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Gov’t Fires Review Process Starting Gun as NAO Warns on 10-year Plan Affordability By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

 

 

 

 

 

Following a very busy week of announcement that will impact on future UK defence strategy and policy in the years to come and without much in the way of additional  comment or analysis from me yet, below for your information are summaries of the most important announcements made during last week that relate to UK defence combined with some of the more interesting press articles associated with them. The full NAO Equipment Plan can be read on the following link:

https://www.nao.org.uk/wp-content/uploads/2020/02/The-Equipment-Plan-2019-to-2029-Summary.pdf

The 10-year Equipment Plan 2019 to 2029

Background to the report

The Ministry of Defence (the Department) Equipment Plan report 2019 to 2029 (the Plan), sets out its spending plans for the next 10 years. It assesses whether its equipment and support programmes are affordable and sets out its expected expenditure on projects to equip the Armed Forces.

The Plan summarises the Department’s investment programme over a 10-year period because of the long-term nature of large, complex defence projects. It includes equipment already in use, such as the Hercules aircraft, and in development, such as the Type 26 global combat ship.

During the period of this Plan the Department has allocated a budget of £181 billion to equipment and support projects, 42% of its entire budget. It needs to manage this expenditure effectively to ensure the Armed Forces can secure and maintain the equipment they need to meet their military objectives. The Department protects some of this budget to ensure it is spent on equipment, but financial pressures across its wider defence budget can reduce the money available for equipment and support projects.

The Department introduced the Equipment Plan in 2012 after a period of weak financial management, which led to a significant gap between funding and forecast costs across the defence programme. As a result, a cycle of over-committed plans, short-term spending cuts and re-profiling of expenditure resulted in poor value for money and reduced funding for front-line military activities. At the request of the then Secretary of State for Defence, we provide Parliament with an annual commentary when the Department publishes the Plan. The purpose of our report is to assist Parliament in evaluating the Department’s assessment of affordability and its response to the financial challenges it faces. 

Content and scope of the report

This report examines the Department’s approach to assessing the affordability of its Equipment Plan 2019–2029, including our review of the assumptions on which its assessment is based. We completed this review in November 2019. This year, we give greater attention to examining the Department’s approach to managing the continued funding shortfalls, and the consequences of its approach. In doing so, we draw on the wider lessons from our assessments of government’s financial planning.

This report examines:

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  • the affordability of the Equipment Plan 2019 to 2029 (Part One);
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  • the Department’s approach to producing the Plan (Part Two); and
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  • the adequacy and consequences of the Department’s response to the affordability gap (Part Three).

We do not consider the value for money of the specific projects mentioned in this report. Nor do we comment on the specific prioritisation or operational judgements that the Department needs to make to develop an Equipment Plan that is affordable and meets future defence needs. This report focuses on the scale of affordability challenge that the Department faces, and its response. We are carrying out separate work on the Department’s approach to introducing military capabilities. 

Key Facts

The Ministry of Defence’s (the Department’s) equipment procurement and support budget is large but does not cover its forecast costs over 2019–2029 The Department’s estimates of the funding shortfall over 2019–2029 is £180.7 billion, and £2.9 billion being the central estimate of the most likely funding shortfall, based on forecast costs of £183.6 billion over the 10 years and £13.0 billion being the upper estimate of the funding shortfall  (so-called black hole) should risks it has identified materialise.

The Department has been over-optimistic when making two significant adjustments to the Equipment Plan’s forecast costs £7.8 billion additional costs removed from the 2019–2029 Plan as a result of the Department’s more optimistic judgements on its ability to deliver the equipment programme and make savings The affordability pressure occurs in the next five years 2019-20 to 2023-24 2024-25 to 2028-29 Affordability £6.0 billion shortfall £3.1 billion surplus Contingency in the Equipment Plan budget £1.5 billion £3.3 billion This year, the Department reduced the Equipment Plan budget to reflect wider funding pressures £7.7 billion shortfall in the overall defence budget between 2020-21 and 2024-25.

The Department is restricting spending on the Equipment Plan to offset this funding shortfall £4.8 billion Equipment Plan contingency over the next 10 years, down from £5.1 billion last year £0 department-wide contingency to offset any cost increases across the defence budget over the next 10 years, down from £4.3 billion last year

Report Conclusions

For the third successive year, the Equipment Plan remains unaffordable. The Department’s central estimate of equipment procurement and support costs is lower than last year, but this reflects a restatement of the affordability gap rather than actions to address the funding shortfalls. The Department has still not taken the necessary decisions to establish an affordable long-term investment programme to develop future military capabilities. It has responded to immediate funding pressures by strengthening its management of annual budgets and establishing controls on future expenditure on equipment and support projects. It is also seeking to develop a more realistic assessment of affordability but has not yet addressed inconsistencies in the cost forecasts which support it.

However, the Department has become locked into a cycle of managing its annual budgets to address urgent affordability pressures at the expense of longer-term strategic planning, and is introducing new commitments without fully understanding the impact on the affordability of the Plan. It is not, therefore, using the Equipment Plan as a long‑term financial management tool, as it was originally designed to be. The Department’s continued short-term decision-making is now leading to higher costs and reduced capabilities. There is evidence that these problems are growing and increasingly affecting the Armed Forces’ ability to maintain and enhance their capabilities. As a result, there are increasing risks to value for money from the Department’s management of the Equipment Plan.

Integrated Foreign Policy, Security and Defence Review

The Prime Minister last week formally announced that the proposed integrated review will look into the UK’s foreign, defence, security and development policies and that this was set to be the largest government-led review since the end of the Cold War. Led by senior civil servant Sir Alex Ellis and overseen by a raft of national security experts from inside and outside the civil service, as well as a cross-Whitehall team in the cabinet, the hope is that the inquiry will signal the possibility of increase in defence spending over and above the current 0.5% annual increase put in place in 2016. The Government has already committed to maintaining the defence budget as representing two per cent of GDP.

Mr. Johnson told the House of Commons that “We cannot rest on our laurels. We must do more… to ensure British foreign policy is rooted firmly in our national interests, now and in the decades ahead.” The major foreign policy “overhaul” is intended to probe a wide-range of security-related topics, future foreign office policy taking onto account our withdrawal from the EU, future procurement process, investment in new technology, information sources and space alongside legacy defence issues. The PM’s senior advisor Mr. Dominic Cummings, a long-time critic of defence procurement process, is widely anticipated as being likely to be very involved in the review process.

One Additional Quick Comment:

I note that the Plymouth Labour MP, Mr. Luke Pollard has recently sought fresh assurances about the future of the two Plymouth based Albion class-amphibious assault ships HMS Albion and HMS Bulwark.

Designed primarily to support deployment of the Royal Marines, the future of both ships now looks to be in serious doubt. Former Secretary of State for Defence Lord Hutton warned in a House of Lords debate recently that withdrawing the two HMNB Devonport based vessels would ‘end British amphibious capability’. HMS Bulwark has been effectively mothballed at HMNB Devonport since December 2016 on what is termed an ‘extended readiness basis’ but past experience and lack of any announced plan to bring the ship back into service over the past near four years suggests that the vessel will unlikely to be brought back into full use.   

In 2018 then Secretary of State for Defence, Gavin Williamson stated that he was happy to announce that he was “protecting… vital [both] landing platform ships, HMS Albion and HMS Bulwark”, after fears that were facing the scrapyard to save cash. Behind this lay an underlying fear that the two new Queen Elizabeth-class aircraft carriers would be able to undertake the amphibious assault deployment role as well. At the same time fears existed that the Royal Marines might even be merged with the Parachute Regiment and become part of a new Commando Unit although this notion was quickly dismissed as “pure speculation” by the Ministry of Defence.

CHW (London – 2nd March 2020)

Howard Wheeldon FRAeS 

Wheeldon Strategic Advisory Ltd,

M: +44 7710 779785

Skype: chwheeldon

hwheeldon@wheeldonstrategic.com

@AirSeaRescue  

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