November 16, 2011 12:01 am

MoD makes progress on cost overruns

The Ministry of Defence is making considerable progress in its efforts to avoid the sudden cost increases in major military equipment projects that have long been a blight on the department’s finances, Whitehall’s accountancy watchdog reports today.

In the latest indication that the MoD is beginning to get its budget under control after years of uncertainty, the National Audit Office says that in the last financial year £500m has been added to the forecast cost of completing the department’s 15 biggest equipment programmes.

The NAO is critical of the increase in projected costs, which has partly come about because of a decision taken by the government last year to delay the introduction of a new submarine fleet to carry the UK’s independent nuclear deterrent.

Nevertheless, the £500m figure is significantly below the increase of £3.3bn in forecast costs registered by the NAO in the previous financial year 2009-10. As a result it reports today that “the underlying trend of the [MoD’s] major projects is reduced cost growth” and that the department is “actively working to balance its books in the longer term.”

The NAO has been fiercely critical of the MoD’s finances in the past. However, an official acknowledged that today’s report marks a change in tone.

“While the MoD hasn’t fully turned the corner in terms of getting its finances in order, they clearly acknowledge the corner is there,” the NAO official said. “We’re a lot more positive in this report than we have been in the past.”

The decision to delay completing the submarine fleet for the nuclear deterrent until 2028 was taken in last year’s Strategic Defence and Security Review in order to ease huge pressures on the equipment budget that will come about at the end of this decade.

This, in turn, meant that the programme to build a new fleet of conventional Astute submarines had to be slowed to avoid a production gap. This has added to the overall cost of building the Astute submarines, not least because shipyard workers need to be employed for longer.

Over the last decade, the MoD’s equipment programme has suffered from huge cost increases that often run into billions of pounds. Indeed, the NAO reports that the MoD’s 15 biggest current projects, including the Typhoon fighter aircraft and the Future Strategic Tanker Aircraft, are projected to be £6.1bn, or 11.4 per cent, over original budget.

The government has long argued that this increase has happened because of mistakes that the last Labour government – and former MoD service chiefs – have made in managing the budget. Liam Fox, the former defence secretary, has argued that Labour ministers signed contracts to buy equipment without any certainty that there would be cash in future years to pay for it.

Some of the major decisions to scrap equipment taken in last year’s SDSR may well have inhibited cost growth over the last financial year. The decision to scrap the Nimrod MRA4 reconnaissance aircraft was almost certainly the most significant in this regard. The project was 114 months late and £789m over budget – and would almost certainly have added to MoD costs over and above what was budgeted in the last financial year.

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