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.
“The Equipment Plan 2018-28 shows that the Ministry of Defence has a clearer understanding of the affordability issues that it faces, but it equally shows how urgently it needs to get on and tackle them.”Amyas Morse, head of the NAO
Read the full report
Notes for editors£186.4bn Ministry of Defence's (the Department's) 10-year equipment and support budget £193.3bn the Department’s 10-year equipment and support forecast costs £7.0bn most likely variance between budget and costs identified by the Department, after contingency The Department's budget of £186.4 billion includes: £5.1 billion departmental contingency that the Department has allocated to the Equipment Plan £1.1 billion nuclear-related contingency that is controlled by the Department and that it has dedicated to nuclear programmes The Department's forecast costs of £193.3 billion reflects: £7.3 billion reduction for efficiency savings for which there are firm plans in place £2.2 billion reduction for less certain efficiency savings, which are in outline form and have no detailed cost estimate available £6.7 billion reduction for the Department's assumption that, across a portfolio, some projects will be delayed or not progress as envisaged Risks not reflected in the costs include: £3 billion potential understatement of costs in the Plan estimated by the Department’s Cost Assurance and Analysis Service
- The Ministry of Defence's Equipment Plan 2018 to 2028 sets out its equipment and support budget for the period 2018 to 2028. The Plan includes equipment already in use, such as the Typhoon combat aircraft, as well equipment in development, such as four new nuclear-armed submarines. For the next 10 years, the Department will allocate over 40% of its total budget to its equipment and support programmes.
- The Equipment Plan was introduced in 2012. At the request of the then Secretary of State, the NAO provides Parliament with a commentary on the Plan when it is published each year, and assesses the robustness of its underlying assumptions.
- The Department announced its Modernising Defence Programme (MDP) to review defence capabilities in January 2018. As part of the MDP, the Department will consider its future equipment and support projects, including whether to delay, defer or de-scope some of its future defence requirements.
- Press notices and reports are available from the date of publication on the NAO website. Hard copies can be obtained by using the relevant links on our website.
- The National Audit Office scrutinises public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Sir Amyas Morse KCB, is an Officer of the House of Commons and leads the NAO, which employs some 785 people. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund have used their resources efficiently, effectively, and with economy. Our studies evaluate the value for money of public spending, nationally and locally. Our recommendations and reports on good practice help government improve public services. Our work led to audited savings of £741 million in 2017.