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NAO’s Premature Defence Equipment Report By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

Although the MOD had told the Public Accounts Committee back in July last year that it would not publish a full Equipment Plan report until after an agreed defence budget covering the next four years and the then ongoing Integrated Review of Security, Defence, Development and Foreign Policy process had concluded, the latest NAO annual report confirms that, for a fourth year running, a considerable gap between budget and proposed equipment spend through the ten year 2020-2030 £190 billion equipment plan period. This year the NAO says that the estimated shortfall is £7.3 billion and the worst-case scenario of £17.4 billion.

Not surprisingly, armchair critics on Twitter and other forms of social media have once again been out in force and in their element criticising the MOD, some calling for heads to role although they can’t quite seem to decide on who should carry the blame! One even went as far as suggesting that it was no coincidence that many of us envisage was probably a deliberate leak from the MOD or Cabinet Office that the current Chief of Defence Staff would not be given an extended period. My own view is that it was more likely a genuine coincidence.

By its own admission, the NAO makes an annual assessment of the MOD Equipment plan affordability and its response to the financial challenges faced. In my experience of observing MOD Equipment Reports since these were introduced back in 2012, the work of the NAO in auditing and challenging some MOD assumptions has proved to be very valuable.

This year however, the NAO appears to be working without having seen the full Equipment Report covering the 2020-2030 period because the final detail of defence aspects of the so-called Integrated Review process has not yet been published. That being the case, I consider the NAO audit report process to have been somewhat premature.

I am certainly not about to defend the MOD’s continued inability to keep within its allocated budget and would go so far as to suggest that even after publication of the Integrated Review strategy in respect of defence planning and that will include equipment capability and all other aspects of defence requirement as envisaged by government including ambition, I would probably still anticipate that the NAO would be able to conclude that a black hole as such remains.

I would caution all those who have been quick to condemn the MOD ahead of what we will see sometime during the first two weeks of February when the Government finally announces what is left of its Integrated Review plan in respect at least of defence, that this will contain plans for substantial cuts to existing equipment and of how the MOD plans to use its raised four year £16.5 billion budget funding announced in November last year and which I might add, was the largest rise in defence spending announced since Margaret Thatcher was prime minister back in the 1980’s.

My assumption and indeed my hope for the outcome of all this is that whatever one may wish to read into the current ten-year 2020 -2030 plan will in part be remedied within the 2021-2031 plan that could well be published in July this year. Experience of course reminds that despite a huge increase in the defence budget problems in previously underfunded elements of the defence equipment programme will remain until the MOD is able to make itself more efficient, work better with industry small and large, gets its own house in order and ensure that we ultimately can have a system that provides a cost-effective procurement process.

NAO Report On The MoD Equipment Plan 2020-2030

This report reviews the robustness of assumptions underpinning the Ministry of Defence’s 2020–2030 Equipment Plan.
Background to the report

The Ministry of Defence (the Department) publishes its Equipment Plan report each year, setting out its intended investment in equipment and support projects over the next 10 years and whether this is affordable within its future budget. In July 2020, the Department wrote to the Committee of Public Accounts to explain that it would not publish a full Equipment Plan report this year. It is deferring a full Equipment Plan report until the Spending Review and Integrated Review of Security, Defence, Development and Foreign Policy have concluded.

The Equipment Plan 2020–2030 includes the same depth of financial analysis as in previous years, however, it has cut back the contextual commentary in its report and included less project-level information. It shows that the Department has allocated a budget of £190 billion to equipment and support projects, 41% of its entire forecast 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 introduced its Equipment Plan in 2012 after a period of weak financial management. The Secretary of State for Defence invited the National Audit Office’s Comptroller and Auditor General to examine the robustness of the Equipment Plan’s underlying assumptions. Each year since then the NAO has, in parallel, published a report examining the Department’s assessment of the Equipment Plan’s affordability and its response to the financial challenges it faces.

Scope of the report

The Department needs effective long-term financial planning to maintain and develop future military capabilities. The aim of this report is to evaluate the Department’s assessment of the affordability of equipment and support projects, and to set out how it can strengthen its approach to preparing future Equipment Plans. It examines:

  • the affordability of the 2020–2030 Plan, considering the Department’s approach to cost forecasting and reasonableness of its adjustments (Part One); and
  • how the Department has been seeking to manage funding shortfalls (Part Two).

Report conclusions

For the fourth successive year, the Equipment Plan remains unaffordable. However, the Department has still not established a reliable basis to assess the affordability of equipment projects, and its estimate of the funding shortfall in the 2020–2030 Plan is likely to understate the growing financial pressures that it faces. The Plan does not include the full costs of the capabilities that the Department is developing, it continues to make over-optimistic or inconsistent adjustments to reduce cost forecasts and is likely to have underestimated the risks across long-term equipment projects. In addition, the Department has not resolved weaknesses in its quality assurance of the Plan’s affordability assessment. While the Department has made some improvements to its approach and the presentation of the Plan over the years, it has not fully addressed the inconsistencies which undermine the reliability and comparability of its assessment.

The Department faces the fundamental problem that its ambition has far exceeded available resources. As a result, its short-term approach to financial management has led to increasing cost pressures, which have restricted Top-Level Budgets from developing military capabilities in a way that will deliver value for money. The growing financial pressures have also created perverse incentives to include unrealistic savings, and to not invest in new equipment to address capability risks. The recent government announcement of additional defence funding, together with the forthcoming Integrated Review, provide opportunities for the Department to set out its priorities and develop a more balanced investment programme. The Department now needs to break the cycle of short-termism that has characterised its management of equipment expenditure and apply sound financial management principles to its assessment and management of the Equipment Plan.

 

CHW (London – 13th January 2021)

Howard Wheeldon FRAeS

Wheeldon Strategic Advisory Ltd,

M: +44 7710 779785

Skype: chwheeldon

hwheeldon@wheeldonstrategic.com

@AirSeaRescue

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