#publicspending – Page 11 – Martin Wheatcroft

Magnox contract exit cost: a small price to pay?

16 September 2020: The National Audit Office has issued a report on the £20m cost of exiting the failed Magnox contract to decommission nuclear research sites and power stations.

The National Audit Office (NAO) report covers the handling by the Nuclear Decommissioning Authority (NDA) of the failed Magnox contract to decommission two nuclear research sites and 10 Magnox power stations and the estimated £20m cost incurred on exiting the contract.

The NDA is a statutory body established in 2005 to take ownership of the decommissioning programme for the UK’s oldest fleet of nuclear power stations and other nuclear facilities. At 31 March 2020, the NDA had an estimated liability of £135bn in its accounts for the costs of decommissioning still to be incurred.

The NDA has awarded a series of contracts to clean up nuclear sites and deal with radioactive materials, including fuel. This includes the 14-year Magnox contract awarded in 2014 to Cavendish Fluor Partnership (CFP) which the High Court decided was wrongly awarded, with the NDA agreeing a £97m settlement with a bidder in 2017.

The NDA then decided to terminate the contract with CFP nine years early, and an earlier report by the NAO stated how £122m had been lost by that point. The Public Accounts Committee reported in 2018 that the NDA needed to improve its understanding of the state of the sites, its ability to monitor work carried out on them, and the capability and expertise of its executive team.

Since 2017, a revised contract has been agreed with CFP and further litigation avoided, with £2.7bn of decommissioning work completed before the contract ended in August 2019.

The NAO says there have been further costs to the taxpayer, including an estimated termination cost of £20m to negotiate the early exit from the contract and incentivise a smooth handover of sites without further legal challenge. This is a relatively small amount in the context of the £6.9bn to £8.7bn estimated cost for decommissioning the Magnox sites.

The NAO report stated: “With the NDA now taking more direct control over the management of its sites, it will be critically important that it builds and retains better knowledge of the condition of its sites to enable it to plan and deliver decommissioning work efficiently and effectively. The NDA considers that it will be better placed to achieve this under its revised delivery model, but it is too early for us to assess the effectiveness of these arrangements.”

Martin Wheatcroft FCA, adviser to ICAEW on public finances, commented: “The huge sums being spent on decommissioning nuclear facilities can hide many sins, but we are fortunate that the National Audit Office is able to dig around and analyse what is going on.

“On this occasion, the £20m cost of exiting the Magnox contract appears a relatively small price to pay for a second chance at getting the decommissioning of the Magnox fleet right. There are much larger sums – in the billions – riding on the as-yet unproven new delivery model being put in place by the Nuclear Decommissioning Authority.”

Image of front cover of NAO report 'Progress report: Terminating the Magnox contract'. Click on the image to go to the NAO website to download the report.

This article was originally published on the ICAEW website.

ICAEW chart of the week: Foreign, Commonwealth & Development Office

11 September 2020: The UK’s highly regarded diplomatic service in the FCO was combined last week with the UK’s highly respected international development department DfID to form a new government department – the FCDO.

Chart on net expenditure 2019-20 FCDO £2,750m + DfID £10,350m = £13,100m.

The newly established Foreign, Commonwealth & Development Office (FCDO) is the subject of the #icaewchartoftheweek, illustrating the amounts spent by its predecessor departments in the financial year ended 31 March 2020. The Foreign & Commonwealth Office (FCO) incurred net expenditure in the order of £2,750m, while the Department for International Development (DfID) spent £10,350m, a combined total of £13.1bn.

Although DfID was the bigger department in financial terms, the FCO was larger operationally with 13,751 staff in 2019-20 (5,263 in the UK and 8,488 abroad) compared with the 3,535 employed by DfID (2,628 in the UK and 773 abroad). As a consequence, net operational spending amounted to somewhere in the region of £1,250m for the FCO, while DfID cost in the order of £350m to run.

The FCO spent approximately £700m in 2019-20 on international programmes, including grants to the British Council and the BBC World Service amongst others. The other big element of its spending of just under £800m was on conflict prevention, stability and peacekeeping.

DfID spent around £2,150m on international development programmes and organisations, policy, research and evidence and humanitarian aid and £750m on conflict, security and stabilisation. Around £3,000m was spent on economic development, while £4,100m went to regional programmes, including approximately £900m in west and southern Africa, £1,300m in east and central Africa, £850m in the Middle East and north Africa and £1,050m in Asia and elsewhere in the world.

DfID has provisionally calculated that total development spending across the UK Government, including by the FCO, DfID, Home Office, Business, Energy & Industrial Strategy and Department for Environment, Food and Rural Affairs departments, amounted £15.2bn in total in the 2019 calendar year. This was in line with the UK Government’s legally binding commitment to spend 0.7% of Gross National Income on development. This includes a proportion of the EU’s spending on international development but excludes the UK’s contributions towards development within the EU, in particular in eastern European member states.

The coronavirus pandemic has reduced the size of the economy this year and hence the 0.7% calculation will result in a smaller amount to spend in 2020-21, hence the combined budget for the FCDO will be smaller than the amount spent in the last financial year.

The new department is abbreviated to FCDO in writing, which the Government is insisting should be spoken out loud as ‘focado’ (similar to the online grocery store), no doubt in a valiant attempt to prevent other forms of short-form pronunciations becoming popular.

This chart was originally published on the ICAEW website.

Public sector debt hits £2tn for the first time

21 August 2020: The fiscal deficit of £150.5bn for the four months to July 2020 is almost triple the £55bn budgeted for the entire financial year.

The latest public sector finances for July 2020 published by the Office for National Statistics (ONS) on Friday 21 August 2020 reported a deficit of £26.7bn in July 2020, following on from £123.8bn for the three months to June 2020 (revised from £127.9bn reported last time).

Public sector net debt increased to £2,004.0bn or 100.5% of GDP, an increase of £198.3bn from the start of the financial year and £227.6bn higher than in July 2019. This is the first time this measure has exceeded £2tn, a major milestone that has arrived several years earlier than anticipated as a consequence of the pandemic.

Image of table showing variances against prior year. Go to the ICAEW website at the end for the table itself.

The combination of lower tax receipts and much higher levels of public spending has resulted in a deficit for the four months to July 2020 that is almost triple the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget in March, and almost seven times as much as the same period last year.

Cash funding (the ‘public sector net cash requirement’) for the four months was £199.1bn, compared with £5.4bn for the same period in 2019.

Interest costs have fallen despite much higher levels of debt, with extremely low interest rates benefiting both new borrowing to fund government cash requirements and borrowing to refinance existing debts as they have been repaid.

Some caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled. In particular, the OBR points out that the ONS has yet to record any allowance for losses that might arise on the more than £100bn of tax deferrals, loans and guarantees provided to support businesses through the pandemic.

Commenting on the latest figures Alison Ring FCA, director for public sector at ICAEW, said:

“The positive news for the Government is that despite debt reaching £2tn, low interest rates have reduced its cost, and its growth is slowing as the exceptional support measures to deal with the pandemic are withdrawn and furloughed employees return to work.

“The big question is how much permanent damage is being done to the economy, with accelerating job losses a concerning sign as we approach the autumn. How quickly debt continues to grow will also depend on any additional support that the Government might provide to sectors that are still struggling.”

Image of tables showing monthly breakdown for April through July 2020 and 2019. Go to the ICAEW website at the end for the tables themselves.

For further information, read the public sector finances release for July 2020.

This article was originally published on the ICAEW website.

£31 billion charge shines spotlight on £2.2tn pounds public sector pension liability

21 August 2020: Ministers insulated older employees from public sector pension reforms in 2015, despite advice saying not to. The courts found this was age discrimination, resulting in a £31bn charge in the Whole of Government Accounts.

When the Hutton review on public sector pensions reported in 2011, it recommended retaining the defined-benefit pensions provided to public sector employees. However, it wanted to reform how public sector pensions are calculated to reduce the cost to taxpayers, while at the same making them fairer for lower-paid employees.

Recommendations included switching from final salary to career average for calculating pension entitlements, aligning the retirement age for most public sector employees with the state pension age, and increasing employee contributions.

The Hutton reforms followed a major cost saving already achieved in switching from RPI to CPI-linked increases for pensions in retirement, which resulted in a one-off gain of £126bn in the 2010-11 Whole of Government Accounts (equivalent to a 10% reduction in the gross pension liability at that time) as well as reducing the cost of providing pensions going forward.

To protect existing employees, Hutton recommended that accrued rights at the date of the switch should still be calculated on final salaries, with only subsequent years of service accruing on an average salary basis. Retaining existing rights meant there was no significant gain or loss recorded when the reforms to existing pension arrangements were implemented in 2014 and 2015, with any cost savings arising in future years.

Despite the Hutton report explicitly stating that “age discrimination legislation … means that it is not possible in practice to provide protection from change for members who are already above a certain age”, the Government decided to provide transitional protection for older members. Full transitional protection was offered to workers 10 years or less away from retirement in 2012, with partial protection on a sliding scale tapering away to zero for those with 14 or more years to go until retirement at that point.

As might have been expected, given the clear advice in the Hutton review that this would constitute unlawful age discrimination, the UK Government lost in the Supreme Court in 2019 in the McCloud and Sargeant cases. As a consequence, employees that have lost out because the transitional protections did not apply to them will receive an uplift in their pensions when they reach retirement.

Illustrative example

To illustrate the issue, consider the case of fictional civil servants Sarah and Maxine who were 20 and 10 years away from retirement respectively in 2012 and who were moved into the new career-average ‘alpha’ pension scheme in 2015. Each is expected to retire with 30 years’ service on a final year salary of £80,000, following rapid promotions in their final 10 years of service.

Image of table with worked example. Click on link at the end of this post to for the article on the ICAEW website containing the table itself.

In this illustration, Maxine, who in 2012 had 10 years to go before retirement, should receive an initial pension of £40,000 a year when she retires in 2022, including a £500 transitional protection uplift.

Without transitional protection, Sarah would expect to receive £34,000 a year when she retires in 2032. Although the precise details of the remedy in response to the court judgements is still being worked out (see HM Treasury consultation), it is likely that Sarah will now receive a transitional protection uplift covering the period from 2015 to 2022, potentially adding around £4,000 (based on our illustrative assumptions) to her pension on retirement, but still below what she would have received without the changes.

The court ruling will only affect employees who would have got more under the final salary arrangements. For a significant proportion of public sector workers, the faster accrual rate on a career average basis will provide them with a higher pension than they would have received under the slower accrual rate applied to final salary under the old arrangements. They will not have lost out from not having had transitional protection.

Spotlight on the £2.2tn public sector pension liability

The £31bn past service cost recorded in the Whole of Government Accounts in 2018-19 added 1.4% to the amounts owed to current and former public sector employees for their accrued pension rights, increasing the gross liability recorded to £2.2tn at 31 March 2019. (The Government separately reported that the court judgements would cost £17bn but did not explain how this number reconciled with the £31bn reported in the accounts.)

£2.2tn is a huge amount of money, equivalent to around £80,000 for each household in the UK. Most public sector schemes are unfunded (£1,756bn out of the £2,244bn gross liability) with pension payments funded out of future taxation. Local authority and other funded public sector schemes (£488bn) do have pension fund investments (£350bn at 31 March 2019) set aside to pay pensions, but they will need to increase their contributions to those funds to cover the cost of extending transitional protections to affected employees.

There are no doubt many morals to be drawn from this story, but what it does highlight is the sheer scale of the pension obligations that public sector employers have built up over the years, and just how much a single ministerial decision can end up costing taxpayers.

This article was originally published on the ICAEW website.

Chief Secretary brands Treasury ‘new radicals in government’

3 August 2020: Chief Secretary to the Treasury Steve Barclay delivered his first speech last week, providing fresh detail on the plan for the Spending Review.

Steve Barclay’s first speech as Chief Secretary, delivered to thinktank Onward on Tuesday 28 July 2020, set out how he believes Treasury can be an accelerator of change in government.

He sees the Spending Review as a significant moment in the lifecycle of any government, but with the current review being conducted against the backdrop of the most challenging peacetime economic circumstances in living memory.

Despite that, the Government believes the recovery from this pandemic can be a moment for national renewal, with the Spending Review acting as the mechanism to deliver the Prime Minister’s ambition to ‘level up’ the country.

As a constituency MP, Barclay said he has run up against a system that is slow and siloed. By way of an example, he asked why there is a seven-year gap between funding being agreed for a road scheme and the first digger arriving? Or why it takes a decade to decide to produce a full business case on whether to re-open eight miles of railway track?

The lack of upfront clarity on outcomes, the slow speed of delivery and the variable quality of data within government are all areas the Spending Review provides an opportunity to challenge.

The Chief Secretary stressed that to ‘level up’ the country properly, the Government needs to ensure that Treasury decision-making better reflects the UK’s economic geography, with more balanced judgments taking into consideration the transformative potential of investment to drive localised growth.

He drew on the speed of change during the pandemic, with the furlough scheme taking just one month from being announced to being opened for applications when normally such schemes take months – years even – to deliver.

He asked if the wheels of government can be made to spin this fast in a crisis, with all the added pressures of lockdown, why can’t it happen routinely?

Time to level up

The Chief Secretary stated that the actions being taken to support businesses and jobs during the pandemic are the right thing to do, even though it comes at a cost. The cost of inaction would be far greater, he claimed.

Even though the Prime Minister has made it clear that austerity is not the answer to navigating a much-changed economic landscape, departments will have to make tough choices in the months ahead.

The commitment to reviewing the Green Book investment manual was reiterated with changes planned to allow room for more balanced judgments on investments to reduce inequality and drive localised growth.

During the speech, Barclay listed several priorities for government in the Spending Review:

accelerating the UK’s economic recovery;
levelling-up opportunity across the country;
improving public services; and
making the UK a scientific superpower.

Outcomes, speed and data

To achieve these objectives, the Chief Secretary focused on three key approaches: outcomes, speed and data.

On outcomes, the Spending Review would try to tie expenditure and performance more closely together, with Treasury having clearer sight of both intended outcomes and subsequent evaluation of their delivery.

For some of the most complex policy challenges, this will involve breaking the silos between departments, and pilot projects are currently being used to test innovative ways of bringing the public sector together.

On speed, Barclay noted that this is a ‘hallmark of the digital era’. Programmes need to start with robust goals and the temptation to repeatedly change plans has to be resisted if the UK is to bring down capital costs that are typically between 10% and 30% higher than in other European countries. A new Infrastructure Delivery Task Force (known as Project Speed) will be established to cut down the time it takes to develop, design and deliver vital projects.

This will involve more standardisation and modularisation between projects, for example in speeding housing construction. The Spending Review will seek to accelerate the adoption of Modern Methods of Construction and explicitly link funding decisions to schemes that priorities it.

On data, the Chief Secretary believes that government is behind the curve when it comes to obtaining, analysing, and enabling access to open data. It remains the case that decisions still rely heavily on spreadsheets from departments rather than data directly sourced in real time. Work has already begun to incentivise departments and arms-length bodies to supply higher quality standardised data and to support the Treasury to better interrogate this data.

Building this will involve sorting out the data architecture as well as the data sets, and the Spending Review will focus on addressing legacy IT and investing in the data infrastructure needed to become a “truly digital government”.

The new radicals

Barclay concluded with stressing the importance of taking risks, setting ambitious goals and experimenting with ways of delivery, even if failure is a possibility. He wants to move beyond a simple yes/no approach to public spending and instead bring together people, ideas and best practice from inside and outside government.

He concluded: “This is an opportunity for the Treasury to capture the ‘can do’ attitude shown by civil servants during the COVID pandemic and make it permanent. To be the new radicals, leading change across government.

“Done well, we can move on from an era of spreadsheets. We can create a smarter and faster culture in Whitehall. And we can ensure that Britain does indeed bounce back from this crisis stronger and better than before.”

Speech by Steve Barclay MP, Chief Secretary to the Treasury, on 28 July 2020.

This article was originally published by ICAEW.

ICAEW chart of the week: Fiscal interventions

10 July 2020: Fiscal interventions reach £190bn as the Chancellor Rishi Sunak pours even more money into the economy in an attempt to keep it from stalling.

Components of £190bn in fiscal interventions - as set out in text below.

The Chancellor’s summer statement is the subject of this week’s #icaewchartoftheweek, with the £30bn ‘plan for jobs’ being the latest in a series of fiscal interventions in response to the coronavirus pandemic.

The measures announced included £9bn for a £1,000 job retention bonus for furloughed workers, £4bn for work placements and boosting work searching, skills training and apprenticeships, a £5bn boost for the hospitality and leisure industries in the form of a cut in VAT and discounts on eating out, and £12bn in economic stimulus. The latter includes over £5bn on infrastructure projects (as announced by the Prime Minister last week), £3bn to make homes energy-efficient and £4bn for a temporary cut in SDLT on housing sales under £500,000.

This brings the total amount of fiscal interventions to £190bn or around 9% of GDP, once an extra £33bn in spending on health and other public services is incorporated. This was also ‘announced’ yesterday, albeit by means of a small footnote buried inside one of the accompanying documents!

As a consequence, the fiscal interventions can be broadly split between £77bn being spent on supporting household incomes (£54bn on the furlough scheme, £15bn on the self-employed income support scheme and £8bn on universal credit), £30bn to support businesses (£13bn in business rates and other tax reliefs and £17bn in grants and other support), £53bn for public services and other (£39bn on health and social care and £14bn on public services and other spending), and £30bn in economic stimulus through the ‘plan for jobs’.

Businesses have also benefited from support with their cashflows through the deferral of £50bn in tax payments and £73bn of loans and guarantees.

This is not the end of the story for fiscal interventions. Not only are there are a number of sectors such as local government, universities, and manufacturing where rescue packages may be needed, but the Chancellor made clear that this announcement only covered the second of a three-phase response.

The third phase – rebuilding the economy – will be set out later in the year. How much additional money will be involved is anyone’s guess.

This article was originally published by ICAEW.

Further fiscal interventions focused on post-furlough future

9 July 2020: Chancellor announces £30bn in new measures to support, protect and create jobs, bringing total fiscal interventions to £190bn.

The Chancellor used his summer statement speech to set out a phased approach to the UK Government’s response to the coronavirus pandemic.

The first phase – the existing measures already taken during the pandemic – was about the protection of the economy during lockdown, while the second phase – the subject of yesterday’s announcement – is about jobs. The third phase – to be announced later in the year – will be about rebuilding the economy and investing for the future.

As anticipated, the summer statement promised substantial sums to support the economy as it emerges from lockdown, with the Plan for Jobs including £30bn in additional funding measures to support, protect and create jobs through economic stimulus.

£9.4bn – Job Retention Bonus: £1,000 for keeping furloughed staff on until January
£2.1bn – Kickstart work placements for those aged 16-24
£1.6bn – boosting work searching, skills and apprenticeships
£4.1bn – temporary cut in VAT on hospitality, accommodation and attractions
£0.5bn – discounts on eating out
£5.6bn – infrastructure investment announced by the Prime Minister last week
£1.1bn – public sector and social housing decarbonisation
£2.0bn – grants to make private homes more energy-efficient
£3.8bn – six-month cut in stamp duty to stimulate the housing market

This takes total fiscal interventions announced by the government to around £190bn, including the £1.3bn for cultural institutions announced a few days ago.

When combined with lower tax revenues, this is expected to result in a fiscal deficit in 2020-21 in excess of £300bn. A better estimate should be available next week from the Office for Budget Responsibility when it updates its short and long-term forecasts.

The amounts above do not include tax deferrals and business loans and guarantees, which have now reached a total of £123bn.

It is as yet unclear whether there will be any statements about the planned third phase on rebuilding the economy before the Budget and spending review later in the autumn when plans for 2021-22 and beyond will be set out in more detail.

There was significant disappointment in some quarters that the National Infrastructure Strategy, originally scheduled to be published in March, has still not been published.

For those trying to track the fiscal position this year, this is unlikely to be the last fiscal announcement that will move the dial. The government has indicated that further funding is likely to be made available later in the year to local government on top of the £2bn package announced last week. Rescue packages may also be needed for vulnerable sectors such as universities.

This article was originally published by ICAEW.

NAO qualifies DWP accounts for 32nd year running

6 July 2020: The National Audit Office reports that overpayments from fraud and error reached their highest ever estimated rate in 2019-20. COVID-19-driven claims since March are likely to increase this even further.

The Department of Work & Pensions (DWP) published its annual report and financial statements for the year ended 31 March 2020, containing a qualified audit opinion for the 32nd year running due to the material level of fraud and error in benefit expenditure.

The audit report from the independent National Audit Office (NAO) contains a clean opinion on the truth and fairness of DWP’s financial statements for 2019-20. However, the Comptroller & Auditor General Gareth Davies (the head of the NAO) has qualified the second part of his audit opinion with respect to overpayments attributable to fraud, error where payments have not been made for the purposes intended by Parliament, and for overpayments and underpayments that do not conform to the relevant authorities.

Excluding the state pension, where the level of fraud and error is relatively low, the estimated level of benefit overpayments increased to an estimated £4.5bn (4.8%) in 2019-20 from £3.7bn (4.4%) in the previous financial year. Underpayments were estimated to amount to £1.9bn or 2.0% of the relevant benefit expenditure.

The NAO reports that overpayments of Universal Credit increased from 8.7% to 9.4%, which is the highest recorded rate for any benefit other than tax credits. It says the most common cause of fraud and error is incorrectly reported income (leading to £1.4bn of overpayments and £0.35bn of underpayments), followed by incorrectly reported savings (at a value of £0.9bn).

NAO head Gareth Davies issued a press release commenting on his concern that the level of error and fraud in benefit payments has risen again – and highlighting the likelihood of even higher levels as a consequence of relaxed controls at the DWP during the coronavirus pandemic.

Commenting on the report Alison Ring, director for public sector at ICAEW, said: “Although the National Audit Office is quite right to stress how important it is that the DWP does more to reduce the incidence of fraud and error, it is likely that the increase seen in 2019-20 is primarily as a consequence of the further rolling out of Universal Credit, a complex welfare benefit which is inherently prone to error and more vulnerable to fraud than many other benefits.

“As well as investing more in tackling individual cases of fraud and error, the DWP may want to give further thought to the design of Universal Credit and how it could be improved to reduce the likelihood of error and fraud in the first place.

“The relaxation of controls over benefit payments during the coronavirus pandemic has helped get financial support to claimants in quite often severe financial difficulty, but that has come with the prospect of much higher levels of fraud and error in the current financial year. Reducing the levels of both over- and under-payments will be a big challenge for the DWP, especially if there is further large surge in claims as the furlough scheme comes to an end in the next few months”.

The Department for Work & Pensions Annual Report & Accounts 2019-20 and the associated NAO press release are publicly available.

This article was originally published by ICAEW.

New funding package for English local authorities

2 July 2020: Secretary of State Robert Jenrick has announced a new £2bn package for English councils to replace lost income and cover spending pressures.

The government has announced additional funding for local authorities in England to help alleviate the financial pressures they are under. This follows on from our previous article on council funding pressures, which reported that total lost income and additional expenditure could amount to £9.4bn by next March.

The funding package announced today comprises £500m to cover incremental expenditures being incurred by councils – adding to the £3.2bn already provided – together with a reimbursement scheme covering up to 71% of lost income from sales, fees and charges.

The reimbursement scheme kicks in where losses are more than 5% of a council’s planned income from sales, fees and charges. The government will cover 75% of the lost income above 5%, meaning that councils will need to cover around 29% of the shortfall from their own resources. Depending on the final details, councils could receive somewhere in the order of £1.5bn and £2bn to replace lost income.

The Ministry of Housing, Communities & Local Government (MHCLG) also announced that councils would be able to phase repayments of council tax and business rates deficits over three years rather than one, reducing cashflow pressures on councils. However, the apportionment of irrecoverable council taxes and business rates will not be decided until the Spending Review in the autumn.

This announcement should significantly reduce the risk of councils needing to issue s114 ‘bankruptcy’ notices – for the next few months at least.

Commenting on the announcement Alison Ring, ICAEW Public Sector Director, said: “Although the new funding won’t cover all the expenditure and lost income councils have suffered due to coronavirus, it should be enough to help most get through the rest of the summer, and the prospects of some having to declare themselves bankrupt with s114 notices should recede for now.

However, we’re concerned that councils will still have to cut back spending to cover the lost income from areas such as car parking, leisure centres, planning fees and other charges that are not being covered by central government. This has the potential to damage local economies just as they are trying to recover.”

This article was originally published by ICAEW.

UK aircraft carrier groups won’t be operating to full extent until 2026

26 June 2020: NAO reports on challenges remaining to the Carrier Strike programme, including cost overruns since their last report in 2017.

The National Audit Office (NAO) has published the latest in a series of challenging reports on defence procurement with a critique of the Ministry of Defence (MoD) programme to establish two fully operational carrier strike groups.

This is a complex multi-year effort that has seen the building of the HMS Queen Elizabeth and HMS Prince of Wales aircraft carriers at a cost of £6.4bn, the initial order of 48 fighter aircraft (out of a long-term plan for 138), and the planned integration of carriers, warships, radar systems and support ships with navy personnel into two fully combat capable carrier groups.

This report focuses on the last three years of development since 2017 – a period that has seen the Royal Navy complete and launch two new aircraft carriers, receive and test the initial batch of aircraft, construct essential on-shore infrastructure, and undertake extensive training of sailors and aircrew.

Key highlights from the report include:

There was a further cost overrun of £193m on building the two aircraft carriers, equivalent to 3% of their total cost of £6.4bn.
The MoD has spent £6.0bn to date on 48 Lightning II fighter jets, of which 18 have been delivered on schedule. Port and military airfield facilities have now been completed.
The Crowsnest airborne radar system is 18 months behind schedule, affecting carrier group capabilities in the first two years of operation.
The MoD delayed seven of its 48 jets on order to 2025 to accommodate budgetary pressures, with the approved cost now at £10.5bn, a £1.0bn or 15% increase.
Funding has not yet been made available for enough Lightning II jets to support the carriers through to the 2060s as planned, with no commitment as yet to order the remaining 90 jets.
The MoD has been slow to develop the support ships needed to operate carrier strike group, with only one ship currently in operation – with delays in ordering three new support ships potentially hampering operations until 2028 or later. The MoD has also not provided the necessary funding for logistics projects and munitions.

The NAO reports that the MoD is making progress in delivering key milestones, albeit with some caveats.

Initial operating capability for one carrier group and 12 jets is expected to be achieved by December 2020 on schedule, albeit with more basic radar capability than originally planned.
There is a tight schedule to deliver ‘full operating capability’ by 2023 (two carrier groups with up to 24 jets) and the planned extended capability by 2026 to deliver a wide range of air operations and support amphibious operations worldwide.
Significant questions need to be answered about the place of the carrier groups within defence strategy, the investment prioritisation necessary to ensure that they can operate for the planned life-span of 50 years, and a clear understanding of the full costs of operating the carrier groups in the context of a Defence Equipment Plan that is currently unaffordable (as reported in several other NAO reports).

The NAO conclude by making a series of recommendations for strengthening programme management, ensuring there is a clear view of future costs, and on monitoring new governance arrangements that have recently been put in place. The NAO also recommends transferring lessons learned from the Carrier Strike programme over to other major defence projects.

Gareth Davies, the Comptroller & Auditor-General for the United Kingdom and the head of the NAO, commented on the good progress made by the MoD to deliver Carrier Strike. But he also stressed the need for greater attention to be paid to the supporting capabilities essential for full operability, and the need for the MoD to get a firmer grip on future costs.

Martin Wheatcroft FCA, advisor to ICAEW on public finances, said:

“In many ways, the MoD receives quite a positive report card from the NAO on the good progress that it has made over the last three years, improving on much less complementary reports in 2017 and before.

However, as the NAO reports, the MoD continues to struggle to deliver major procurement programmes within a defence budget that is unaffordable and there remain significant issues that need to be addressed. The extent to which further funding will be provided in the long-delayed Spending Review later this year is yet to be seen.”

The NAO report ‘Carrier Strike – Preparing for deployment’ is available on the NAO website.

This article was originally published on the ICAEW website.