1 Reallocation of costs outside the
boundaries of the Major Projects Report
1. The Major Projects Report 2007 provides information
on the time, cost and performance of 20 of the Ministry of Defence's
largest military equipment projects, where the main investment
decision has been taken, and the top 10 projects in the earlier
Assessment Phase.
2. The current total forecast procurement costs for
the 19 largest military equipment projects (excluding the Typhoon
aircraft) is £28 billion.[2]
This is an increase of 11% compared with the 'most likely' cost
when the main investment decision was taken. The Department is
struggling to afford all the equipment it wants to buy and is
juggling its budgets as a result. For the second year running,
the Department has limited cost increases on its major projects
by reallocating expenditure, and sometimes the associated budget,
to other areas of Defence spending. In 2006-07, over £600
million was transferred to different budget lines (Figure 1).
The Department believes that this reallocation of responsibility
for costs will lead to projects being managed better and make
measuring performance easier.[3]
3. As some of these reallocations do not represent
real savings, they will inevitably impact on other areas of Defence
spending. In its Treasury Minute response on the Major Projects
Report 2006, the Department agreed it would take steps to identify
the impact on other areas of defence where costs are transferred
out of the Major Projects Report.[4]
The Department has not been able to provide concrete examples
whereby the opportunity costs of such transfers are quantified.
Instead, it cited:
- its well-established planning
process, through which it balances its acquisition programme within
the given budget, including identifying savings that can be made
and how their impact can be controlled across all the major military
equipment projects on an ongoing basis; and
- Capability Audits and Balance of Investment Reviews,
through which the Department seeks to absorb the costs from the
Major Projects Report by reducing investment within the wider
equipment and support programme.[5]
4. If no reallocations had taken place, the cost
of the Major Projects would be £1 billion more than reported
in 2007. While the Department has not claimed these reallocations
as savings, they are masking cost increases on projects, in particular,
because, in many cases, the money is being managed by the same
project teams. This process may help for accounting purposes,
for example, in ensuring the total cost of the asset in construction
can be easily identified, but after two years, the Department
should have identified all the incorrectly allocated budgets and
re-assigned them to the appropriate managers.[6]
Figure 1: In 2006-07, £609 million
was transferred to be managed either corporately or by other projects
and budget holders
PROJECT
|
EXPLANATION
| TOTAL COST TRANSFERRED (£M)
|
MANAGED BY
|
| Transfer of costs to other budgets
|
| Support Vehicle
| Warranty costs, previously included within the Demonstration and Manufacture phase budget, have been re-categorised to the in-service budget.
| -64
| The same project team in a different budget line
|
| Sting Ray torpedo
| Modifications to the torpedo and conversion costs have been recognised as separate programmes.
| -7
| The same project team in a different budget line
|
| Transfer of costs to other programmes
|
| Guided Multiple Launch Rocket System
| Funding transferred to the Indirect Fire Precision Attack programme, which is in the Assessment Phase project population (Appendix 2).
| -165
| Different project team which as yet has no approval for the expenditure
|
| Precision Guided Bomb
| Reduction reflects the transfer of integration costs to the corresponding aircraft. These projects are currently outside the Major Projects population1.
| -67
| Tornado and Typhoon project teams
|
| Falcon communications system
| Costs associated with the Vehicle Military Engineering Programme transferred to Joint Electronic Surveillance Integrated Project Team.2
| -1
| Different project team
|
| Measures in line with the Defence Industrial Strategy
|
| Astute Class Submarine
| Costs of maintaining a sovereign submarine build capability removed from programme.
| -227
| The same project team in a different budget line
|
| Type 45 Destroyer
| Additional costs, caused by a move of ship build from Barrow to the Clyde.
| -78
| The same project team in a different budget line
|
| TOTAL 2006-07
| ####nbsp####
| -609
| ####nbsp####
|
| TOTAL 2005-06
| ####nbsp####
| -448
| ####nbsp####
|
| MAJOR PROJECTS REPORTS 2006 AND 2007
| ####nbsp####
|
-1,057
| ####nbsp####
|
Note 1: Typhoon Future Capabilities Programme will
be in the Major Projects population for 2007-08
Note 2: This expenditure does not fall within the
Major Projects Report population
Source: C&AG's Report, Figure 5, page 13
5. The Major Projects Report 2007 does not provide
sufficient information for the Department to be held properly
accountable for its expenditure. As a result of the Department
reallocating money outside the Major Projects Report boundaries,
the cost of the project as reported does not provide Parliament
with the full picture of the cost of bringing the equipment into
military service. The Department's approach can be likened to
an individual only budgeting for the cost of buying a car, and
not thinking about the additional initial expenses of being able
to use it, or the on-going costs of keeping it on the road. Thus,
costs associated with training and logistics are not included
within the Department's forecast costs for major projects. Proposed
revisions to the format of the Major Projects Report present the
Department with the opportunity to correct these omissions and
provide us not only with information on the cost of building and
procuring the asset, but also making it usable by frontline service
personnel.[7]
2 C&AG's Report, para 2. The Typhoon aircraft is
excluded from the analysis of costs as the information is commercially
sensitive. Back
3
Qq 1, 20-22 Back
4
Treasury Minute on the Forty-sixth Report from the Committee of
Public Accounts 2006-2007, Cm 7275 Back
5
Qq 2-3, 6, 45-46, 70; Ev 15 Back
6
Qq 23-24, 26-30, 35, 37-39, 48 Back
7
Qq 34, 73-78, 80 Back
|
