The Ministry of Defence’s assessment that its 2022-2032 Equipment Plan is affordable continues to be based on optimistic assumptions, and does not fully reflect the impact of growing pressures on costs, according to the National Audit Office (NAO).
The Ministry of Defence (MoD) publishes the Equipment Plan (the Plan) each year, setting out its planned investment on equipment procurement and support projects over the next decade.1 The latest Plan covers the period from 2022 to 2032, and the MoD has allocated a budget of £242 billion, comprising forecast costs for some 1,800 projects at different stages of development.2
The MoD judges that the 2022-2032 Plan is affordable, with the £242 billion budget exceeding forecast costs by £2.6 billion, a surplus of 1%. The MoD has improved its assessment of cost pressures, strengthening its adjustment of cost forecasts and establishing a more reliable methodology to compare affordability with previous years. The MoD recognises that pressures on costs are growing, but believes these are manageable within the current Plan.
The NAO found that MoD’s assessment continues to be based on optimistic assumptions that it will achieve £13.5 billion of efficiency savings over ten years. The Top Level Budgets (TLBs)3 are still developing plans to deliver a quarter of these efficiencies (£3.4 billion). In addition to these savings, TLBs need to find cost reductions totalling £3.7 billion, but do not yet have credible plans to achieve £1.6 billion of these.
Project costs could also increase by more than the Plan assumes. The MoD’s Cost Assurance and Analysis Service assessed projects making up 53% of the Plan’s costs this year. It concluded that these projects could cost £5.2 billion more than stated in the Plan, including £1.6 billion for the Dreadnought programme (for which HM Treasury has a separate contingency). The MoD is facing increasing risks in delivering projects to budget and schedule. It has estimated that there will be a deficit of £7.3 billion if all risks materialise. The NAO considers that this does not fully reflect all the uncertainties the MoD is facing.
The MoD has limited flexibility to absorb any cost increases on equipment projects, or across other budgets, particularly in the short-term. The Plan has a deficit of £2.6 billion across the first seven years, and a surplus of £5.2 billion in the final three years. It includes a contingency of £4.3 billion, which the MoD can use to fund new capabilities or to help address unexpected pressures, equivalent to 2% of the Plan’s overall budget. It has also set aside an additional £4.4 billion from 2025-26 to exploit its investment in research and development. However, the NAO found that it will be challenging for the MoD to manage affordability pressures, and to deliver equipment projects as planned.
The MoD has a good understanding of operational capability risks and continually reassesses which equipment projects to fund. It cannot currently afford to develop all the capabilities set out in the 2021 Integrated Review of Security, Defence, Development and Foreign Policy. The MoD may need to replace existing projects, reduce their scope or accept later delivery, if it is to be able to develop the new military capabilities within existing budget limits.
The MoD has not yet reflected the impact of growing external cost pressures, such as rising inflation and the impact of the conflict in Ukraine, on the Plan’s affordability. The MoD estimated, based on March 2022 forecasts, that project costs could be up to £2.1 billion higher because of inflationary pressures, but this is not reflected in the assessment that the Plan is affordable over ten years. Inflation has increased further since the March forecast, meaning that the affordability position reported in the Plan has already been overtaken by events.
The MoD is quantifying these external pressures, and intends to reflect them in the next planning round, along with future uncertainties. It will also assess the implications of the Ukraine conflict, for example on what capabilities, stockpiles and levels of resilience are needed to respond to changing threats.
The NAO recommends that MoD assesses whether its financial planning processes provide the level of responsiveness and flexibility that it now requires, given the rapidly changing context in which it is operating. This includes assessing how to provide a more timely assessment of affordability, and how to capture uncertainty more realistically. It should also ensure it has sufficient flexibility to adapt its equipment programme to respond to changing threats.
“The Ministry of Defence has made improvements to how it assesses affordability, but its view that the 2022-2032 Plan is affordable is still based on optimistic assumptions. Pressures on costs continue to grow, and the MoD will need to make difficult decisions on priorities to live within its means, and retain the flexibility needed to respond promptly to the changing pressures that it faces.”Gareth Davies, the head of the NAO
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Notes for editors
- The MoD introduced the Equipment Plan in 2012, 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 current Plan is based on financial data as at 31 March 2022. The 1,800 projects include equipment in early stage development, equipment already in use, and budgets to support and maintain military capabilities. They include the projects MoD has chosen to fund in response to the 2021 Integrated Review of Security, Defence, Development and Foreign Policy.
- Top Level Budgets are the four Front-Line Commands (Navy, Army, Air and Strategic Command), the Defence Nuclear Organisation and the Strategic Programmes Directorate. They are responsible for delivering their agreed defence outcomes within delegated budgets.
- 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.