"Ministry of Defence must act now on unaffordable Equipment Plan" says PAC

- More than four-fifths of estimated £7 billion shortfall occurs in Plan’s first four years

- Urgent need for Government to take decisions on its defence priorities

- Industry must have confidence to invest in equipment and support required by Forces

REPORT SUMMARY

In May 2018 we reported that the Ministry of Defence (the Department) did not have enough money to buy and support the equipment it needs.

Despite committing to tackle this problem, the Department has made little progress, continuing to delay the difficult decisions needed to make the Equipment Plan (the Plan) affordable, particularly around which programmes to stop, delay or scale back.

It now estimates a most likely affordability gap between its budget and its forecast costs of £7 billion across its Plan over the next ten years. It also estimates that the gap could widen to £14.8 billion, but even this looks to be unlikely and overly optimistic.

The escalating and continuing affordability issues have led to short-term decision making which has only worsened the longer-term affordability risks. As a direct result, there is uncertainty for both the Department and for industry which needs to be addressed.

Coupled with our ongoing concerns over the Department’s ability to forecast costs and efficiencies accurately, we remain sceptical that the Department is close to reconciling what it says it needs with the funding it has available.

COMMENT FROM PAC CHAIR MEG HILLIER MP

“In terms of poor financial planning, the Ministry of Defence is a repeat offender. The Department’s progress with addressing the concerns set out in our last report on the Defence Equipment Plan has been woeful.

“The MoD simply cannot afford everything it says it needs and it is not acceptable for officials to continue deferring decisions that have a bearing on its current affordability gap and longer-term risks.

“A department that is unwilling or unable to take the action required to help it live within its means is failing taxpayers, who rightly expect Government to deliver the best possible value for their money.

“We urge the MoD to act on our recommendations now, work with the Treasury to ensure its funding and planning models are fit for purpose, and bring some much-needed clarity to its priorities and costs.”

CONCLUSIONS AND RECOMMENDATIONS

The Department’s Equipment Plan remains unaffordable as government continues to delay decisions on its priorities, and on whether to increase funding or stop, delay or scale back programmes. The Department estimates that 84% of its £7 billion affordability gap falls in the first four years of its 10-year Plan, and it therefore urgently needs to decide how to make the Plan more affordable. It is alarming that the government has not yet made these decisions, with defence capability reviews continuing since July 2017. Back in March 2018, the Department committed to sharing emerging findings from the MDP in July 2018, with the cost information available in autumn 2018. However, with both a Spending Review and Strategic Defence and Security Review likely in the next two years, we can only see continuing uncertainty and delay. The Department now says that programme-related decisions will most likely be incorporated into the Spending Review 2019, but not reflected in the Equipment Plan until 2020. Any delay to the 2019 Comprehensive Spending Review would wreak havoc on the Department’s ability to take urgently-needed decisions on its transformation agenda. While the Department confirmed it was uncomfortable with the size of its current affordability gap, it said it would always expect there to be “a prudent level of over-programming”, although did not know what level this would be.

Recommendation: As soon as possible, government must produce an affordable Equipment Plan by:

• providing clarity on its priorities and the subsequent decisions made to stop, delay, and scale back areas of the defence programme to make the Equipment Plan affordable; and
• clarifying what it considers to be a prudent level of over-programming across the 10-years and why.

The Department’s inability to provide certainty on its equipment and support plans, risks reducing the confidence industry needs to invest in the equipment and support required by our Armed Forces. The Department recognises it needs to prioritise how it manages its suppliers and says that it is now having more open conversations with industry about future threats and requirements. The Department needs to ensure industry retains and maintains certain skills, particularly within the UK, such as for the development of fighter aircraft. The UK needs specialist skills which may require government support to be sustained; for example, a UK-based capability to develop complex radar, which the Department says it is discussing with industry. We are pleased to hear that the Department recognises the need to discuss industrial strategy in more depth across government, particularly around aerospace.

Recommendation: The Department should report back to us by July 2019 on how it has engaged with industry, and whether the Department and industry are signed up to a coherent plan to maintain the UK-based capability to develop and deliver the equipment required in the future. 

Recommendation: The Department should report back on how it is working with industry to purchase off the shelf equipment rather than pursue unnecessarily complex kit, to maximise value and drive the transformation agenda.

The Department still lacks the capability to accurately cost programmes within its Equipment Plan, making it more difficult to plan effectively. Although there have been some improvements to cost forecasting, for example across nuclear programmes, the Department recognises that more progress is needed. The Department’s independent cost assurance team considered project teams’ cost forecasts in the latest Plan were underestimated by £3 billion. While the Department sees the independent review as a useful challenge, it clearly also raises questions about the accuracy of project teams’ costs. The Department hopes that its financial skills strategy, launched in the summer of 2018, will help develop cost forecasting and risk skills over the next three years. However, we remain sceptical given the number of similar promises we have heard before.

Recommendation: By July 2019, and each year after, the Department should provide the Committee with a progress report on the development of financial skills and performance against the metrics that the Department will be using to measure success.

The Department is assuming it will achieve significant efficiency savings, despite not having a coherent and credible plan for monitoring and delivering them.The Department accepts that its efficiency plans have been optimistic and that it has found it difficult to provide a clear and comprehensive view of progress towards efficiency targets. It has a £13.4 billion efficiency savings target over the 10 years of the Plan. It is confident of achieving £7.3 billion of these, and has assumed a further £2.2 billion of ‘less certain’ efficiency savings in its forecast costs. However, this leaves a residual £3.9 billion for which it still needs to develop plans. Even if the Department achieved this amount of additional efficiencies, it would not reduce forecast costs enough to completely close the Plan’s £7 billion affordability gap. It hopes the increased use of digital technology and business modernisation, which requires up-front investment, will help bridge the gap. The Department has given us a commitment that it will provide a more transparent assessment of efficiencies for when we examine next year’s Equipment Plan.

Recommendation: In compiling its Equipment Plan 2019 position, the Department must ensure that it only includes efficiencies that it can realistically expect to deliver, and that it discloses in future Plans a detailed and robust statement of how it will deliver them.

The Equipment Plan still does not fully outline the level of risks and uncertainties within the Plan. The Department remains committed to producing a 10-year Equipment Plan and we are pleased that the 2018 Plan was produced quicker than in the past. The presentation of the Plan has also improved with, for example, the gap between forecast cost and budget being quantified for the first time. However, more can be done to improve transparency, particularly around large programmes and future risks. For example, there remains uncertainty on the plans for F-35s beyond the procurement of the first 48 jets, with clarity on future support and maintenance costs dependent on the results of current trials.

Recommendation: The Department’s future Equipment Plans should include more information on the cost, maturity and risks of the largest projects (including, in particular, the F-35 and Type 31e frigate), as well as being more transparent about its costing approach. 

HM Treasury’s requirement for departments to live annually within their means hinders the Department’s ability to plan for the long-term. The Department recognises the trade-off between the short-term decisions needed to ensure spending stays within its means and longer-term value for money of programmes. It has set out to HM Treasury the case for greater funding flexibility and multi-year settlements for long-term complex programmes such as the nuclear programme. The Department considers that the Budget settlement in October 2018, when some additional money was given to the Department, reflected HM Treasury’s initial acceptance of the difficult choices needed to tackle the affordability gap. The Department told us it has recently introduced a programme looking at defence-wide options to find further savings through the increased use of digital technology and business modernisation. It explained that this work will need upfront investment, and it will present its plans as part of the Spending Review 2019.

Recommendation: The Department should use the Spending Review 2019 as an opportunity to explore longer-term budgeting arrangements in certain areas such as nuclear programmes and shipbuilding maintenance and improvements planning.

Recommendation: The Department should report back to the Committee on how the extra funding settlement for nuclear and anti-submarine warfare in October 2018 was allocated and spent.

Given the size of the projected shortfall in the Defence Equipment Plan of at least £7 billion, we recommend that the Department work more closely with HM Treasury to produce a procurement plan, including realistic costing of “unknowns” and support and logistics costs, which puts the Department on the same realistic financial planning as all other Government Departments.

Recommendation: We expect the Department to report to the Committee on substantial progress within 12 months.