MoD projects face cancellation over £36bn black hole in budget

Public Accounts Committee condemns poor accounting for delayed projects and lack of equipment

The Ministry of Defence is facing a black hole of more than £36bn in its budget, risking the operational needs of the armed forces and making some major projects simply "unaffordable", according to a scathing House of Commons report.

Systemic failure, the inability to take into account the effect of impending spending cuts and the near certainty of the defence budget not increasing mean the MoD "will undoubtedly need to take difficult decisions, including possibly cancelling projects".

The report, by the Commons' Public Accounts Committee, comes amid all the major political parties warning that the defence budget will have to be cut in an economically straitened time. The Strategic Defence Review, due to start after the election, is expected to lead to a number of "prestige" projects being cut. The Royal Navy's two new projected aircraft carriers, some of the new generation of RAF jets, and a portion of the Army's squadrons of tanks are seen to be vulnerable.

The MoD itself has acknowledged a budget deficit of £6bn, based on a yearly increase of the defence budget by 2.7 per cent. But Edward Leigh, the committee chairman, pointing out that any increase is unfeasible in the near future, declared "Even if cash spending on defence stays flat, then the projected deficit will be in the order of £36bn. The deficit could be even higher than that.

"That the MoD has got itself into such a mess is an indictment of its current governance and budgetary arrangements. It has hitherto reacted to cost pressures by arbitrarily taking decisions to delay projects or reduce the amount or the capability of the equipment on offer.

"The problem is that such measures are often economies in the short term only, leading to higher overall costs and poor value for money in the longer term. In future, they must not be implemented without a proper quantified assessment of the impact on military operations and their overall value for money."

The report stated that the MoD's delaying of "the first Queen Elizabeth class aircraft carriers by a year has raised net costs by £674m and postponing the Astute Class submarines saves £139m over the next four years, but ultimately increases costs by £539m... It is an indictment of the department's guidance and budgetary arrangements that it has got itself into such a mess that, in their own words, these decisions represents the 'least bad' option open to them."

The report also examined other attempted savings by the MoD. "To save money, only 30 Merlin helicopters will now be upgraded to a new standard and the number of Future Lynx helicopters has been cut by 23 per cent and flying hours reduced by one-third, without any quantified operational analysis of the military impact of these measures." The committee noted a "worrying trend" of the MoD changing its assessment of military needs to fit in with overspend. "Previous departmental witnesses have told us they require 12 Type-45 destroyers – now they tell us they can do what they need to with six. Similarly, Nimrod numbers have fallen from 18 to six and yet the department claims it can make do. Either the original estimate is extraordinarily wrong or there has to be a loss in capability. Yet the department continues to cut equipment numbers without a proper assessment of operational impact."

The committee also criticised the Treasury for not adequately overseeing MoD spending. "The Treasury has been remiss, up to now focusing purely on whether the MoD's books were balanced in each year and ignoring the fact that the major-projects programme was becoming unaffordable. It must now seek assurance on whether the new projects can be afforded within the overall defence budget."

The shadow Defence Secretary Dr Liam Fox said: "Instead of this Government conducting a Strategic Defence Review by stealth, destroying capability in the process, we need a rigorous, foreign-policy led defence-spending review so that we can once again match resources with commitments. We need root-and-branch overhaul of the procurement process so that we can match equipment with the budget."

The Commons committee criticised the MoD for " not have any contingency funding in place within its budget to address either external pressures or cost growth from within the equipment plan. Currently, projects are budgeted on the 'most likely' cost (the expected cost of the project) and not their 'not-to-exceed cost' (the highest cost-estimate approved). A recent report showed average project costs of 40 per cent more than their 'not-to-exceed' cost by the time they are completed."