06 Feb 2018

NOA: MOD could face affordability gap of £20bn

The Ministry of Defence’s (MOD) ten year Equipment Plan is not affordable and does not provide a realistic forecast of the costs the department will have to meet over the next 10 years buying and supporting the equipment it has determined the Armed Forces need, according to a report from the National Audit Office (NAO).

Spending on equipment and associated support in the 2017 Plan is projected to be £179.7 billion, including a £6 billion contingency. But even after assuming the contingency will be used, the NAO has calculated a minimum affordability gap of £4.9 billion. There is an additional potential affordability gap of £15.9 billion if all risks of cost growth materialise and the MOD does not achieve any of the savings assumed in the Plan. Overall, the potential affordability gap could be as much as £20.8 billion.

The NAO report found that the MOD failed to include £9.6 billion of forecast costs in the Plan. This variance arose as a result of the Department’s 2017 budget setting process not being able to match costs to available budgets.

In addition, the NAO’s review found that the department has understated forecast costs by at least a further £1.3 billion as the planned cost of buying five Type 31e frigates are not included in the Plan, while the cost of nuclear-related projects continues to grow.

There are also significant risks to the cost of the Equipment Plan: over-optimism in forecast costs of £3.2 billion as calculated by the Department’s independent Cost Assurance and Analysis Service; and the risk of increased costs of £4.6 billion due to the MOD not using foreign currency exchange rates that reflect market rates at the date of the Plan.

The NAO also found that the MOD is also relying on ambitious savings to help fund the Plan, with the department reporting that it has achieved savings of approximately £7.9 billion against an increased savings target of £16 billion, with approximately £8.1 billion still to be achieved by 2027.

However, there is a lack of transparency on the full amount of savings included in the Plan and the Department does not have evidence to support all the savings it has claimed to date.

The MOD has limited flexibility to use other budgets to address the funding shortfall for equipment and support. It was unable to agree a balanced defence budget for 2017-18 and is now managing a significant projected overspend in 2017-18.

The NAO’s past work has identified an £8.5 billion funding gap for managing the Department’s estate, with the MOD also facing challenges in managing its staff budget.

Amyas Morse, Head of the National Audit Office: “The Department’s Equipment Plan is not affordable. At present the affordability gap ranges from a minimum of £4.9bn to £20.8bn if financial risks materialise and ambitious savings are not achieved.”

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