In defence of MoD spending

A report has warned that the Ministry of Defence will struggle to afford the new jets, ships and armoured vehicles set out in its 2015 plans. Defence Business analyses the figures and saving and spending plans of the MoD

The risks to the affordability of the Ministry of Defence (MoD) Equipment Plan are greater than at any point since reporting began in 2012, according to a January 2017 report from the National Audit Office (NAO).

The government’s Strategic Defence and Security Review (SDSR), published in November 2015, announced an additional £12 billion in defence spending, and, at the time of its publication, the SDSR was widely welcomed. Malcolm Chalmers, deputy director of the Royal United Services Institute (RUSI), said that the outcome of the SDSR ‘is much better than the armed forces had been expecting’, while the International Institute for Strategic Studies (IISS) claimed that it offered ‘a credible plan to improve, modernise and increase UK security and hard power’ and ‘maintains the UK as a significant defence power’.

The Equipment Plan, first established in 2012 as a new approach to generate greater stability in the MoD’s procurement activity, involves developing a budget for a ‘core programme’ of key equipment projects, covering forecast spend for 10 years. This is then updated annually.

Spending on equipment and associated support in the 2016 Plan is projected to be £178 billion, an increase of seven per cent, compared to an increase of just 1.2 per cent between 2013 and 2015. The SDSR added £24.4 billion of new commitments to the MoD budget, including the Mechanised Infantry Vehicle, the Poseidon Maritime Patrol Aircraft and an acceleration of purchases of the F-35 Joint Strike Fighter.

The NAO, the body established to scrutinise public spending for Parliament, has warned that in order to meet the funding requirements proposed by the Review, the MoD must use the entirety of the £10.7 billion headroom previously set aside to meet emerging requirements in future years, suggesting the absence of future flexibility.

To further ensure the affordability of the Plan, the MoD must also find £5.8 billion of savings from existing projects in the next 10 years. Plans for achieving these are still under development. Of this, £1.5 billion will be provided from savings elsewhere in the Defence budget, for example through military and civilian pay restraint, or savings from the running of the defence estate, the latter of which the NAO reported in November 2016 would be extremely challenging. These savings targets are in addition to £7.1 billion of brought forward savings already assumed in the Plan, £2.5 billion of which have yet to be generated.

Cost uncertainty
The level of cost uncertainty in the Plan has also increased considerably, with 15 per cent of additional commitments yet to go through detailed costing at project level. The MoD’s current costing practice can lead to significant understatement in the cost of projects in their early stages of development, the proportion of which has increased as a result of the Review. The MoD’s independent Cost Assurance and Analysis Service estimates that currently the Plan is underestimating financial risk by £4.8 billion. This figure is within the contingency provision of £5.3 billion but it does not include estimates for the new Review commitments. Major changes to the requirement for the Type 26 Global Combat Ship mean that costings for this, the largest non‑nuclear programme in the Plan, will be unclear until 2018. The Plan also reports cost increases to various parts of the nuclear submarine programme.

The Plan is also vulnerable to changes in foreign exchange rates. Approximately £18.6 billion of the Plan will be paid in US dollars and £2.6 billion in Euros over the 10 year period. Planning assumptions are currently based upon rates set before the result of the EU referendum, and the recent exchange rate fluctuations threaten to impact significantly upon the affordability of the Plan.

Amyas Morse, head of the NAO, said of the report: “The affordability of the Equipment Plan is at greater risk than at any time since its inception. It is worrying to see that the costs of the new commitments arising from the Review considerably exceed the net increase in funding for the Plan. The difference is to be found partly by demanding efficiency targets.

“There is little room for unplanned cost growth and the MoD must actively guard against the risk of a return to previous practice where affordability could only be maintained by delaying or reducing the scope of projects.”

Harriett Baldwin, Minister for Defence Procurement, has reassured that the 10-year plan would deliver ‘the best kit for our armed forces at the best value for the taxpayer’.

She said: ”We are focused on maintaining an affordable programme and delivering the efficiencies we need to reinvest in cutting-edge ships, planes, versatile strike brigades, and greater cyber capabilities, so that our Armed Forces have the equipment they need to keep the UK safe and secure.”

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