Budget constraints have forced the Ministry of Defence to prioritise short-term cost-cutting in the management of its estate at the expense of longer-term savings, a new report from the public spending watchdog has warned.
Last year, the MoD spent almost £5bn – or 12% of its overall budget – on its estate, according to the latest assessment by the National Audit Office, and ministers have asked it to reduce its built estate by 30% by 2040.
But the NAO's report finds that the MoD's efforts to bear down on the costs of maintaining its vast estate through the setting up of the Defence Infrastructure Organisation (DIO) in 2011 have been "undermined by cuts to its budget" and "fundamental weaknesses" in a contract it agreed with private firm Capita to help run the new organisation.
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The DIO was established in the last parliament to centralise management of most of the defence estate. The MoD opted to outsource many of its functions to Capita in 2014 in a bid to bring in specialist skills and, the NAO says, "deliver the savings the department could not achieve on its own".
However, the National Audit Office says the MoD still faces a "huge challenge" in maintaining its existing estate, with ongoing constraints on funding leading it to make decisions "that are poor value for money in the longer term" in a bid to meet "urgent requirements".
"Funding constraints are leading the department to make decisions that are poor value for money in the long term" – National Audit Office
"As we have noted in our work on the Equipment Plan, budgetary imbalance forces the department to slip or make cuts to projects and programmes, which can be poor value for money and cause delays," the NAO says. "This is also the case with the estate."
It adds: "The squeeze on the department’s funding for its estate is both the main reason why it wants to make more cost-effective use of its estate, and the main barrier to doing so.
"If the department can reduce its estate, it will also decrease the future costs associated with upgrading and maintenance.
"However, funding constraints are leading the department to make decisions that are poor value for money in the long term. Pressure on its estate budget is further increased by the consequences of decisions the department has taken in the past."
"Poor audit trail"
The NAO is also sharply critical of the MoD's management of its contract with Capita, saying the performance regime for the deal to run the DIO is "not fit for purpose" and is failing to incentivise sustainable spending reductions.
While the MoD believes some 30% of the £240m in savings achieved through the deal in 2015-16 are "sustainable", according to the report, a "poor audit trail has been kept to substantiate and verify those savings". The NAO says the contract "does not require the partner to ensure that these savings are in fact sustainable, nor to demonstrate this to the department".
According to the report, the Ministry of Defence failed to deliver changes in the running of the DIO, including implementing a single IT system, before signing the contract with Capita. This, the NAO says "limited the benefits of the contract" and "created complexity in relation to the departments' ability to hold the partner to account for its performance".
The NAO says Capita received £90m from the MoD between June 2014 and July 2016 – even though its performance "has not met all expectations and has not made a notable difference in transforming DIO to better meet the needs of the Commands".
"Not clear"
The DIO's governance arrangements also come in for criticism from the NAO, with the report warning that the infrastructure organisation's acitivities "are influenced by a complex web of strategies, plans and programmes", with no clear leadership structure.
"While the lines of accountability and governance have been defined, their complexity results in them not being clearly understood," the NAO says. "In practice, this means it is not clear who within the department is responsible for the performance of DIO, including its transformation."
While the NAO says the MoD has "started to improve its management of the defence estate" and has now recognised that "demand for funding significantly exceeds budgets", much of the department's long-term strategy for its estate is remains based on "uncertain" assumptions.
"There is a risk that anticipated financial benefits will not be realised and that long delays and gaps in funding will emerge" – NAO
"There is a risk that anticipated financial benefits will not be realised and that long delays and gaps in funding will emerge," the watchdog warns.
It adds: "The strategy and current funding levels also allow only for a partial reversal of the decline in the condition of the remaining estate. The department has not yet set out how it will fully address the significant challenges it faces sustaining the whole of its estate and the resulting risks to military capability."
That view was echoed by Meg Hillier, the Labour MP who chairs parliament's Public Accounts Committee.
Hillier said the MoD remained "too narrowly focused" on its recently-unveiled Footprint Strategy was "to properly address risks to military capability, and to improve the living and working conditions of our service men and women".
She added: "The Department need to get a better grip on their estate to make sure they meet their target to release land for a third of the 160,000 new homes promised by the government by 2020."
Mark Serwotka, general secretary of the Public and Commercial Services (PCS) union, meanwhile said the report "ought to be deeply embarrassing for the government".
He added: "It is clear that spending cuts and privatisation have failed our armed forces and their families and are set to continue to do so unless ministers agree to significant investment."
A spokesperson for the MoD said the NAO had produced an "important report" and said the department was “determined to deliver a better defence estate".
They added: “That’s why we’ve outlined a long-term, military-led strategy, to invest £4 billion in training facilities fit for our strong and modern armed forces and better accommodation to deliver more stability for military families.”