Public Accounts Committee publish Carrier Strike report

The Public Accounts Committee publishes its 18th Report of this Session which, on the basis of evidence from the Ministry of Defence examined the Carrier Strike 2012 reversion decision

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

“This u-turn, which will cost the taxpayer at least £74 million, is the latest in an ongoing saga that has seen billions of pounds of taxpayers’ money down the drain.

“When this programme got the green light in 2007, we were supposed to get two aircraft carriers, available from 2016 and 2018, at a cost to the taxpayer of £3.65 billion.

"We are now on course to spend £5.5 billion and have no aircraft carrier capability for nearly a decade.

“The MOD rushed into a decision in the 2010 Strategic Defence and Security Review to change the type of aircraft to be flown from the carriers, claiming it would save money and improve capability. Just 18 months later they were forced to admit they had got it wrong and revert to the original choice of aircraft.

“At the time of the SDSR the Department believed the cost of converting the carriers for the new aircraft would be between £500 million and £800 million. By May 2012 it had realised that the true cost would be as a high as £2 billion.

“The MOD has admitted that the 2010 decision was based on deeply flawed information, generated under time pressure and in secret. Officials also made incredibly basic errors such as forgetting to include the costs of VAT and inflation.

“The Committee is still not convinced that the MOD has this programme under control. It remains subject to huge technical and commercial risks, with the potential for further uncontrolled growth in costs. We are also concerned that, according to current plans, the early warning radar system essential for protecting the carrier will not be available for operation until 2022, two years after the first carrier and aircraft are delivered and initially operated. And the MOD does not yet have the funding to replace the shipping needed to support the new carrier.

“To avoid making the same mistakes again the MOD needs to start planning now for the next SDSR in 2015, including making sure that this time it has the right information on which to base decisions.”

Margaret Hodge was speaking as the Committee published its 18th Report of this Session which, on the basis of evidence from the Ministry of Defence, examined the decision by the Department to revert to the original choice of aircraft to be flown from the two aircraft carriers.
Summary.

In October 2010, the Ministry of Defence (the Department) decided on the basis of deeply flawed information to change the type of aircraft to be flown from the two aircraft carriers under construction for the Carrier Strike programme. In 2012, when the Department realised that this decision would result in additional costs and delay, it decided to revert to the original choice of aircraft.

Despite this change of mind, the Department still faces major challenges to the affordability of the Carrier Strike programme, particularly with the uncontrolled cost growth in the aircraft and carriers, and the misalignment of essential capabilities such as the radar system needed to protect the carriers. In addition, the Department might not have the skills or capability to manage the programme despite having some 400 staff working on it.

Conclusions and recommendations

Carrier Strike programme

1. The Carrier Strike programme comprises two new aircraft carriers, the aircraft that will operate from them, and a new helicopter-based early warning radar system (known as ‘Crowsnest’). As part of the 2010 Strategic Defence and Security Review, the Department decided to change the type of aircraft to be flown from the carriers from the Short Take-Off and Vertical Landing (STOVL) variant of the Joint Strike Fighter to the carrier variant. In 2010 the decision was justified by claiming the alternative aircraft would both save money and enhance capability. Yet 18 months on the Department yet again changed its mind. In May 2012, the Department asserted that the benefits expected from switching to the carrier variant of the aircraft would not be achieved, the costs of switching would be significantly higher than projected, and it would delay the operation of the new carriers. Accordingly, the Department decided to revert to the original aircraft type and announced that it would once again be buying the STOVL variant. That change of mind will cost the taxpayer at least £74 million more, though final costs will only be known in 2014.

History of poor decisions

2. The Department has a history of making poor decisions, based on inadequate information. In this case, the Department provided decision makers with deeply flawed information on the benefits of changing the type of aircraft which included basic errors, such as omitting VAT and inflation from the costs of converting the carriers. The Department attributed these mistakes, which have cost taxpayers at least £74 million, to the process being rushed and secret.

Recommendation: For the 2015 Strategic Defence and Security Review, the Department must plan now to provide decision makers with improved information, sufficient time to consider options rationally and avoid repeating the mistakes of the 2010 decision.

Altered views

3. In justifying its further changes the Department said it had altered its view on the urgency of securing the new capability in service and on how it was going to operate with our allies in deploying the aircraft carriers. It does not make for good planning to have a constant change of view which results in changes to specification and requirements.

Recommendation: The Department must determine its needs and requirements thoroughly and transparently and then do all it can to stick to these over time.

Component elements delivered piecemeal

4. The component elements of the programme will be delivered piecemeal, reducing the benefits from the sums invested. There is a two year gap between the planned delivery and initial operation of the first carrier and aircraft in 2020, and the early warning radar system Crowsnest in 2022, which is essential to protecting the carrier and its crew. In addition, some support shipping will be 30 years old when the carrier comes into service but the Department does not yet have funding to replace them.

Recommendation: The Department needs to align the delivery of the various component projects of Carrier Strike to make the most effective use of its significant investment. It must provide decision makers with the necessary information to prioritise and allocate appropriate funding for the programme and the support shipping to operate the carriers, as part of the 2015 Strategic Defence and Security Review.

High risk programme

5. Carrier Strike remains a high risk programme as the Department has little control over the technical risks and costs involved in acquiring the aircraft. Despite assurances from the Department, we are not convinced that it has the aircraft contract under control. Although Carrier Strike is over five years from planned operation, significant technical issues, costs and delivery dates for the aircraft are not resolved. There are also significant cost risks associated with in-service contracts for maintenance which have yet to be resolved.

Recommendation: The Department must seek to minimise outstanding risks as soon as possible and it should, drawing on its experience of other aircraft programmes such as Tornado and Typhoon, exert its influence with international partners to ensure that the support arrangements take full account of UK requirements.

Crucial negotiations with industry

6. The Department has not yet completed crucial negotiations with industry over the carriers. The current carriers’ contract is not fit for purpose as it fails to provide industry with any real incentive to control costs. The Department has not been able to transfer delivery risks to contractors and has struggled to manage its relationship with UK industry.

Recommendation: The Department must establish clear cost and time baselines for the completion of the carriers, which the Department must use to monitor progress.

Management of the programme

7. Despite having some 400 staff working on Carrier Strike there is a risk the Department is not managing the programme effectively. Although the Department employs some 400 people on this programme, it may not have the right procurement skills to manage the risks in delivering Carrier Strike effectively. We recognise there have been cuts to this function, but question whether the team is now the right size or if further significant reductions are possible. We are concerned that the Department’s staff are wasting their time with bureaucracy and duplicated effort in having to make detailed checks on the operations of contractors, raising a question as to the quality of the contracting process.

Recommendation: The NAO should examine whether the Department has the appropriate mix of staff, skills and capability in procuring equipment and support from industry and whether the Department’s processes for managing contracts are fit for purpose.