Today
Wed 3 March 2021

Stephen Delahunty reports on the Ministry of Defence’s fanciful financial outlook

Ministry of Defence (MoD) plans to spend nearly £200 billion of public money on equipment over the next 10 years has been slammed by the spending watchdog as “unaffordable” and “inconsistent” with a funding shortfall that could be as large as £17 billion.

It is the fourth year running that the National Audit Office (NAO) has concluded that the MoD’s Equipment Plan is too costly. The report estimates a likely funding shortfall of £7.3 billion, that could rise to more than £17 billion depending on any risks that could materialise.

These growing financial pressures are creating perverse incentives to include unrealistic savings, the NAO says. Worryingly, the report warns that the MoD’s short-term approach to managing costs is increasingly restricting its ability to develop the capacity of the UK’s Armed Forces.

The NAO’s annual assessment covers the period between 2020 and 2030. It looks at the viability of the MoD’s spending programme and the credibility of its plans to balance the books. It shows that the department has allocated a budget of £190 billion to equipment and support projects – 41% of its entire forecast budget. 

The plan was first introduced in 2012 to assure Parliament that the MoD’s spending programme was affordable, following a period of poor financial management. 

The current assessment, however, suggests little has changed. The plan is already more than £7 billion over budget – an increase of £2.9 billion in one year. What’s more, the report highlights that the MoD has not reduced its budget to reflect restrictions on spending commitments, as it has in previous years.

Affordability pressures have increased since 2015, as forecast costs have risen by £31 billion. This has led the department to search for greater efficiency savings. However, these adjustments have been described as over-optimistic, with patchy progress.

Ultimately, a focus on short-term financial management and deferred project expenditure has led to higher overall costs and larger funding shortfalls, the NAO contends.

On top of that, funding for equipment remains uncertain. An additional £20 billion may need to be found to pay for future military capabilities and to replace existing ones as they become obsolete, such as the Navy’s mine-hunting capacity. Other major procurement projects include new submarines, new combat aircraft and space capabilities, the costs of which are not included in the plan.

“The department continues to make over-optimistic and inconsistent judgements when forecasting costs,” the NAO report says. “Its Cost Assurance and Analysis Service independently estimated the forecast costs of a sample of projects in the plan and concluded that costs were again understated.”


Hardware Hindrance

Under the MoD’s delegated model, managing projects is the responsibility of the Front-Line Commands (Navy, Army, Air and Strategic Command), the Defence Nuclear Organisation and the Strategic Programmes Directorate. These organisations are known as ‘Top-Level Budgets’ (TLBs) and are required to deliver their agreed defence outcomes within delegated budgets.

To meet the department’s funding shortfall, TLBs need to achieve £4.6 billion of expected efficiency savings and identify or secure a further £3.8 billion of savings. TLBs have responded by stopping projects or deferring spending into later years, severely hindering their ability to develop the capabilities they need.

The ability of individual TLBs to address these shortfalls also depends on the nature, maturity and complexity of the military capabilities that they are developing. The long-term nature of Air Command’s contracts mean that 62% of its forecast equipment support costs are already committed over the next 10 years, limiting its programme flexibility.

The NAO notes that the £16.5 billion increase to the department’s budget, announced in November 2020, should help to establish a more affordable equipment programme. However, the department remains focused on short-term pressures and it cannot even assure the quality of much of its data and assumptions. The NAO report concludes that the MOD’s ambition has far exceeded available resources.


Recommendations

In order to break this cycle of short-termism, the report makes a number of recommendations.

Namely, that the MoD must ensure that all adjustments to cost forecasts are fully evidenced, transparent and supported by a clear rationale. The basis of TLB cost forecasts must also be challenged, the NAO says, while ensuring that funding challenges are directly addressed.

The MoD must also strengthen its analytical capacity by developing staff with financial qualifications, as well as improving its use of data.

An MoD spokesperson said: “Defence secured a substantial settlement over four years in order to restore financial sustainability and the Defence Secretary has committed to matching ambition with resources for future Equipment Plans.”


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