Recommendation 3

The Department’s failure to break the cycle of short-term financial management is preventing it from developing essential military capabilities in ways that achieve value for money and is restricting its ability to respond to new opportunities or threats. The Department’s continued focus on meeting the Treasury’s requirement for it to balance its budget every financial year comes at a huge cost for equipment projects. The Commands have undertaken yet another re-prioritisation exercise to balance the budget for 2020–21, resulting in equipment projects being descoped or delayed. This results in higher costs in future years, with the Department now estimating a funding shortfall of £8.3 billion in the next five years. Furthermore, the Department allocated all its contingency funding at the start of 2020–21 to reduce the funding shortfall, restricting its ability to respond to any unexpected cost pressures during the year. It acknowledged this was not good practice. All funding in the 2020–2030 Plan is also allocated to existing projects, which means that the Department cannot develop new capabilities without further commensurate disinvestment or additional funding. We are deeply concerned at the Department’s procurement practices, having seen examples of over-specifying capabilities, a ‘salami slicing’ approach to projects and a failure to achieve value for money; for example, when the original number of vehicles or ships are not procured on affordability grounds, driving up unit costs. There is a growing risk that the financial pressures and the Department’s procurement approach are restricting its ability to exploit new opportunities, such as technological advances, and to develop capabilities to respond to new threats. Recommendation: After the Department has translated the decisions in the Integrated Review into a balanced investment programme, it should write to the Committee setting out the key principles of how it will make future investment decisions and manage