Is the Ministry of Defence living beyond its means?

Professor Trevor Taylor, Professorial Research Fellow, RUSI

The National Audit Office (NAO) report on the Strategic Financial Management of the Defence Budget [1] has attracted understandable press attention because of the criticism it made of the Ministry of Defence's (MoD) failure to generate affordable plans, primarily but not exclusively in the area of equipment procurement. As a consequence the Ministry constantly has to make short-notice, time-consuming, expensive, and sometimes incoherent efforts to ensure that it does not overspend its actual allocation. However, the report also recognises both the demanding nature of the challenges that the MoD faces and the progress it has made in some areas.

The report states that 'the Department has a fair understanding of costs within each major component of its budget, however it does not routinely analyse the cost of cross-cutting activities across all the elements required to generate military capabilities'. This perhaps is an understatement and it would be more accurate to say that the MoD currently cannot cost the generation of capabilities because it does not produce information in the right form. There is also the unspoken issue of whether the MoD's effort to manage the planning and delivery of defence, on a capability basis, is hindered significantly by its management operating extensively on single service lines.

Finance at the heart of defence decision-making?

The report recommends that the Finance Director, and financial management in general, should be even more prominent in the Ministry, finding that the department 'still does not place financial management at the heart of its decision-making' (para. 18).  But, defence for good reason can never find it easy to reconcile the Whitehall golden rule about always avoiding budget overspends with the other pressures that arise when military lives and operational success are at risk. Especially in a time of war, there are strong public pressures, endorsed in the last Conservative Party Manifesto, that British forces on operations should have 'the best' equipment, not the best value equipment. Over the last seven years the media has not been slow to criticise the ministry when it appeared that troops had been sent to Iraq or Afghanistan with inadequate kit.  Intriguingly, in his 2009 analysis of the Nimrod crash. Charles Haddon-Cave found differently to the NAO, complaining that finance had actually become too central in defence acquisition, and that safety had suffered as a result. The Military Aviation Authority has been set up as a consequence.

The pre-eminence of the Finance Director?

The NAO's enthusiasm for a strong Finance Director implies that the Strategy Director should be in a subsidiary position, but it cannot be forgotten that the Strategy Director's post was established to help meet a Cabinet Office complaint, generated in its Capability Reviews of departments, suggesting that the MoD could be stronger in setting direction, delivery and strategic processes. To an extent, the MoD is receiving contradictory guidance from the Cabinet Office, Haddon-Cave and the NAO. It does, however, seem inescapable that the roles and relationships of three, three-star posts, the Finance, Strategy and Policy Directors, and the responsibilities of the Permanent Secretaries above for integrating their activities, need further attention.

Long-term cost plans

Under Labour, the pan-defence Long Term Costings were abandoned, largely because it took a lot of work to produce poor quality information that was little used in practice? However the NAO is content that the MoD is going back to financial planning across defence that covers the next ten years, rather than just planning equipment for that period, as was the case for most of the time of the last Labour Government. There is nothing in the report as to why the new long-term costings are going to be more reliable and usable than their predecessors.

Contingency funds

The NAO endorses the idea that the MoD should include more contingency in its financial and activity plans so that unexpected increases in cost in one area does not cause disruption in others, costing the Ministry some of its funding as a result. Also a contingency fund would avoid staff having to devote a large amount of time and effort deciding just where adjustments should be made.

A central contingency fund would certainly be of value in the equipment area, but the MoD would be more incentivised to develop such an element if it were allowed to carry forward unspent money into the next financial year. This issue is not addressed by the NAO. One possible model could be that the MoD sets aside a sum of £(x) pounds each year in a contingency fund, that unspent funds can be carried forward, and that the maximum size of the fund would be capped, perhaps at 3(x). Parliament would have to agree to such an arrangement and see it as justified by the particular risks that the MoD faces.

Stock levels

A final element in the report is its questioning of whether the MoD is yet holding the right level of assets and stocks and whether too much money is still tied up in these elements: 'there may be scope to realise savings from efficiencies in relation to asset holdings'. This ties in to another recent NAO report which questioned whether the MoD was organising the Defence Estate as well as it should. Inventory management is a subject needing constant attention in the light of evolving supply chain risks to capability and operations but certainly all slow moving stocks should receive careful scrutiny. Finally comprehensive consideration in this area should also take into account MoD liabilities, particularly with regard to the disposal costs of materials associated with nuclear weapons and nuclear propulsion.

Conclusion

Like many NAO and other external reports, this one will be welcomed in some parts of the MoD and given a frosty reception elsewhere. The buffeted Ministry has in recent months been a recipient of not always coherent guidance from the NAO, the Cabinet Office, Mr Haddon-Cave and of course Bernard Gray. Like Gray, this most recent NAO report is particularly valuable for its underlining of the extra work, and so cost, that is associated with the MoD having to prioritise at short notice across defence when costs increases in a specific area. But, as the NAO officials themselves know well, this report is not the last word on the subject.

NOTES  

1. Report by the Comptroller and Auditor General, Ministry of Defence; Strategic Financial Management of the Defence Budget, HC 290, Session 2010-11, London, National Audit Office, 21 July 2010.