The Ministry of Defence is responsible for over £42 billion of annual expenditure. While it has managed to stay within budget each year, it has failed to exercise the robust financial management necessary to control its resources effectively in the long term.
It has also failed to match its future plans to a realistic assessment of the resources available. There is a shortfall in planned expenditure against likely funding of up to £36 billion over the next ten years.
The Strategic Defence and Security Review did not explicitly set out how this long-standing gap between defence spending and funding would be resolved. It is imperative that the Department should now do so.
The Department’s consistent pattern of planned overspend demonstrates serious organizational failings and a dangerous culture of optimism. The underlying reasons for the systemic failings in budgetary controls are the tendency towards financial over-commitment, weaknesses in the financial planning processes and a division in responsibilities and accountability for financial stewardship.
The failure to integrate financial planning and control into decision making means that cuts in programmes and delays in expenditure on defence equipment are made very late in the day, leading to inefficiency, poor value for money and longer term additional costs.
The Accounting Officer has not discharged his responsibility to ensure that planned and committed expenditure across the defence budget represents value for money. For example, in 2008 the Department signed a contract to buy new aircraft carriers which was unaffordable, without having identified compensating savings. Because these savings were not subsequently found, it was necessary within a year to delay the project, resulting in an enormous cost increase and poor value for money.
We were astonished to learn that the Department has not had an explicit financial strategy linking its funding to its priorities. Without a clear strategy, it is difficult to resolve funding conflicts or to reallocate resources when priorities change. The Department does not have the tools to help it to revisit assumptions underlying its plans, ensure plans are realistic and make provision for unexpected events and managing risk.
Furthermore, the Department does not prioritise individual elements of the defence programme against its strategic priorities. When financial savings have to be found there is then no clear basis for determining where cuts should be made. So in-year decisions on budget cuts are made on an ad hoc basis, without proper consideration of relevant priorities and needs.
The Department has made some inroads into improving its financial management; however, it has yet to give financial management the serious consideration that it deserves. The Department has now appointed a professionally qualified Finance Director, and has undertaken to provide him with the full authority he needs to do the job.
On managing the defence estate
The defence estate covers 1.5% of the UK land mass, is valued at over £20 billion, and costs an estimated £2.9 billion per year to run. The Department has reduced the amount of built estate in the UK by 4.3% between 1998 and 2008, and achieved £3.4billion in sale receipts. However, staffing over the same period was cut by 13%, so more of the estate could and should have been released.
The Department does not assess its estate against clear objective criteria, such as the cost of running a site or the intensity of usage. The bias always appears to lie with keeping a site rather than disposing of it.
The Department does not collect centrally the information and data that would allow it to manage its estate in an effective way. It appears to lack urgency in its plans to improve its information base.
[Download not found]
