session 2015-16, HC 849, National Audit Office, February 2016.

5 Ministry of Defence, Defence Reform: An independent report into the structure and management of the Ministry of Defence, June 2011.

6 Top-level budgets, of which there are seven, are a financial structure within the Department.

7 The Department’s top-level budgets, such as the DNO and Navy Command, consider those lower-value and less contentious programmes and decisions.

Part Three

Managing the Enterprise

3.1 Our past reports on complex programmes, including the 2008 report on the nuclear deterrent, have highlighted common risks concerning costs, commercial relationships, people and timeframes.8 This part describes how the Ministry of Defence (the Department) approaches these core aspects of programme management across the Nuclear Enterprise (the Enterprise).

Managing costs

3.2 Most Enterprise spending – 96% of the 2018-19 forecast costs – relates to long-term equipment procurement and support programmes. In spring 2018, the Department forecast the Defence Nuclear Organisation (DNO) would spend £43.9 billion on these programmes between 2018 and 2028, with Navy Command (the Navy) spending £6.7 billion and Joint Forces Command spending £355 million (Figure 12).

3.3 The Department forecasts the costs of the Enterprise to help identify how much money it needs to request from HM Treasury. As we recognised in 2008, doing this with a high degree of confidence for complex equipment programmes, such as submarines, can be difficult given the uncertainties involved. The Department expects its forecast costs to change as programmes develop and the underlying risks and economic assumptions become clearer. We have previously highlighted significant increases for both the Dreadnought and Astute-class 10-year forecasts in our annual Equipment Plan report.9 These increases stemmed from changes in labour and overhead costs, design changes and more accurate forecasting.

3.4 In the last two years, the Department’s expenditure on the Enterprise has been within 2% of the allocated budget. It has previously recognised and managed affordability concerns across its nuclear programmes. For example, in July 2016 it approved the first Dreadnought build phase, recognising the programme was unaffordable within budget at that time. It has also cut costs, for example, by delaying construction of a submarine refit centre, suspending the defueling of submarines and seeking additional funding to complete the seventh Astute-class submarine. In 2017-18, the Department also brought forward £300 million for DNO to spend on Dreadnought production.

3.5 To inform the 2018-19 funding round, in summer 2017 the Department sought to develop a more coherent and realistic understanding of the DNO costs through a bottom-up review of equipment and support programmes. This work gathered the views of programme teams about costs over the next 10 years, based on identified risks and particular costing scenarios. The exercise involved:

Revisiting the confidence levels used for programmes

Previously, forecasts were based on a 50% chance of programmes costing more or less than the forecast. Other complex programmes such as Hinckley Point C, the civil nuclear power station, estimate costs at the 80% confidence level. After reviewing the appropriateness of confidence levels, 48% of projects within the exercise were costed on a ‘most likely outcome’ basis, and 17% of the projects were costed at the higher confidence level of 70%.

Applying common standards

Programme teams previously costed risk and uncertainty differently. During the 2017 exercise, teams applied a common approach to costs and assumptions, such as pay rates and contractors’ performance, and were encouraged to be realistic about risks.

Considering Navy-controlled programmes

The Navy provided information on operational assumptions, such as in-service dates, and ensured that assumptions were coordinated. It produced its own cost estimate alongside the SDA, but did not conduct a similar bottom-up costing exercise.

Review by the Department’s independent cost assurance team

After reviewing 90% of the SDA’s programme costs, the team forecast a 3% higher cost. This resulted from different views on submarine design maturity, the schedule, efficiencies and contractor engagement.

3.6 On the basis of the summer 2017 review, the Department developed detailed cost forecasts for DNO’s procurement and support programmes, including the warhead. For the Dreadnought programme, the review considered ways to reduce costs and also re-profiled costs, increasing forecast spending by 26% in the first four years. The aim of this was to keep the programme on schedule and within the £31 billion Strategic Defence and Security Review (SDSR) 2015 forecast whole life cost commitment.

3.7 Using the 2017 review as a baseline, the Department subsequently reached a formal departmental forecast cost position of £43.9 billion over the next 10 years for its DNO equipment and support programmes. Comparing these cost forecasts against its final agreed budget, after reflecting agreed budget increases, created a £2.9 billion affordability gap (Figure 13). In developing this position, the Department:

reduced costs by delaying programmes and altering requirements.

The March 2018 decision to delay by two years the development of a replacement for the Astute-class removed £1.2 billion of costs. In addition, the Department reduced the Astute-class acquisition support costs from £590 million to £430 million over the project lifetime.

agreed with HM Treasury that they would have access to up to £600 million in 2018-19 from the £10 billion Dreadnought contingency announced in the SDSR 2015.

The Department expects to use this to ‘de-risk’ the programme, maintain the build schedule, and ensure the programme remains within the total £31 billion lifetime cost commitment also set out in the SDSR 2015.

included commitments to deliver existing efficiency requirements.

This included the Submarine Enterprise Performance Programme and £669 million of warhead savings (Figure 14). Should the Department be unable to meet this target, it will need to consider additional measures to make the Enterprise affordable.

3.8 Looking beyond 2018-19, the Department’s Modernising Defence Programme (MDP) will consider further options across its nuclear programmes to address the remaining £2.7 billion affordability gap, representing 6% of its forecast cost over the nine years. As part of the MDP, the Department will consider how to use the Department-controlled nuclear contingency. We have previously reported that the Department allocated £580 million of this contingency to the DNO in the three years up to 2019-20, which has been reflected in the Department’s agreed costing position. It has a further £1.1 billion of nuclear-related contingency it could allocate from 2020-21 to 2027-28.

3.9 If the Department were to access the full £600 million it has agreed with HM Treasury that it can take from the Dreadnought contingency in 2018-19, £9.4 billion would remain. The Department will need to agree with HM Treasury under what conditions it can access the remainder if it is required.

3.10 The overall cost, size and complexity of Enterprise programmes mean they have the potential to affect the affordability of the overall Equipment Plan. For example, the £941 million increase that we reported in January 2018 for both Astute-class and Dreadnought-class submarines, represented 52% of the overall increase in the Equipment Plan from 2016-26 to 2017-27. Nuclear programmes represent around a quarter of the Department’s overall spend in the Equipment Plan.

3.11 The Department also needs to manage its long-term Enterprise costs, including for decommissioning and disposing of dockyards, nuclear-licensed sites and 30 submarines. As at March 2017, these liabilities were estimated at £10.3 billion over the next 120 years (Figure 15). Over the past three years, the value of nuclear liabilities has increased by 186%, following changes to HM Treasury’s discount rates, the inclusion of new provisions and updated estimates. The Department expects the estimated liability to vary with changes to HM Treasury’s discount rate guidance.

Managing contractors

3.12 During 2017-18, the Department had 201 active contracts, valued at £48.9 billion, across the Enterprise. They covered building and maintaining submarines, and designing and building nuclear propulsion systems and warheads. Given the specialist requirements, only a small number of contractors can usually undertake Enterprise-related work. During 2017-18, the Department had contracts with 74 companies, of which 50 were UK firms, or subsidiaries of UK firms. The remaining 24 are non-UK firms or subsidiaries of non-UK or mixed parent companies.

3.13 The Department’s policy is to pursue open competition for its contracts wherever possible. In 2014, it introduced the Single Source Contract Regulations to ensure it secures better value for money where competition is not feasible. These regulations should apply to all Enterprise-related contracts agreed after 2014 and those undergoing significant amendment. The Department’s contracts include a £25 billion contract for managing the Atomic Weapons Establishment (AWE), which it renewed non-competitively in 2008 given programme risks and supplier confidence.10 Of the remaining contracts, 77% by value were procured through a single source, compared with 57% of all the Department’s contracts valued at over £400 million.

3.14 Currently, four contractors hold 97% by value (£47.3 billion) of Enterprise-related contracts (Figure 16). They won 83% of the Department’s competitively let contracts and 96% of the single source procurements after removing the 2008 AWE contract. Dependence on a small number of specialist contractors brings challenges. We noted in our 2008 report the difficulties the Department has in giving monopoly contractors incentives to deliver work to time and cost.

3.15 The Enterprise is supported by an estimated 1,500 sub-contractors. During 2018-19, the SDA plans to review the role and interdependencies between its sub-contractors. Many are small and specialist businesses providing bespoke products, and the intermittent and long-term nature of many nuclear programmes creates risks for them.

3.16 Since 2014-15, the Department has become increasingly aware that poor performance by contractors has affected the time, cost and quality of its nuclear programmes. Along with the Infrastructure and Projects Authority (IPA), it assesses contractors’ performance as a high risk to programme delivery for the Dreadnought-class, Astute-class and nuclear core production programmes. On the Dreadnought programme, the Department found that commercial arrangements did not provide incentives for contractors to complete work on schedule and within budget, or to perform as needed. On Astute, contractors saw their profits fall for the first four submarines as a result of poor performance. Following this, contractors’ performance has improved with Rolls-Royce delivering several key components ahead of schedule in 2017 and BAE Systems meeting overall targets at the start of 2018.

3.17 The Department must also meet its own commitments as a supplier. It frequently provides its contractors with parts and skilled personnel. For example, the Department provides around one-third of the parts to BAE Systems to build the Dreadnought-class submarines. It also supplies parts provided by other governments and contractors, such as the nuclear propulsion system that it will receive from Rolls-Royce, to be passed on to BAE Systems. The Department is liable for managing the risk of Rolls-Royce not delivering the components to time or quality.

3.18 The Department has considered different ways to manage its contracts and improve contractors’ performance. For example:

Atomic Weapons Establishment

In 2016, the Department sought to improve its oversight by revising its contract with AWE Management Limited. It split the work into five areas, each with incentives and milestones: warhead and core capability, infrastructure, capital projects, nuclear threat reduction, and leadership and integration.

In-service support

The Single Source Contract Regulations provide the Department with greater insight into contractors’ costs and activities. The Department told us that this meant it had been able to apply the contract terms more rigorously.

3.19 The most significant change to how the Department manages contractors affects production of the Dreadnought-class submarine. Following an internal review in 2014-15, the Department, Rolls-Royce and BAE Systems agreed to work towards establishing an overarching commercial agreement and coordinated incentives, which it describes as the ‘alliance’. The arrangements have evolved and differ from the Department’s initial aspiration. The new ways of working, effective from April 2018, consist of:

the SDA continuing to agree bilateral contracts with contractors;

a managing director, supported by a management committee, responsible for the day-to-day running of the alliance and accountable for delivering Dreadnought. They will set cost and schedule baselines, authorise under/overspends, challenge contractor performance and develop a procurement strategy;

a leadership board, involving all three organisations, to govern the alliance on behalf of all the parties and hold the managing director to account;

a shared cost model; schedule and breakdown of work; and reporting arrangements; and

an incentive scheme, linked to an agreed percentage profit variation, weighted to achieving milestones where two or more members need to work together.

3.20 The Department believes these arrangements will improve information-gathering, cost control and contractor performance. It hopes to move towards a more integrated model as the Dreadnought programme matures.

Managing people and skills

3.21 Having insufficient skilled staff remains a risk across the Department, and mitigating this risk is one of the Navy’s top three priorities. The Enterprise depends on civilian and military staff within the Department and industry to design, build and safely operate nuclear submarines, systems, weapons and the supporting estate. These people have a wide range of skills and expertise, including those skills specific to the Enterprise. Since 2014-15, the Defence Nuclear Safety Regulator has identified that sustaining sufficient civilian and military nuclear staff remains one of the Enterprise’s top strategic issues.

Nuclear specialists

3.22 Government and industry expect that the shortage of both civil and military nuclear skills, which they have experienced for some time, will continue. They recognise the need to close this gap. This shortage includes manufacturing and project management roles, as well as highly skilled scientific and engineering roles. A diverse range of nuclear skills are required across the United Kingdom, including at eight civil and military sites in Scotland.

3.23 In 2017, government and industry predicted a growing demand for the nuclear workforce from 88,000 in 2017 to a peak of 101,000 in 2021 (Figure 17). For this period, it would mean an additional 7,000 full-time equivalent staff a year are needed up to 2021, doubling the current inflow, of which around a quarter would need to be highly skilled scientists and engineers.11 The government has prepared a defence and civil industry national nuclear skills strategy.12

3.24 The Department has had long-standing gaps in skilled military nuclear personnel.13 In January 2018, it identified a shortage of 337 skilled personnel across seven nuclear trades and specialisms. These included nuclear marine engineers and weapons engineers. It assessed five of these shortages as having at least a ‘high impact’ on operations, meaning they regularly placed demands on staff – such as cancelling leave and training – to maintain operations.

3.25 The shortfall in nuclear skills has resulted from:

a decline in activity across both the defence and civil nuclear sectors in recent decades, leading to a skills shortage and an ageing workforce;

the time needed to develop nuclear specialists, which, depending on the skills required, can take between five and 12 years; and

increased competition for skills arising from recent investment in both civil and military nuclear projects.

3.26 The Department acknowledges that it has shortfalls, and the Navy has, over the last three years, introduced initiatives to address them. In particular, it has:

established a dedicated submarine recruitment team;

developed Navy-based schemes, including for graduates and apprenticeships, to speed up development of nuclear marine engineers;

increased numbers by, for example, bringing in people from ships to become submariners, offering service extensions and using reserve forces for more critical trade shortages;

introduced financial and non-financial incentives for nuclear specialists, leading to increased retention;

started consolidating all submarine-related training and operations into a new centre at Her Majesty’s Naval Base Clyde; and

requested an additional crew of submariners to provide resilience.

3.27 The Department has also struggled to attract people with commercial, programme management and project controls skills. Our 2008 report highlighted shortages across both the Department and its contractors, and the Department recognised significant gaps in financial, programme, commercial and technical controls in 2016. Recently, the IPA has identified that the SDA team in Barrow and Bristol needs to grow, with a significant injection of commercial and project control specialists required.

3.28 As at March 2018, the Department used 80 contractors to fill gaps in the SDA. It does not use contractors to fill gaps in the DNO, and expects to spend £6 million in 2018-19 for consultancy expertise. The Department’s terms of employment vary between different parts of the organisation. For example, pay caps in the civil service affect the salaries and benefits the DNO can offer, but the SDA has been set up with similar pay freedoms to DE&S, and so has more flexibility in the packages it can offer.

Managing complex programmes to a fixed timetable

3.29 The Department needs to bring together at the right time the submarines, people, infrastructure and weapons required to maintain the continuous at sea deterrent. It manages around 75 programmes that must be carefully sequenced so that interdependencies are identified and managed.

Bringing submarines into service

3.30 In 2008, we reported that the Department had to bring into service the first of its new deterrent submarines by 2024, in line with its then expected end-of-service life for the Vanguard class. At that time, the Department estimated that it could extend the life of these submarines safely until then.

3.31 In 2010, the Department established that a 2024 in-service date for the Dreadnought class was unlikely and changed its timetable (Figure 18). This arose from delays developing the design and engineering requirements, and securing cross-government agreement. Delaying the in-service date has impacts across the Enterprise. It means, for example, keeping the Vanguard-class submarines in service for longer. As the first Vanguard-class submarines entered service in 1993, they will need to be operated for at least 37 years. This is longer than their 25-year design life and longer than any previous nuclear submarine. The Department currently estimates to spend £400 million over the next 10 years on a life-extension and optimisation programme aimed at ensuring these submarines can continue to be used safely.

3.32 The Department’s ability to meet submarine production timetables depends on factors such as whether the submarines currently in production are built on time (Figure 19). BAE Systems is constructing both types of submarines at its Barrow shipyard, using the same docks and people. The Department brought into service the first three of its seven Astute-class submarines an average of 19 months late, and the remaining four are an average of 27 months behind schedule.

3.33 Delays in other programmes across the Enterprise may affect the build of the Astute class. Refuelling HMS Vanguard resulted in delays as a core component was diverted to HMS Vanguard. It also affected the cost and timeframes for the Department’s programme to defuel decommissioned submarines, leading to a £4 million, six-month delay, and its programme to upgrade the facilities required to produce nuclear reactor cores.

Infrastructure

3.34 To maintain and decommission its submarines, the Department needs capacity and capability across its built estate. The Department has identified a shortfall in dockyard capacity, meaning it would not have the space to conduct scheduled deep maintenance on the Astute-class submarines in the early 2020s or on the first Dreadnought class in the early 2040s.

3.35 In considering the infrastructure it needs, the Department is examining how the interdependencies between programmes impact its requirements. For example, across its Devonport estate the Department is considering a work programme, estimated to cost around £1 billion, to address dock availability. This includes for:

Maintaining and defueling larger deterrent submarines. The site currently has only one dock that is suitable for maintaining and defueling deterrent submarines. The Department needs this to both maintain its Dreadnought submarines and to defuel the Vanguard class as they retire. The Department is considering upgrading another dock so that it can undertake these activities simultaneously.

Maintaining its attack submarines. The Department may need to upgrade an existing dock to nuclear regulatory standards so it can be used to maintain attack submarines.

Defueling its attack submarines. As a result of savings measures, the Department paused work on upgrading a dock so it could defuel attack submarines. The Department has since realised that it cannot complete this work until it has decided on the work required to upgrade its neighbouring attack submarine maintenance dock. The Department has a backlog of nine submarines that will need to be defueled, and then disposed of, so there will be space for the Vanguard and Astute-class submarines when they leave service.

8 Comptroller and Auditor General, Capability in the Civil Service, Session 2016-17, HC 919, National Audit Office, March 2017; Modernising the Great Western railway, Session 2016-17, HC 781, National Audit Office, November 2016.

9 Comptroller and Auditor General, The Equipment Plan 2017 to 2027, Session 2017-19, HC 717, National Audit Office, January 2018.

10 Contract currently valued at an estimated £20 billion which may change as it is re-negotiated each year.

11 Highly skilled assessed as those being broadly above NVQ level 5 based on their skills, knowledge and experience.

12 Nuclear Skills Strategy Group, Nuclear Skills Strategic Plan, December 2016.

13 Comptroller and Auditor General, Recruitment and retention in the Armed Forces, Session 2005-06, HC 1633-1, National Audit Office, November 2006.

Appendix One

Our audit approach

1 This landscape report was prepared to help Parliament better understand one of government’s most complex and costly programmes. It does not evaluate the value-for-money of the Nuclear Enterprise (the Enterprise) and its programmes, or comment on the overarching policy. Our audit approach is summarised in Figure 20. The report:

describes the policy context and the elements that make up the Enterprise;

details the organisations and bodies through which the Enterprise is governed, and recent reforms; and

sets out how the Department is managing the Enterprise and some of the issues it faces in doing so.

Appendix Two

Our evidence base

1 Our review of the Nuclear Enterprise (the Enterprise) was primarily based on evidence gathered in 2016 and between December 2017 and March 2018. Our audit approach is outlined in Appendix One.

Interviews and visits

2 We conducted semi-structured interviews with:

project teams in Defence Equipment & Support (DE&S) and the Submarine Delivery Agency (SDA);

senior staff in the Defence Nuclear Organisation within the Ministry of Defence (the Department);

senior staff in Navy Command in Portsmouth and Faslane;

representatives of contractors including BAE Systems, Rolls-Royce, Babcock International and AWE Management Limited;

teams in the Department’s Head Office – central finance and Defence Internal Audit;

Infrastructure and Projects Authority and UK Government Investments;

HM Treasury; and

United States Department of Defense and Department of Energy.

3 We also visited the majority of the locations associated with the Enterprise including: Her Majesty’s Naval Base Clyde, the Atomic Weapons Establishment Aldermaston, BAE Systems Barrow, Rolls-Royce Raynesway, DE&S and the SDA in Bristol, and the Devonport Royal Dockyard.

Document review

4 We reviewed a wide range of documentation from across the Enterprise, including board and committee papers, organisations’ terms of reference, organisational structure documents, investment approval submissions, Defence Internal Audit reports, Defence Nuclear Safety Regulator reports, programme reviews, business cases, presentations, published National Audit Office reports and analysis papers.

Data analysis

5 We analysed cost data relating to the Enterprise, including those from programme teams at the Submarine Delivery Agency, the previous Equipment Plans, the Department’s Annual Report and Accounts 2016-17, internal costing reviews and final agreed cost positions, historical financial data, investment approval committee submissions and the Cost Assurance and Analysis Service independent cost estimates and reviews. We also analysed departmental data on nuclear-related contracts, the quality of which we reported on in 2017, and infrastructure programmes.14

14 Comptroller and Auditor General, Improving value for money in non-competitive procurement of defence equipment, Session 2017–2019, HC 412, National Audit Office, October 2017.

Appendix Three

Roles of organisations within the Enterprise

Appendix Four

Summary of previous National Audit Office (NAO) report findings and recommendations

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