MoD lacks funds to buy all the equipment it says it needs, says PAC

REPORT SUMMARY

Last year we reported that the Ministry of Defence’s Equipment Plan was at greater risk of becoming unaffordable than at any time since its inception in 2012.

These risks have now increased and the Ministry of Defence simply does not have enough money to buy all the equipment it says it needs.

It is worrying that the Department is back in the position it found itself in earlier in the decade. The Equipment Plan for 2017 to 2027 is not realistic and the Department lacks cost control.

A significant affordability gap has again opened up; with forecast costs at least £4.9 billion, and potentially as much as £20.8 billion, more than the £179.7 billion budget.

The Department is reluctant to present openly an assessment of the affordability gap and has failed to report transparently to Parliament and the public about the financial risks it faces.

The Department has put its faith in the Modernising Defence Programme to solve its affordability issues and to prepare for the continued challenges of a fast-changing defence landscape, including the UK’s capabilities for cyber, chemical, biological, radiological, nuclear and electromagnetic attacks.

We are highly sceptical that the Modernising Defence Programme will be able to return the Department to a balanced position.

COMMENT FROM PAC CHAIR MEG HILLIER MP

“The MoD’s national security responsibilities give it a unique and critical place in the public sector but that is no excuse for a lack of rigour in its financial affairs.

“It is concerning that the Department could find itself more than £20 billion short of the funding required to buy the equipment it says it needs.

“The MoD’s inability to better quantify that affordability gap has consequences not just for its confirmed spending plans, but also its ability to prepare for serious challenges in national defence.

“The Department must be more rigorous and realistic in its approach to costing its equipment plan. It also needs to be more open with Parliament and the public about its finances, commitments and their costs to taxpayers.

“We heard a lot in evidence about the Modernising Defence Programme but I am concerned this may end up adding more costs to what is already an overstretched budget.”

CONCLUSIONS AND RECOMMENDATIONS

The Department faces a significant affordability gap in its Equipment Plan for the next 10 years, but is unable to determine the size of the gap, thereby reducing its ability to make informed decisions about our national defence. There is an affordability gap of at least £4.9 billion in the Plan, rising to a potential £20.8 billion if all identified financial risks materialise and no savings assumed in the Plan are achieved. Financial risk has increased since last year, and while the Department acknowledges that the affordability gap is in the billions of pounds, it is unable to quantify the size of the gap with any degree of precision. We are concerned by the Department’s vagueness and reluctance to acknowledge its full exposure, and by the Department seeming to question the accuracy of its own numbers when giving evidence. The Department says it is confident that at end of the Modernising Defence Programme, with cost information anticipated in autumn 2018, it will have a “strategically affordable” Plan, but is unable to articulate clearly how this will be achieved.

Recommendation: The Department has committed to emerging conclusions from the Modernising Defence Programme (MDP) by early summer. The Department must report those conclusions within three months, including its assessment on timescale for concluding the MDP. At the conclusion of the Programme the Department must be able to show that it has established an affordable programme and a balanced equipment budget, and commit to reporting those results to Parliament at the earliest opportunity.

The Department’s current approach to planning for equipment does not reflect the continually changing nature of the defence landscape, reducing its ability to be well placed to deliver the future defence capability needed. There are now a number of emerging threats, such as cyber and artificial intelligence, leading to changes in the nature of the defence landscape. However, there is a lack of flexibility in the 10-year Plan, which contains no headroom or unallocated contingency, with spending dominated by a number of large platforms which take years to build.  Increasingly, the UK’s military response is dependent on strong international alliances. The Department is leading the Modernising Defence Programme in response to these changing threats and this could result in some big changes in the Equipment Plan if the Department introduces new projects and de-scopes, defers or cancels others to balance the budget. When completing and implementing the Modernising Defence Programme, the Department faces the challenge of balancing the need to optimise operational capability with both value for money and the need to support UK industry. There is a need for a strong UK defence industry to underpin our ability to react to emerging threats.

Recommendation: The Department’s Modernising Defence Programme and its future Equipment Plans should set out how it will balance the need to develop long term capability with the challenges of maintaining sufficient flexibility to respond to changes in the defence landscape.

The Department’s Equipment Plan is characterised by significant cost optimism bias arising from weaknesses in the Department’s cost management.  The Department’s failure to balance its 2017 Equipment Plan budget arises from a lack of control of the Commands by the centre, which resulted in £9.6 billion of forecast costs being excluded from the Plan. The Department lacks an understanding of what comprises that £9.6 billion, and could provide no meaningful explanation for excluding the costs of buying Type 31e frigates. The Department also needs to be clear about what contingency it is relying on.

Recommendation: The Department needs to improve its management of the Plan to ensure that the next Plan is comprehensive, has much greater clarity around costs and spending, and all elements are realistically and fully costed.

The biggest risk to the Equipment Plan is the cost of the nuclear programme. The costings of the nuclear enterprise in the Plan have continued to grow. The Department says that a recent review indicates that costs for the Dreadnought submarine need to be brought forward, which will further increase short term pressures in the Plan. In addition, the costs of the warhead programme have also increased. Witnesses said their biggest worry is the costing of the nuclear programme. This is a long-term programme which can experience big cost changes throughout its life cycle.

Recommendation: The Department needs to improve its control of the costs of its nuclear projects and to report more transparently, including reporting the impact of cost increases and the interdependencies of projects.

The Department is not sufficiently open with Parliament to allow us and the taxpayer to have a clear view of its finances. We expect to have timely, accurate and full information on the commitments and costs into which the Department enters. This year’s Equipment Plan was not published until 10 months after the start of the Plan period. It provides very little information about the many risks to affordability and the significant dependence of the Plan on assumed, and optimistic, savings targets being achieved. Beyond the Equipment Plan there is a wider transparency gap, highlighted particularly by the lack of cost information available on the F-35 Lightning fighter aircrafts. When challenged, the Department undertook to include more information on its equipment and wider budget in its Annual Report and Accounts, to bring forward their reporting of the Equipment Plan to early autumn, and also undertook to report on the Modernising Defence Programme cost implications in the autumn.

Recommendation: The Department should write back in three months committing to the specific improvements it will make in providing information to Parliament, including how it will provide regular and informative updates on the cost and progress of the F35s. The Department should consider an annual summary to Parliament.

The Department continues to be reliant on ever increasing and optimistic savings targets. A total requirement for £16 billion of savings has been set since the Equipment Plan reporting regime began in 2012. The Department claims that it has achieved £7.9 billion so far, but given the extent of the challenge and its patchy past performance, we remain sceptical that it can achieve the remaining £8.1 billion by 2027. The majority of the remaining savings ideas are at an early stage of development, with implementation plans still to be developed.  The Department recognises past weakness in recording progress against savings and that there are a number of historic overlapping efficiency programmes that have prevented appropriate management. As part of the Modernising Defence Programme, the Department has commissioned an independent review of efficiency savings. It has also appointed a new Chief Operating Officer who is looking to produce consistent guidance, and it has started to develop a more rigorous approach to tracking savings. The Committee will expect to see clear evidence of that more rigorous approach and to be informed swiftly if savings targets are not achieved.

Recommendation: The Department should ensure that its savings targets are realistic, and introduce transparent reporting of progress against all targets in future Equipment Plans. This should include reporting of progress against cost reductions for F-35B aircraft, including sustainment costs.