Background to the report
The Ministry of Defence (the Department) publishes its Equipment Plan report each year, setting out its intended investment in equipment and support projects over the next 10 years and whether this is affordable within its future budget. In July 2020, the Department wrote to the Committee of Public Accounts to explain that it would not publish a full Equipment Plan report this year. It is deferring a full Equipment Plan report until the Spending Review and Integrated Review of Security, Defence, Development and Foreign Policy have concluded.
The Equipment Plan 2020–2030 includes the same depth of financial analysis as in previous years, however, it has cut back the contextual commentary in its report and included less project-level information. It shows that the Department has allocated a budget of £190 billion to equipment and support projects, 41% of its entire forecast budget. It needs to manage this expenditure effectively to ensure the Armed Forces can secure and maintain the equipment they need to meet their military objectives.
The Department introduced its Equipment Plan in 2012 after a period of weak financial management. The Secretary of State for Defence invited the National Audit Office’s Comptroller and Auditor General to examine the robustness of the Equipment Plan’s underlying assumptions. Each year since then the NAO has, in parallel, published a report examining the Department’s assessment of the Equipment Plan’s affordability and its response to the financial challenges it faces.
Scope of the report
The Department needs effective long-term financial planning to maintain and develop future military capabilities. The aim of this report is to evaluate the Department’s assessment of the affordability of equipment and support projects, and to set out how it can strengthen its approach to preparing future Equipment Plans. It examines:
- the affordability of the 2020–2030 Plan, considering the Department’s approach to cost forecasting and reasonableness of its adjustments (Part One); and
- how the Department has been seeking to manage funding shortfalls (Part Two).
For the fourth successive year, the Equipment Plan remains unaffordable. However, the Department has still not established a reliable basis to assess the affordability of equipment projects, and its estimate of the funding shortfall in the 2020–2030 Plan is likely to understate the growing financial pressures that it faces. The Plan does not include the full costs of the capabilities that the Department is developing, it continues to make over-optimistic or inconsistent adjustments to reduce cost forecasts and is likely to have underestimated the risks across long-term equipment projects. In addition, the Department has not resolved weaknesses in its quality assurance of the Plan’s affordability assessment. While the Department has made some improvements to its approach and the presentation of the Plan over the years, it has not fully addressed the inconsistencies which undermine the reliability and comparability of its assessment.
The Department faces the fundamental problem that its ambition has far exceeded available resources. As a result, its short-term approach to financial management has led to increasing cost pressures, which have restricted Top-Level Budgets from developing military capabilities in a way that will deliver value for money. The growing financial pressures have also created perverse incentives to include unrealistic savings, and to not invest in new equipment to address capability risks. The recent government announcement of additional defence funding, together with the forthcoming Integrated Review, provide opportunities for the Department to set out its priorities and develop a more balanced investment programme. The Department now needs to break the cycle of short-termism that has characterised its management of equipment expenditure and apply sound financial management principles to its assessment and management of the Equipment Plan.