The Ministry of Defence’s (the Department’s) Equipment Plan1 remains unaffordable and is not sustainable if the Department wants to deliver longer-term value for money, according to today’s report from the National Audit Office (NAO)2.
The Department’s forecast costs for the Plan exceed its budget by £7.0 billion in the next ten years. It forecasts £193.3 billion on equipment and support costs, against a £186.4 billion budget, including a £6.2 billion contingency. These costs could vary, and in a worst case scenario, should all the identified risks occur, this gap could grow to £14.8 billion.
The NAO report has found that the Department’s approach to forecasting costs is more realistic than in previous years. It has a fuller assessment of nuclear project costs, has used more accurate US dollar exchange rates, and now includes costs for the Type 31e frigates which were omitted from the previous year’s Plan. However, costs are still potentially understated by £3 billion.
In its 2018 Equipment Plan, the Department also outlines for the first time the affordability risks it faces. However some of its analysis remains optimistic and costs could increase further. The Department has improved its understanding of affordability risks, but the NAO still lacks full confidence in the robustness of some of its underlying assumptions, particularly around efficiencies.
The Department needs to use the Modernising Defence Programme (MDP) review3 to resolve its affordability gap. Given 84% of the expected overspend in the Plan occurs over the next four years, decisions need to be made now, rather than relying on longer-term cuts or efficiencies.
In choosing to start the year with a forecast overspend, the Department needs to make in-year programme decisions to bring the Plan back into balance, a practice that the introduction of the Equipment Plan was meant to prevent.
Given the MDP has not yet completed, the Department has focused on making just the first year of its 10-year Plan affordable, but has had to find an additional £1.3 billion from the start of the year for 2018-19. Delaying decisions, while the MDP is ongoing, increases the risk of the Department not achieving long-term affordability and value for money. This increases the likelihood of the Department returning to the past poor practices. For example, to make savings the Department delayed work to replace Astute-class submarines and introduce remotely controlled aircraft (Protector). This may have a longer-term impacts on production and costs.
Financial constraints in other areas of the Department are also limiting its ability to redirect other budgets to address shortfalls in the Plan, with overspend in the Plan having the potential to exacerbate these wider financial pressures. For example, the NAO has previously reported a £8.5 billion gap in the Department’s estate budget and pressures on its spending on staff.
The NAO recommends that the Department decides which programmes to defer, de-scope or delete as soon as possible.