MoD Could Face £14bn Budget Shortfall, Say Auditors (excerpt)
(Source: The Guardian; published Nov 05, 2018
By Rajeev Syal
The National Audit Office report says the MoD is in “real danger” of wasting taxpayers’ money on equipment over the next 10 years.
The findings will raise further questions about the MoD’s financial management after a series of critical reports on the department’s spending plans.
Meg Hillier, the chair of the public accounts committee, which scrutinises NAO reports for parliament, said the MoD did not have enough money to buy the equipment it needed and was in danger of wasting money through short-term decision-making.
“The announcement in the budget of an extra £1bn for defence doesn’t deal with the gap in the MoD’s budget,” she said. “With the ongoing financial pressures, the MoD need to be clear about what equipment they will or will not be funding.”
According to the report, the MoD’s forecast costs exceed its budget of £186.4bn by £7bn in the next 10 years. In a worst-case scenario, should all the identified risks occur, this gap could grow to £14.8bn, it concludes.
The NAO recommends that the MoD should decide which programmes to defer or drop as soon as possible and then “outline its decisions, including the financial and broader implications, to parliament.” (end of excerpt)
Click here for the full story, on The Guardian website.
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The Equipment Plan 2018 to 2028
(Source: UK National Audit Office; issued Nov 05, 2018)
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,” said Amyas Morse, head of the NAO.
BACKGROUND NOTES:
-- £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.
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.
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The Defence Equipment Plan 2018 (Financial Summary)
(Source: UK Ministry of Defence; issued Nov 05, 2018)
This financial summary of the Defence Equipment Plan (the Plan) is the seventh consecutive annual publication and presents our plans to deliver the equipment needed by our Armed Forces to defend the country and keep our people safe. The government is committed to meeting the NATO target to spend 2% of GDP on defence and at least 20% of that spending on equipment. This report sets out our plans to spend £186bn on equipment in the 10-years from 2018/19.
We have substantially revised the content of this report to make it more transparent and accessible. For the first time, we have set out the strategic context for the Plan and presented in detail the Department’s assessment of affordability.
The NAO has assessed our plans, the supporting assumptions and transparency of our reporting. Their report is available online1.
In 2017/18 the Department achieved several significant milestones in procurement and support of equipment and successfully delivered the plan within budget, driving out significant costs through effective cost control and oversight. Highlights include the commissioning of HMS Queen Elizabeth, the first of our new aircraft carriers, the biggest and most advanced warships ever built for the Royal Navy, and delivery of a further 12 F-35 Lightning aircraft, which will form an integral part of our Carrier Strike capability once operating from the aircraft carriers.
We also placed contracts for the seventh Astute class submarine and the next phase of the Dreadnought programme delivery; and prepared the first of the Army’s new family of Ajax multi-role armoured vehicles for their final acceptance process before going into service.
Looking ahead, there are significant financial pressures in the Equipment Plan and across the wider defence budget to be managed over the four years from 2018/19. Our central estimate for the cost of the Equipment Plan at April 2018 exceeded the allocated budget by an average of 3.7% over the 10-years from 2018/19. The shortfall is greatest in the four years from 2018/19. This forecast will vary as risks and opportunities materialise and project plans mature or are changed through management action.
We are acting to address this increased risk to affordability. During the 2017/18 financial planning process, we worked closely with HM Treasury to ensure that budget holders received sufficient funding to deliver their plans in 2018/19. We are confident that with appropriate spend control and oversight we will deliver the Equipment Plan within budget for 2018/19 as we did in 2017/18.
We have also taken steps to enable longer term affordability by improving financial management of the Plan. Efficiency targets have been consolidated to simplify management of outstanding efficiency targets; a new Executive Agency was established to lead on the procurement, in service support and decommissioning of all UK nuclear submarines; and Head Office launched a finance functional leadership strategy which will improve cost management and forecasting accuracy.
The Modernising Defence Programme will further strengthen and modernise UK defence and the Armed Forces and put UK defence onto an enduringly affordable footing for the future. This will involve rigorously pursuing productivity and efficiency gains as well as prioritising capabilities to meet the changing threat environment.
This work will reshape the content of the Equipment Plan and improve the way in which it is managed. We will report on the implications of this work for the Equipment Plan in the next financial summary report.
This is the seventh annual published summary of the ‘Defence equipment plan’. Building on the 2017 summary, it sets out our plans for the next 10 years to deliver and support the equipment our armed forces need to do the jobs we ask of them.
Click here for the full report (37 PDF pages) on the UK MoD website.
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