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British MPs Slam Ship Project Costs (Apr 19)

EDITOR’S NOTE: below are excerpts of the Defence Committee report, which among other issues related to MoD’s performance examines in detail the management of the Royal Navy’s Landing Ship Dock (Auxiliary) program, whose cost has doubled to attain nearly £500 million for four ships. A link to the full report is provided at the bottom of the page.

1. We are concerned that as at 1 April 2005 there was a 4.9 per cent manning shortfall in the Royal Navy / Royal Marines against the overall requirement. We note that by April 2006 the shortfall is expected to reduce to 3.6 per cent and look to MoD to take action to ensure that the improvements continue and to address the serious shortages at Petty Officer level. (Paragraph 9)

3. We are concerned that there are critical shortages, in various specialist trades, in all three Services, including aircrew and medical personnel. We note that the overall shortfall in medical personnel has reduced from 23 per cent to 20 per cent, and look to MoD to take further action to address this substantial shortfall in such a vital area. (Paragraph 18)

7. MoD's Performance Report shows that MoD only 'partly met' its PSA Target relating to procurement, missing the targets relating to time slippage and cost increases. In contrast, the Report shows that the Defence Procurement Agency met five of its six Key Targets, only missing one target on customer satisfaction. We expect MoD to review the way that its performance in relation to defence equipment procurement is reported in order to provide a clearer picture on whether performance is improving or not. (Paragraph 30)

8. We note that in 2004-05, in-year cost decreases of some £699 million were reported on the top 20 major defence equipment projects. However, a 'significant element' of this decrease related to a reduction in the numbers of equipments being ordered. In our view, it is not a great achievement to report an in-year cost decrease, if this is only because less equipment, or less capable equipment, has been acquired. (Paragraph 33)

9. We fully support MoD's efforts to improve procurement performance. We note that a review of defence procurement has been instituted and expect the recommendations of the review to be implemented both quickly and fully. Improvements in the way MoD procure equipment are vital to the success of the Defence Industrial Strategy and we plan to monitor this closely. (Paragraph 37)

11. MoD reports substantial savings in its Annual Report and Accounts yet, when pressed by us, informs us that some of the reported savings "cannot be validated". This is worrying. We expect figures in MoD's Annual Report and Accounts to be based on robust evidence and look to MoD to introduce systems which can generate accurate figures relating to savings, rather than figures which cannot be substantiated fully. Overstating savings undermines confidence in the accuracy of the Performance Report. (Paragraph 44)

12. We consider that there is a strong case in the future for the National Audit Office to provide an opinion on the savings figures claimed by the MoD in its Performance Report, as we have little confidence in the accuracy of such figures. (Paragraph 45)

13. Follow-up information provided by MoD showed that the savings of £88 million on Tornado aircraft support were achieved in two years, not four years as stated in MoD's Performance Report. This is a notable achievement. Nevertheless, once again, it raises questions about the accuracy of information provided in the Performance Report and we look to MoD to ensure that more accurate information is provided in the future. (Paragraph 49)

14. We are surprised to learn that stock sold under a rationalisation programme had to be bought back for some £73,000 as it was subsequently found to be needed. We expect MoD to learn lessons from this case and, in future, to assess properly the future need for items before they are disposed of. (Paragraph 52)

19. A new contingent liability of some £400 million, relating to a liability to clean up training sites in Canada should the UK cease training there, has been included in the 2004-05 financial accounts. We consider this to be a substantial liability and expect MoD to re-assess, on a regular basis, the size of this liability and consider how such a liability of this scale would be funded if it fell due. (Paragraph 70)

21. We find it hard to understand why the procurement of these four ships, which are not particularly sophisticated, is likely to cost in the region of half a billion pounds, substantially over the initial contract price. The Landing Ship Dock (Auxiliary) programme cannot be considered to have achieved value for money. MoD seems to have given the lead contractor on the programme an open-ended cheque book. (Paragraph 81)

22. The first contract for two ships, on the Landing Ship Dock (Auxiliary) programme, was let in December 2000. While this was some time after the launch of the Smart Procurement initiative, this procurement cannot be considered 'smart'. It raises questions about how MoD assesses whether a contractor has the necessary skills to deliver a specific equipment programme. We expect the lessons from this sorry episode to be identified and implemented. We wish to be kept informed of the progress on this programme. (Paragraph 82)

23. We are amazed at the scale of the losses relating to a building at AWE Aldermaston which could not be used. The total losses amount to some £147 million. MoD's acknowledgement that the project "was handled badly" is a considerable understatement. It is essential that the lessons are learned and we do not expect to see a repetition of such a debacle in the future. (Paragraph 86)

24. We are concerned that the two losses relating to the building at AWE Aldermaston, one of £65 million and the other for £82 million, were listed separately in the losses statement in the Annual Report and Accounts, and that there was no way of linking the two losses from the information provided. In future, we expect MoD to provide sufficient information for related losses to be identified. (Paragraph 87)

27. We note that the flotation of QinetiQ has taken place and that £250 million from the sale will be retained by MoD to be invested in the defence programme. We look to MoD to inform us as to how its proceeds from the sale will be used. The NAO has announced that it is to examine the privatisation of QinetiQ to assess whether value for money was achieved: we await this report with interest. (Paragraph 101)

Click here for the full report, on the House of Commons website (HTML format; PDF also available)

Conclusions and Recommendations