MoD accused of cutting cost overruns by stealth

The Ministry of Defence was accused of creative accounting yesterday after a report from Parliament's spending watchdog appeared to show that cost overruns on a number of major military equipment projects fell last year.

The National Audit Office (NAO) reported that £781m had been shaved off the cost of the MoD's 20 biggest programmes, including the Nimrod reconnaissance aircraft, the Astute submarine and the Type 45 destroyer.

But the NAO said more than half of this reduction had resulted from expenditure either being reclassified or transferred to other MoD budgets, meaning that the ministry had not made savings at all. On some programmes, further savings were made by ordering less equipment.

The NAO also warned that, by transferring the costs elsewhere, the MoD might have to make sacrifices in other areas unless it could achieve efficiency gains.

The 20 projects are now forecast to cost £27bn - some £2.6bn more than the original budget - while the overall delay has increased by 33 months. The NAO said this was less than the slippage suffered in the previous year.

These figures do not include any cost overrun on the £16.6bn Eurofighter programme, which the NAO said was "commercially sensitive".

However, Edward Leigh, the chairman of the Commons Public Accounts Committee, said: "When news of an additional 33 months' delay in the delivery of big defence projects is called a step in the right direction, that tells us plenty about the MoD's track record in managing those projects."

Commenting on the apparent reduction in cost overruns, Mr Leigh added: "The reality is that the MoD has done this largely by juggling costs from one budget to another. You don't get something for nothing - so it leaves me wondering what cuts have been made in other parts of the military to accommodate this financial reshuffle."

The report shows, for, instance, that although the cost overrun on the Nimrod went down by £292m during the year, £280m of this was due to accounting adjustments and redefinitions. Overall, the programme is still £703m over budget and seven years late.

Similarly, in the case of Brimstone, an air-launched anti-tank weapon, £41m of the £44m cost saving was due to accounting adjustments and technical factors. Overall, Brimstone has been delayed by four years and is £86m over budget.

The cumulative delay on the 20 projects now stands at 36 years, but the NAO said the further slippage experienced last year was the smallest in four years.

The NAO said that £242m had been saved last year through better management of commercial and contractual arrangements, cost efficiencies and a reduction in the amount of equipment being ordered. For instance, £114m had been saved on the Guided Multiple Launch Rocket System by reducing the number of rockets being ordered.

The head of the NAO, Sir John Bourn, said: "The Ministry of Defence has recognised the concerns expressed by the Committee of Public Accounts and ourselves about the need to tighten its control of costs."

Lord Drayson, the Defence Procurement minister, said he was pleased that the NAO had recognised the work the ministry was doing to tighten its cost controls and added he was confident of further improvement.