Spiralling nuclear costs make the MOD’s equipment plan unsustainable.

The Ministry of Defence’s plan for equipment acquisition over the next decade has once again been branded unaffordable, with overspending on its nuclear programme now clearly responsible for the overall insolvency of the plan. After two years where the plan was predicting a modest surplus, due to the greatest increase in UK military spending since the Korean war, the apparently inexorable rising costs of the government’s nuclear weapon upgrades have created the largest deficit since the government started publishing these plans in 2012.

The Ministry of Defence (MOD) plans its equipment spending around a 10-year budget set by the Treasury. This is longer than most departments, due to the substantial costs and lead-in times involved. The plan covers spending on all equipment used by the armed forces, from submarines to small arms ammunition. The plan is updated annually to cover the next 10 financial years, and is intended to show Parliament that the MOD is able to properly finance its ambitions in military equipment spending.

Once the plan is published the National Audit Office (NAO) carries out an analysis of the affordability, which is published separately. The MOD decided not to publish its 2023 Equipment Plan, telling the House of Commons Public Accounts Committee that it needed more time to “work through the consequences” of the 2023 Integrated Review Refresh (IRR) and its accompanying Defence Command Paper. However, all of the financial analysis for the plan has been undertaken and the NAO has published a report based on that analysis.

The MOD’s assessment

The MOD’s own figures show that there is a £16.9bn shortfall in the plan, compared to the £2.6bn surplus in the previous year’s plan. While there are shortfalls in every ‘Top Level Budget’ (TLB) in the plan, huge increases in the forecast cost of the MOD’s nuclear weapon upgrades is the most significant driver of these deficits.

The Defence Nuclear Organisation (DNO), the TLB which oversees the majority of the MOD’s spending on its programme, has seen its spending on the equipment plan increase 62% since last year to £99.5bn. The DNO appear to have been given approval to spend whatever is deemed necessary to avoid delays in the production of the Dreadnought submarine class, as the NAO says it has prioritised delivery to schedule “over immediate cost constraints”. This approach is apparently supported by the Treasury, and although it is hard to dispute their claim that fewer delays will in general lead to lower overall costs, it is a questionable approach to financial management.

The TLB which has seen the second largest increase in forecast equipment plan costs is the Navy, whose costs have increased by £16.4bn, or 41%, since the previous plan. The Navy’s equipment plan budget is split between nuclear and non-nuclear projects, with the former representing about 20% of its costs in the current year of the plan. As nuclear spending is ring-fenced and is not allowed to be cut, the Navy appear to have reacted to rising nuclear costs by refusing to submit a plan that matches its allotted budget and instead included all of the capabilities that they are required to deliver.

This approach is different from what they have done in previous years and from the approach taken by the Army, which have drawn up an equipment plan that fits within its budget. As a result, a number of projects belonging to the Army and other TLBs that took this approach are not included in the equipment plan, despite being deemed necessary in the IRR and related policy documents. The MOD estimates that £12bn of additional funding will be required for the Army projects alone. This divergence between military ambitions and budget is in stark contrast to the professed aims of the IRR’s predecessor, the 2021 Integrated Review, which was intended to break with previous defence reviews by incorporating budgetary deliberations and ensure that its recommendations can be funded.

Potential for greater shortfalls

The estimated £16.4bn shortfall in the equipment plan does not take into account the full forecast costs of the projects in the plan. As in previous years, the MOD has incorporated assumptions of savings it believes it can make over the 10 years of the plan. Without these assumptions, the total forecast cost of the plan rises from £305.5bn to £341.4bn, £52.8bn above the currently available budget of £288.6bn. In the MOD’s own ‘worst-case’ forecast for the plan there is a £29.8bn funding gap.

The included assumptions include planned reductions in the scope of projects, efficiency savings and ‘adjustments for realism’, which is spending the MOD expects to be deferred beyond the 10 years of the plan due to unforeseen project delays. The £35.9bn of savings assumptions built into the plan is 18% higher than the previous year’s plan, and includes £4.4bn of assumed savings for which no concrete plan currently exits. The DNO has £2.3bn of efficiency savings included in their calculations for the equipment plan, and the highest proportion of ‘adjustments for realism’ of any TLB, about 20% of their total forecast costs. This would seem to be at odds with its stated top priority of delivering the Dreadnought programme, its largest project by value, to schedule.

Separately, the MOD’s internal Cost Assurance and Analysis Service (CAAS) has carried out its own assessment of equipment plan forecasts. This assessment covers the more risky projects in the equipment plan, and estimates that these projects will cost £1.3bn more. However, their analysis also warns that in a “very unlikely” worst case scenario the total overspend could be £14.5bn more than the main equipment plan forecast. The Dreadnought programme was one of the projects scrutinised by CAAS, and they estimate that it will cost £2.8m more than currently forecast over the 10 years of the equipment plan. Over the full life of the Dreadnought programme, CAAS estimates that costs will be £4bn higher, a substantial increase from their estimate last year of costs being £1.2bn above current forecasts.

The CAAS estimates for the remainder of the equipment plan appears initially to contain better news for the MOD, as they predict that the other 50 projects will be delivered for £1.5bn less than current forecasts. However, this figure is largely due to two factors, both of which entail problems in the nuclear programme. Firstly CAAS predict that delays to the SSN-AUKUS submarines, which are intended to replace the current Astute-class fleet, will lead to £2bn of costs being spent after the 10-years covered by the current plan. Secondly, CAAS estimate that another £1bn will not be spent on supporting in-service submarines due to budgetary constraints. It is difficult to imagine that this money can be saved without seriously affecting submarine availability or safety, given the current reliability problems in the Vanguard fleet and the maintenance backlog in both the Vanguard and Astute fleets.

Cost increase factors

The NAO identified several factors leading to increased costs in the equipment plan. Inflation accounts for £10.9bn of increased costs, but the MOD’s method for estimating inflation costs remains a “work in progress” and the DNO has apparently suggested that it is currently underestimated. Issues with supply chains and constraints on industrial capacity are also a factor, with the Navy citing a shortage of welders for shipbuilding projects.

The NAO also highlights the propensity of project delays leading to increased costs, both in the projects themselves and in related programmes, such as maintaining equipment that had previously been scheduled for retirement. This has frequently been the case within the MOD’s nuclear programme, and again raises questions about the substantial ‘adjustments for realism’ in the DNO’s current calculations.

A lack of plans

The gulf in the MOD’s equipment plan finances in general, and nuclear project finances in particular, is emerging despite substantial increases in funding from the Treasury. In the 2023 Spring Budget £3bn of additional funding was announced alongside the IRR, and current budgets allow for annual increases of £2bn, both specifically for nuclear projects. £2bn of the Dreadnought programmes nominal £10bn contingency fund had already been spent by March 2023, and the current forecast cost for the project appears to anticipate another £1bn being spent. The Treasury have apparently ‘set out the arrangements’ for further contingency spending, although it is still to be agreed on a case-by-case basis. In practice, the contingency does not exist as a separate fund, and this ‘contingency’ is just a mechanism for the Treasury to approve overspend.

While the stated commitment of the MOD and Treasury to funding the Dreadnought programme above any other considerations is clearly intended to dispel any doubts about the viability of that project, it is hard to see any resolution to the current state of the equipment plan that does not involve spending on conventional equipment projects being cut. The NAO warns about this prospect and highlights the reliance of nuclear-armed submarine patrols on conventional forces that are not currently protected by the ring-fencing of the MOD’s nuclear spending.

The MOD does not appear to have plans to resolve the shortfalls in its equipment plan. According to the NAO, while the MOD has started ‘balance of investment work’, they are not planning to take decisions on cutting programmes until after the next spending review. This is said to be expected in 2024, presumably after the next election.

The MOD appear to be using the government’s stated long-term ambition to increase military spending to 2.5% of GDP in defence of their unwillingness to produce an equipment plan that is commensurate with the allotted budget. As the NAO observes, this is antithetical to the purpose of the equipment plan and makes it likely that substantial amounts of public money will be spent on projects that will later be cancelled. The MOD’s refusal to take difficult decisions now merely increases the number of tough choices that will await an incoming government after the next election. The most likely outcome of those choices is that once again conventional military spending will be cut to fund the government’s nuclear ambitions.

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