Thursday, 15 January 2015

The 2014 Major Projects Report

So, this is 2015 is it? Looks very similar to last year by my reckoning. But a new year means a new... major projects report from the National Audit Office. How dreary. This one does include a review of the ten year equipment plan (2014-2024) as a bonus though. Don't all celebrate at once. Having read it though I can honestly say this; it is unintentionally hilarious.

Well actually we need a bit of context for this, so first we need to look at the governments propaganda blurb in response to the report;
An independent audit found the cost of the department’s 11 biggest equipment programmes fell by £397 million in the past year...

Across the sample of projects that are reviewed by the Major Projects Report, this year represents the MOD’s best cost performance since 2005 and the best time performance since at least 2001...
Minister for Defence Equipment, Support and Technology Philip Dunne said: This equipment plan sets out our plans to spend around £163 billion on new equipment and support over the next 10 years. For the third successive year it is realistic and affordable and provides excellent value for money to the taxpayer across the coming decade as evidenced by our success in securing savings in Equipment Support, which we have been able to factor in to the 10 year plan... 

In addition I welcome the NAO report which recognises the progress we are continuing to make. We have reduced costs by almost £400 million in our major projects and enjoyed our best performance on cost since 2005 and time since 2001. There is always more we can do, but I am delighted the great strides the department has made have been recognised...
The Government had to take difficult decisions to balance the Defence budget as part of its long term economic plan, and this is what has led to a position where it is now able to invest significantly in equipment. The NAO report recognises the progress we are continuing to make, including the relative stability of forecast project costs, as well as highlighting areas where we must continue to improve and refine our processes...

Today’s report builds on Lord Levene’s Defence Reform findings published in December last year which said the right attitudes and behaviours are increasingly in place in the Head Office and the MOD’s management board has already come to be considered among the best in Whitehall. The report also provided a positive assessment of progress in Defence Equipment and Support where reforms augur well for the future...
So, all good it would appear then. Everything under control, budgets being balanced, projects being delivered on time, and the claim that the MOD is now the envy of Whitehall when it comes to management. So what exactly did the report itself say? Let the humour begin!
Compared with the 2013 Plan the forecast cost of procurement has increased by £5.4 billion while support costs are expected to be £6.2 billion less over the period. This is due mainly to: a reclassification of costs for one project as procurement rather than support; and anticipated efficiency savings in the support budget more generally. Anticipated efficiency savings are the main cause of a £5.8 billion decrease in the Equipment Plan budget across the 9 years that the 2013 and 2014 Plans have in common.
The word to keep an eye on here in particular is "Anticipated". It crops up a lot and as we'll see later, the case for all the governments optimism isn't exactly shared by the NAO. For example;
The project teams have provisionally identified potential savings of £2.9 billion over 10 years. Only a limited proportion of these savings have been realised to date.
Not off to a good start it would seem, but there's 9 years left to run in fairness. So what else have we got?
Project teams continue to be over-optimistic in their forecasts of procurement costs. The Department’s Cost Assurance and Analysis Service estimates that the forecast cost of procuring equipment is understated by £3.2 billion against project team forecasts, a reduction from £4.3 billion for the 2013 to 2023 period. The Cost Assurance and Analysis Service has also reviewed 28% of the support cost budget to date, and estimate that project team forecasts for those projects are £2 billion understated.
Oh dear, oh dear. What's especially frustrating about reading that is that this has been a consistent theme in UK (and indeed global) defence procurement for decades. One of the major causes of cost and time over runs in defence projects tends to be simply that the initial estimates are often chronically understated, which of course at the time helps to make the initial case to government to get the projects off the ground. 

It just seems like this is a record that keeps getting played again and again at the MOD and nobody ever seems to get round to changing it. It's also quite an ominous indictment when the previous paragraph talked about "Anticipated" savings. Anticipated savings from an organisation that has a chronic problem with over-optimism equals...? On we go;
A review of the estimated procurement costs of 29 of the largest projects within the Plan by the Cost Assurance and Analysis Service in January 2014 initially estimated the gap between the allocated budget and the realistic procurement costs of these projects to be some £4.7 billion. In April 2014, the Department adjusted its budget allocations, adding £2.4 billion to the 2014 Equipment Procurement Plan. There is currently no overall estimate of whether, or to what extent, support budgets may be understated.
I distinctly remember this government having a moan at the last government on defence, something to do with unfunded plans etc? It seems what's good for the goose is good for the gander now. It also doesn't mesh well with the claims that everything is balanced up and nice savings have been made if it then turns out that there is a shortfall on the horizon. At least the government has a contingency fund in place though, right?
The Department’s contingency may not be enough to mitigate the combined effects of underestimates in project team costs and equipment plan budgets.
Whoops. Still;
Our review of the forecast cost of 11 major projects where the Department has decided to buy equipment shows that the time, cost and performance of these projects has remained stable in 2013-14.
Well that's something at least.
We have excluded the £754 million cost increase of the Queen Elizabeth Class Aircraft Carriers, which we reported in our Major Projects Report in February 2014.
... ah. 
The Department has taken action to manage the risk of underspending against its budget, as in past years.
Only in government could the possibility of underspending on your budget be described as a "risk". Normally an underspend is a good thing, a sign that you're doing something right and that frees up money for future years. But government has long been in the game of "use it or lose it". And so the MOD opted to use it, and in doing so went £185 million over budget!
To avoid a significant underspend in 2013-14 the Department included £920 million of additional work in the programme. When the Department became concerned that an underspend would emerge in-year, a further £213 million of additional work was added to the programme. In the event, the Department overspent by £185 million against its original assumptions.
Now we have to be careful, because "additional work" could just mean bringing forward work that would otherwise have been done in the future and so it might as well be done now while there is time and spare capacity to do it. The question is though, what exactly was this additional work? And if it was work that has been conjured up out of nowhere just to consume a chunk of the budget then who will be resigning for wasting £920 million of taxpayers money? Something for the defence select committee to look into I think.

Whether the work was or wasn't planned is also neither here nor there. The concerning factor for me is that the MOD some how ended up going back over budget again. Did someone not think that was a little odd? Does anyone at the MOD actually own a calculator, and if so, do they actually know how to use it? Why is this not a bigger issue, as both the government and opposition seem perfectly fine with it?

Indeed it creates a stark comparison when you hold the MOD up against some commercial organisations like Tesco, where an over statement of profit by £263 million has led to a criminal investigation, an internal investigation with the help of an external auditor, the chairman of the board announcing he will step down next year, bonuses being withheld from two former executives, and eight senior executives being suspended. 

Where is the list of suspensions, bonus retentions and resignations at the MOD, considering they managed to not only not notice a nearly £1 billion underspend until it was on top of them, but then some how managed to swing the opposite way and over spend by almost £200 million? Does nobody else find this remarkable, or has government incompetence become so wide spread that now nothing comes as a shock to the system, no matter how bloody outrageous the level of contempt for handling public money might be?

At least it can't get any worse from here on in. Nothing can top that;
In addition, external consultants working with the Department to review support costs have found consistent weaknesses in:
• specifying requirements;
• estimating costs; and
• working with suppliers to drive down costs.
Pass me a drink;
Only 9 of our 17 projects forecast a range of potential costs based on the likelihood of different scenarios and risks, in line with good practice. Sometimes project teams rely on industry to model realistic cost estimates for projects. This casts doubt on whether the forecast costs are sufficiently robust for the Department to have confidence that the Equipment Plan is affordable and the Department has sufficient quality of information to manage the risks to the budget.
 ... And then I said, *hic*, so how does he reach the top shelf?! HAHAHAHAHA;
... Also, the Department can choose to spend more than that on equipment procurement and support, and the current Equipment Plan budget is significantly in excess of the amount allocated by HM Treasury for equipment procurement.
Remind me someone, where have we heard before something about unfunded equipment plans, defence blackholes etc? And yet here we are again. 

Honestly I think I might as well stop there because it's getting late and I'm pissed (in both the British and American sense of the word). If you want to read the rest of the report you can do that through this link, while Think Defence has also done his own analysis which you can find here.

To me it just reads like the same old, same old. Multi-million pound overspends at the drop of a hat, the sort of cost planning and cost management skills that means the MOD wouldn't even be able to get a small business loan out in the commercial world, overoptimism at every turn and seemingly zero accountability for the mistakes. 

Or "business as usual at the MOD" as it's otherwise known.

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