Despite improvements to the Ministry of Defence’s 2021-2031 Equipment Plan there is a risk to its affordability because of over-optimistic assumptions about future budgets, costs and the likely achievement of savings targets, according to the National Audit Office.
The Ministry of Defence (MoD) publishes the Equipment Plan (the Plan) each year, setting out its intended investment in equipment over the next decade. The NAO’s annual assessments of the Plan show that the MoD has consistently found it difficult to strike the right balance between increasing equipment capability and living within its means.
In the 2020 Spending Review, the MoD received £16.5 billion of additional funding over four years to support its ambitious agenda to reshape the armed forces (subsequently set out in the 2021 Integrated Review of Security, Defence, Development and Foreign Policy) and to cover previous funding shortfalls. The MoD announced that the Integrated Review and extra funding represented a real chance to remedy the affordability problems it had struggled with in its equipment planning over many years.
The Plan has increased in value by a record £48 billion (25%), from £190 billion in the 2020-30 Plan to £238 billion for 2021-31.2 The MoD has assessed its 2021-2031 Plan as affordable, with the budget exceeding estimated costs by £4.3 billion. Currently the MoD’s planned spending in the next ten years is higher than its budget, but it believes that it can make savings so that budget and costs will eventually align.
The MoD intends to spend £15.8 billion on new capabilities, such as a New Medium Helicopter. It is stopping some investments, such as the Warrior armoured vehicles. It also intends to defer spending to fund higher priorities in the short term. In some cases this will increase costs as it will need to re-contract at higher prices (at the time of the Integrated Review, the MoD expected that delaying the purchase of Chinook helicopters by three years would cost an extra £295 million). It is too early to say if the new investments outlined in the Plan includes all the equipment the Armed Forces will need in the next decade.
A range of costs identified by MoD project teams, but not currently included in the Plan, could result in financial risk if the Department does not reassess its priorities. Including these costs would increase the cost of the Plan by £4.2 billion. For example, early business cases for the Future Combat Air System, New Medium Helicopter and Future Commando Force programmes show that these programmes are currently underfunded.
Project costs could increase by more than the Plan assumes. The MoD’s Cost Assurance and Analysis Service assessed projects making up 58% of the Plan’s costs this year. It concluded that these projects are likely to cost £7.6 billion more than outlined in the Plan.
The Plan assumes that the Top Level Budgets (TLBs)3 will reduce equipment costs by £7.0 billion over the next decade. The TLBs do not yet have plans to achieve £3.9 billion of these reductions, but the MoD’s worst-case scenario only assumes that £935 million of savings will not be achieved.
The MoD aims to substantially reduce the size of its workforce, which could affect the money available for the Plan. The MoD assumes that wages will fall in real terms, but even a small change to the Department’s assumptions about pay would have a significant impact on the affordability of its spending plans. For example, an additional 1% pay rise above what is planned in 2022-23 would cost approximately £1.4 billion more over the following nine years.
The NAO has found that the quality of the Equipment Plan has improved in recent years, but the way it is produced incentivises short term affordability, which builds up financial pressures over the longer term. The TLBs spend more slowly on projects to keep within their budgets and re-classify budget shortfalls as ‘planned cost reductions’ or efficiencies to be achieved in future years, even if they do not have plans to achieve them.
Over-optimism about budgets and costs, and a focus on the short term have been consistent findings in NAO Equipment Plan reports over many years. The NAO has found that only approximately half of the recommendations it has made in Equipment Plan reports since 2016 have been fully implemented. To break the pattern, the MoD’s Head Office needs to work with the TLBs to fundamentally change the way it builds, and reports on, the Plan.
“The Ministry of Defence has taken some difficult decisions, reducing spending in some areas to allow it to spend more on its highest priorities. However, in this year’s Equipment Plan, risks remain of over-optimistic assumptions about costs, budgets and the likely achievement of savings targets.
“The new multi-year spending settlement gives the Department a rare opportunity to reset and develop an affordable Equipment Plan. The Department has further improvements to make if it is to both deliver the required equipment and make best use of the money it has been given.”Gareth Davies, the head of the NAO
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Notes for editors
- The MoD introduced the Equipment Plan in 2012 after a period of weak financial management. Its original intention was to assure Parliament that its spending plans were affordable. The Secretary of State for Defence invited the NAO’s Comptroller and Auditor General to examine the robustness of the Plan’s underlying assumptions. Each year since then the NAO has published a parallel report examining the Department's assessment of the Plan's affordability and its response to the financial challenges.
- The MoD’s budget for the Plan is higher because of the Spending Review settlement and annual increase of 0.5 per cent over inflation in later years. The amount allocated to the Equipment Plan reflects this, as well as cost growth recognised by the Department within individual programmes. This is by far the largest increase since 2012; by comparison the second largest increase was 7% between 2015 and 2016.
- Top Level Budgets are the MoD’s four Front-Line Commands (Navy, Army, Air and Strategic Command), the Defence Nuclear Organisation and the Strategic Programmes Directorate.
- 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.
About the NAO
The National Audit Office (NAO) scrutinises public spending for Parliament and is independent of government and the civil service. It helps Parliament hold government to account and it uses its insights to help people who manage and govern public bodies improve public services.
The Comptroller and Auditor General (C&AG), Gareth Davies, is an Officer of the House of Commons and leads the NAO. The NAO audits the financial accounts of departments and other public bodies. It also examines and reports on the value for money of how public money has been spent.
In 2020, the NAO’s work led to a positive financial impact through reduced costs, improved service delivery, or other benefits to citizens, of £926 million.