‘Unaffordable’ UK MoD Equipment Plan Is Up to £21 Bn Short, Says NAO

The Ministry of Defence’s (the Department’s) ten-year Equipment Plan is not affordable and does not provide a realistic forecast of the costs the Department will have to meet over the next 10 years buying and supporting the equipment it has determined the Armed Forces need, according to today’s report from the National Audit Office.

Spending on equipment and associated support in the 2017 Plan is projected to be £179.7 billion, including a £6 billion contingency.

But even after assuming the contingency will be used, the NAO has calculated a minimum affordability gap of £4.9 billion. There is an additional potential affordability gap of £15.9 billion if all risks of cost growth materialise and the Department does not achieve any of the savings assumed in the Plan.

Overall, the potential affordability gap could be £20.8 billion.

The NAO report found that the Department has not included £9.6 billion of forecast costs in the Plan. This variance arose as a result of the Department’s 2017 budget setting process not being able to match costs to available budgets. In addition, the NAO’s review found that the Department has understated forecast costs by at least a further £1.3 billion as the planned cost of buying five Type 31e frigates are not included in the Plan, while the cost of nuclear-related projects continues to grow.

There are also significant risks to the cost of the Equipment Plan: over-optimism in forecast costs of £3.2 billion as calculated by the Department’s independent Cost Assurance and Analysis Service; and the risk of increased costs of £4.6 billion due to the Department not using foreign currency exchange rates that reflect market rates at the date of the Plan.

The Department is also relying on ambitious savings to help fund the Plan. The Department reports that it has achieved savings of approximately £7.9 billion against an increased savings target of £16 billion, with approximately £8.1 billion still to be achieved by 2027. However, there is a lack of transparency on the full amount of savings included in the Plan and the Department does not have evidence to support all the savings it has claimed to date.

The Department has limited flexibility to use other budgets to address the funding shortfall for equipment and support. It was unable to agree a balanced defence budget for 2017-18 and is now managing a significant projected overspend in 2017-18. Our past work has identified an £8.5 billion funding gap for managing the Department’s estate. Also, the Department faces challenges in managing its staff budget.

“The Department’s Equipment Plan is not affordable. At present the affordability gap ranges from a minimum of £4.9bn to £20.8bn if financial risks materialise and ambitious savings are not achieved,” said Amyas Morse, head of the National Audit Office.

BACKGROUND NOTES:

Affordability gap range
-- £179.7bn
Total size of the Ministry of Defence's (the Department’s) 10-year equipment and support budget, including contingency

-- £4.9bn
The minimum size of the affordability gap in the Department's Equipment Plan, after contingency

-- £15.9bn
Additional affordability gap if all identified financial risks materialise and no assumed savings are achieved

-- £20.8bn
Potential affordability gap (£4.9 billion + £15.9 billion)

Costs not included in the Plan
-- £9.6 billion
Excess of the Department's forecast project costs over the 2017 budget, that are not included in the Plan

-- £1.3 billion
The Department's forecast cost of buying five Type 31e frigates not included in the Plan

-- (£6 billion)
Centrally held contingency

£4.9 billion Minimum affordability gap

Further risks to affordability
-- £3.2 billion
Estimated potential understatement of costs in the Plan as calculated by the Department's Cost Assurance and Analysis Service

-- £4.6 billion
Potential increase in costs if the Department had used the exchange rate prevailing at the start of the Plan period (1 April 2017) to forecast costs

-- £8.1 billion
Remaining savings assumed within the Plan that the Department must achieve over the next 10 years

-- £15.9 billion
Additional affordability gap if all identified financial risks materialise and no assumed savings are achieved

-- £20.8 billion
Potential affordability gap

Click here for the full report (51 PDF pages) on the NAO website.

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Today's defence-related media includes news of the NAO's report on the defence Equipment Plan. There is widespread coverage, including in The Telegraph, FT and The Sun, of the NAO's report on the defence Equipment Plan.

An MOD spokesperson said:

“We have just launched the Modernising Defence Programme to ensure our Armed Forces have everything they need to defend the country from intensifying threats across the globe. We have already saved almost £5bn in efficiencies while making sure our military have the best equipment available and taxpayers get value for money.

“Most outlets say the NAO has warned the MOD is potentially facing around a £20bn shortfall. The report’s potential affordability gap reflects the wholly unlikely and unrealistic situation where all Equipment Plan financial risks materialise and the MOD achieves none of its efficiency and savings measures. The MOD has already saved almost £5bn in efficiencies – nearly 70% of its target.

“The Times says the MOD omitted to include in the plan the £1.3bn price for a fleet of five new Type 31e frigates set for the Royal Navy. Type 31e support costs are actually still included under a larger Type 26 programme. The costings for both projects are being revised, with the Type 31e programme in the earliest stages of delivery. Costings will be developed.

The MOD remains committed to delivering large, complex and technologically challenging defence programmes to give our military the very best equipment.

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