The Committee’s recommendations are outlined in its Eleventh Report of this Session, Strategic financial management in the Ministry of Defence and Military flying training.
The Report follows an inquiry by the Committee, which in turn followed steps taken by the MoD to address a £38 billion funding gap. The Committee also heard evidence on the project to create the UK Military Flying Training System.
Commenting on its findings, PAC Chair Meg Hillier MP said today:
"Individual policy challenges should not distract from the fact the Ministry of Defence needs to keep a grip of its finances. It is vital it manages its budget effectively, and in particular projects carried out by contractors.
This point is well illustrated by the project to introduce a new military flying training system, which proceeded on outdated assumptions and without sufficiently swift action to tackle poor performance. Such weaknesses and related delays can result in additional costs to the public purse.
More broadly we recognise the MoD has taken steps to operate within its means and restructure significant aspects of its operation. However, we are concerned it has done so in part by deferring some costs to future years and by delegating responsibilities to staff with limited experience of handling large budgets.
While this is well-intentioned, there is a real risk of taxpayers being left further out of pocket. The Department must equip itself with the skills to ensure projects begin on a sound footing, properly monitor their progress and, should circumstances change, have credible measures in place to respond effectively."
Prior to the 2010 Strategic Defence and Security Review, a £38 billion gap was identified between the funding the Ministry of Defence (the Department) expected and the forecast cost of Defence over the following ten years. This funding gap was having a destabilising effect on the defence budget. Since 2010, the Department has adopted a two-pronged approach to improving its financial management. It has sought to:
- address the funding gap in its equipment programme and reduce costs in all areas of the defence budget to meet the Spending Review 2010 settlement; and
- improve its management structure by delegating greater financial responsibilities to the Armed Forces who, since April 2015, have managed over 70% of the £34 billion defence budget.
The Department has sought to reduce costs by reforming its Head Office, its procurement arm (Defence Equipment and Support) and its estate management organisation (Defence Infrastructure Organisation). Reform of the procurement and estate management functions is being sought through contracts with industry to provide additional skills and capabilities the Department does not hold.
The use of industry expertise to reform areas of the Department’s business is not new. In 2008, the Department signed a 25 year contract with Ascent, to develop and manage a new approach to core flying training. Under this approach, Ascent is responsible for providing aircraft and simulators for training, running training courses and training an agreed number of aircrew from all three of the Armed Forces each year.
The Department remains responsible for many aspects of core training. These include providing military instructors, determining the number of students it needs and setting the training input and output standards.
However, full implementation of the new core training has been delayed by nearly six years.
Several events affected the Department’s original assumptions about how its 25-year contract with Ascent would work. These include the government’s decision to reduce the size of the front line fleet of aircraft, resulting in a substantial reduction in the number of aircrew entering training each year; a decrease in overall funding from a forecast of £6.8 billion to £3.2 billion; changes to the funding approach (from PFI to conventional funding); and poor contractor performance between 2008 and 2012. These events took the Department time to resolve but contractor performance has since improved.
The Department has addressed the £38 billion funding gap that emerged prior to 2010 between the funding it expected and the forecast cost of Defence over the following ten years. It has also cut its costs to live within a reduced budget. However, this has been achieved not just by delivering financial savings, but also by deferring some costs into future years, at the risk that these costs could increase because of the delay.
The stability of the Department’s financial position depends on the accuracy of a large number of assumptions it has to make, many of which have proved over-optimistic in the past, and its ability to: control its costs, achieve the significant savings anticipated in the equipment and infrastructure budgets, and manage the cost of the Department’s portfolio of nuclear-related programmes.
The Department is reliant on contractors to fill gaps in its skills and capacity and to help it achieve savings and operate more efficiently. But the Department’s management of its contractors has often been poor. For example, the introduction of a new military flying training system has been delayed by six years due to poor contractor performance and significant changes to the assumptions underpinning the contract on the number of students, the method of financing and the total forecast cost.
The position has improved, but we are concerned by how slow the Department was to take action to address these issues with its contractor and its ability to determine whether the expected benefits of the new training system are being delivered. This programme demonstrates the need for the Department to identify and address under performance quickly as it becomes increasingly dependent on contractors to improve its skills and capabilities and deliver its programme.
We remain concerned about project and contract management by the Department, particularly in relation to the Armed Forces who are now responsible for managing over 70% of the defence budget. Failure to improve its skills and capabilities in these areas and to put in place strong assurance mechanisms to identify any problems at the earliest opportunity could threaten the Department’s ability to maintain the stability of its financial position.