MOD equipment affordability risks remain despite £48bn extra funding

The National Audit Office have expressed concerns about the affordability of the latest 10-year Ministry of Defence (MOD) equipment plan, despite a £48bn funding increase.

The MOD has published annual Equipment Plans since 2012. Each Plan set out its anticipated spending on equipment over the next decade, starting with the current financial year. The 2021-2031 Plan calls itself ‘one of the most important in recent years’ as it is the first after the Integrated Review (IR), which was published in March 2021. The Plan also follows the November 2020 spending review, which set a 4-year funding settlement for the department, intended to provide a period of much-needed financial certainty and stability.

The Plan

The 2021-2031 Equipment Plan is the first one the MOD has assessed as affordable in 4 years. Compared to the previous year’s plan spending has risen £48bn to £238bn. However, the actual forecast cost for the equipment spending over the decade is £265.8bn, and the MOD has included a number of reductions in the Plan in order to make it fit the budget. These include planned cost reductions of £7bn, efficiency savings of £13.1bn, and a £12bn ‘adjustment for realism’: money that the MOD believes will be saved due to delays, causing project costs to be deferred. Collectively, these reductions allow the MOD to claim that Plan spending will be £4.3bn below budget.

Spending on nuclear projects accounts for a substantial proportion of the Equipment Plan. Of the £230.2bn of Plan funds currently allocated, £62.8bn is for the Nuclear Enterprise. This is larger than any other operating centre, and more than twice the next largest. The Dreadnought Programme alone has £19.2bn of spending allotted to it in the Plan. Supporting documents show that the approved budget for Delivery Phase 2 of the Dreadnought Programme, which ran until April 2022, was just over £12bn.

Affordability risks

The National Audit Office has formally assessed all the MOD Equipment Plans. From 2017 to 2020 it has deemed the Plans to be unaffordable. It does not explicitly state this to be the case for the 2021-31 plan. However, it does say that the MOD “risks repeating the same mistakes made in previous Defence reviews”, quoting from the IR forward which said those reviews were “over-ambitious and under-funded”.

The NAO cites numerous factors that contribute to affordability risks in the Plan. Due to new investments launched under the IR, it contains a higher proportion of newer projects with reliable cost forecasts. The NAO found that “some of the cost assumptions are relatively imprecise”. The MOD’s own Cost Assurance and Analysis Service (CAAS) looked at 80 projects, about 58% of the plan cost by value, focussing particularly on high risk and newer projects. They concluded these projects were likely to cost £7.6bn more than the costing in the plan. Additionally, some project teams have identified costs that are not included in the plan, which amount to £3bn.

The £7bn of planned cost reductions in the Plan is £4.3bn higher than in the previous year’s plan. Currently no plans exist for £3.9bn of these reductions. £5.1bn of these reductions are due to fall during the MOD’s current 4-year funding settlement, between 2021/22 and 2024/25. The plan assumes that £4bn of efficiency improvements will be made through the Defence Transformation Programme, but the department’s most recent assessment suggests that only £3.3bn of these will be realised. This assessment hasn’t been checked by CAAS, who have “low confidence” in this forecast.

The NAO has repeatedly expressed concerns “about the over-optimism of the Department’s assumptions” about efficiency savings, and about the way that ‘adjustments for realism’ are used to make equipment plans appear affordable. Adjustments for realism amount to £12bn in the 2021-21 Plan. In total, adjustments to reduce the Plans costs come to around £21.6bn, 9% of the total pre-adjustment costs.

The MOD’s weakness in forecasting how future spending will be split between day-to-day and capital spending also comes under criticism from the NAO, which says that the MOD is weaker than other departments in this regard and some IR decisions relied on “crude assessments” to determine this split and in what year spending is likely to take place. In summary, the NAO concludes that, despite the funding increase and the multi-year settlement, the Plan “faces serious affordability risks again”.

Nuclear cost pressures

Although the cost-reductions factored into the Plan for the Defence Nuclear Organisation are smaller than most other Top Level Budgets in the department, amounting to £190m in between 2021/22 and 2024/25, the nuclear programme is not immune to cost pressures. CAAS’s analysis suggests the Dreadnought Programme may need an additional £2.6bn of spending over the 10 years of the Plan, with £2.3bn of these costs falling in the years covered by the current Treasury funding settlement.

The Government now expects Dreadnought to cost more than its official budget of £31bn. It has already spent £1.5bn more than its 2015 cost estimates, and the Plan includes £1.3bn of additional funding from the government’s £10bn Dreadnought contingency. The NAO says there is no clear definition of the purpose of the £10bn Dreadnought contingency or clarity on when the MoD can access additional funds from it.

Beyond the Dreadnought Programme the cost of the Plan may require £2.2bn of additional funding “attributable to the wider nuclear programme”, part of which will go towards the government’s Replacement Warhead, announced in February 2020. CAAS said that cost increases were more likely in projects within the nuclear programme, and since the previous Equipment Plan the MOD forecast costs for nuclear projects has risen by £16bn. In reviewing the Plan, CAAS said the MOD had under-forecast nuclear project costs by £4.8bn, more than the total headroom the MOD claims it has in the Plan.

The wider affordability issues in the Plan will limit its ability to manage this potential overspend in the nuclear programme, particularly during the current 4-year funding settlement, which was already known to be a period where the Programme would undergo serious cost pressures. At the time this article was being prepared for publication it was reported that the Government was due to announce an increase in funding for the MOD. It remains to be seen whether this increase will fully address the pressures on the nuclear programme and the wider equipment plan.

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