An annual report from the House of Commons Public Accounts Committee which takes a deep look into the rolling ‘10-year ‘Defence Equipment Plan’ published by the Ministry of Defence around October each year rarely makes for good reading.
Based on financial data at the 31st March 2022 and published by the MOD in November last year, the Public Accounts Committee (PAC) report on the Equipment Plan which covers the ten-year period of planned equipment spend period 2022 to o 2032 is certainly no exception to those published by the Committee over several years past.
For the record, the MOD has s allocated a budget of £242.3 billion to equipment procurement and support projects (46% of its entire forecast budget) and it assesses that this exceeds forecast costs by £2.6 billion (1% of the equipment budget). In total, the Plan contains forecast costs for some 1,800 equipment projects that it has chosen to fund following the 2021 Integrated Review of security, defence, development, and foreign policy. These include equipment in early stage development, equipment that is already in use and budgets to support and maintain military capabilities.
Using now very familiar terms in the report such as ‘broken military procurement programme’, ‘neither taxpayer nor our armed forces are being served well’, questioning as it usually does whether ‘the UK Equipment Plan is affordable’, whether given Ukraine and other factors, ‘the plan is agile and responsive enough’, ‘whether over optimism has been properly balanced by inflation fears’ and ’whether efficiency savings plans required in order to meet the budget of achievable’, ‘whether there has been any genuine change in the fragility of the supply chain and weapons stocks’, ‘whether we can meet our NATO obligations’ and the harsh and arguably, true in part if you include projects such as Ajax, line ’that the MOD needs to break from this cycle of costly delay and failure and deliver a fundamental, root and branch reform of defence procurement’.
OK, we have heard it all before and there are programme failures. Look no further than the disgrace that is the Ajax programme for one of those and on which MOD and industry are equally to blame on that one.
There has, it is also true, been too much planning for tomorrow’s requirements and not enough for todays. I am sometimes not sure whether it is a lack of strategic thinking within the armed forces that is to blame or whether it is down to the politicians!
That, despite the IR Refresh, we are struggling in respect of defence capability and capacity – partly perhaps because we always try to do things on the cheap, is surely a given. But what I dislike most is that while the larger part of the blame for failure is placed at the MOD’s door and lack of a cohesive and yet flexible forward strategy, there are too almost always too many hints that industry is also to blame. If the PAC only but knew what industry sometimes has to cope with when dealing with sudden required cuts or very specific tied areas such as single source. There is, sadly in my view, far too little praise for what industry achieves particularly in delivery of maritime and air capability and of what has been learned by industry from past mistakes. Neither is there a sufficient level of understanding of how communications systems between industry and government operate.
Equally it is always too easy for everyone to blame the MOD or as committee’s like to refer to this, as the ‘department’. As the unit that is responsible for procurement within the MOD the Bristol based DE&S is an organisation that I would have to say is more for fit for purpose today than at any time over the past twenty years. That is not to say that it is perfect or needs to be even better.
Perhaps the same may not be said internally within the MOD in Main Building but that is not all the MOD’s fault. Part of the problem lies in defence always being a political choice until the enemy is at the door. Apart from always trying to do things on the cheap whether this is on property portfolios, armed forces basing and housing, people or capability and too often being forced to pair equipment capability numbers to the bone and subsequently perhaps, reducing numbers further without fully thinking costings through and, always being forced to put cost above actual requirement and need. Another problem is the farce of decision-making processes in relation to military staff despatched into areas of procurement and how long they stay before being moved on. We also have to accept that with huge reductions in the numbers of civil servants working in defence and indeed, defence procurement, while large scale improvements have been made across the procurement system, gaps in capability and knowledge remain.
The Ministry of Defence’s (the Department’s) approach to its Equipment Plan has failed to adapt to a more volatile world. The invasion of Ukraine has challenged strategic assumptions and necessitated a refresh of the 2021 Integrated Review. However, we have serious doubts about whether the Department’s Equipment Plan process is agile and responsive enough to react to this more dangerous international situation.
We are concerned that the Department lacks the urgency required to develop and deliver promptly the enhanced capabilities that the Armed Forces need. The Department acknowledges that its land forces must catch up to fulfil our NATO commitments, but programmes to achieve this, such as Ajax and Morpheus, have been beset by problems and delays for many years. The Department has also not focussed sufficiently on developing the enabling and supporting capabilities required in operational environments.
If the Department does not act swiftly to address the fragility of its supply chain, replenish its stocks, and modernise its capabilities, there is a risk that the UK might struggle to maintain its essential contribution to NATO. This is compounded as the 2022–2023 Equipment Plan is already somewhat out of date, as it does not yet reflect the emerging lessons from Ukraine.
The Department assesses its Equipment Plan as affordable over the next ten years, but this assessment is still characterised by optimism bias. It relies on the Equipment Plan budget exceeding forecast costs by £5.2 billion in the Plan’s final three years, to rectify a forecast deficit of £2.6 billion in the first seven years. The Department’s assessment of the Plan’s affordability also assumes it will reduce project costs by £30.4 billion during the next ten years. This includes the Department achieving all planned efficiencies and savings, although it does not yet have plans for £1.6 billion cost reductions and £3.4 billion efficiency savings, of which it needs more than £2 billion in the next three years.
We are also concerned that the Department has not yet secured the skills it needs to deliver the Plan, particularly given the impact of rising inflation on staff recruitment and retention. The Committee examines the Equipment Plan every year and sees the same problems recurring with major, often multi-billion-pound, defence procurement programmes. Equipment arrives into service many years late and significantly over-budget, with depressing regularity.
Neither taxpayers nor our Armed Forces are being served well. There needs to be meaningful change of this broken system. The Department needs to break from this cycle of costly delay and failure and deliver a fundamental, root and branch reform of defence procurement once and for all.
PAC Conclusions and Recommendations
The Russian invasion of Ukraine has highlighted the need for an agile and responsive Equipment Plan process, which ensures the Department can afford and quickly develop the capabilities our Armed Forces need in a more volatile world. The UK’s membership of NATO, and the deterrence that this provides, is central to our defence strategy. It is therefore essential that the UK can react quickly to changing circumstances and continue to fulfil its leading role in the alliance. However, the 2022–2032 Equipment Plan is already out of date because it does not reflect the emerging lessons from the Ukraine conflict. The Department is learning lessons, such as the UK’s need for changing capabilities and larger munitions stockpiles. However, it accepts that its past approach to developing new capabilities has been neither fast enough nor flexible enough. We have previously found that the Department takes too long to translate decisions into useable capabilities. The Department’s assistance to Ukraine has demonstrated that it can respond quickly to operational demands when required, but we are not convinced that it is showing sufficient urgency to deliver the new capabilities that our own Armed Forces need.
To reassure Parliament that it is responding to changing circumstances promptly, the Department should publish a timelier Equipment Plan report alongside its annual report and accounts. The Department should also write to the Committee alongside its Treasury Minute response setting out how it has addressed our previous concerns that its system for delivering major equipment capabilities is broken and its ways of working have not helped it deliver capabilities effectively.
The refreshed Integrated Review may revise judgements about operational requirements and identify new priorities which are not currently funded in the Equipment Plan. The Ukraine conflict has necessitated a refresh of the 2021 Integrated Review. The Department expected that the refresh would be completed in the first quarter of 2023 and that the core of the Equipment Plan would still hold good. The Government published the refresh in March 2023, but the Department will now have to reflect the changing priorities from the refresh in a further Command Paper, as well as reflecting lessons from Ukraine and recent announcements, such as the combat air partnership with Japan and Italy and the AUKUS partnership with the United States of America and Australia. The Department says it will argue for new capabilities and add these to the Equipment Plan if it secures additional funding from HM Treasury. However, it will need to prioritise investment decisions if new demands exceed available funding. The Department assumes that the refresh decisions will inform the Chancellor’s next Budget, planned for March 2023 at the time we took evidence, but it had not agreed the timetable. If the 2023 Budget does not fund the revised requirements, enacting the changed priorities might be delayed by a year. Furthermore, the Department has been slow to implement the capabilities set out in the original Integrated Review, several of which it has not fully funded in the two Equipment Plans since 2021.
The Department should clearly set out to HM Treasury as soon as it can what capability requirements and priorities arise from the refreshed Integrated Review, the funding requirements to provide these, and the risks arising 6 MoD Equipment Plan 2022–2032 from any shortfall. We expect to see the Department reflect these decisions in the next Defence Command Paper and its 2023 Equipment Plan and will challenge the Department on the changes next year.
The Department has not demonstrated the necessary urgency to deliver enhanced capabilities to deter hostile parties. The Ukraine conflict has demonstrated the renewed importance of land capabilities. However, the Department acknowledges there is significant risk that the UK could not provide NATO with an operational Army division and that the current Equipment Plan does not resolve this. Lessons from Ukraine show that the Army needs to increase its long-range precision artillery, air defences and medical supply chain beyond the capabilities included in the current Plan. Furthermore, the Department is struggling to deliver existing projects to modernise current land capabilities. Notably, timetables for introducing Boxer and Ajax armoured vehicles have slipped significantly, leaving the Army reliant on outdated vehicles and unable to provide the necessary deterrence of adversaries. Even when Ajax is finally introduced it will not operate to its full potential without the Morpheus communications system, which is also delayed. We are unconvinced by the Department’s assertion that it is doing all it can to speed up these programmes or its claim that it could only be quicker by taking more risks.
The Department should reconsider whether it strikes the right balance between risk and delivery speed in procurement and write to us alongside its Treasury Minute response setting out its scope to deliver programmes faster. It should also set out in next year’s Equipment Plan how it will ensure that the Army fully benefits from the investment in new equipment by the timely delivery of military hardware and the technology needed to enable interoperability.
The Department’s assessment of the Equipment Plan’s affordability still relies on over-optimistic assumptions about the cost of programmes and the efficiencies and cost reductions it will achieve. Although the Department assesses that the Equipment Plan is affordable over ten years, this obscures significant financial pressure. There is a deficit of £2.6 billion over the first seven years of the Plan and the ten-year plans of four of the six Top Level Budgets are in deficit. Most notably the Army’s forecast costs are £2 billion more than its budget. Overall affordability is based on potentially over-optimistic assessments of project costs, with the Department’s Cost Assurance and Analysis Service estimating that costs could be at least £5 billion higher than forecast. The Plan’s affordability also relies on the Department achieving a £5.2 billion surplus in the final three years of the Plan, and on the Department achieving all cost reductions and efficiency savings included in the Plan. This includes £2.1 billion in the next three years which Top Level Budgets do not yet have plans to achieve. We doubt that the Department can achieve all these savings, but its contingency to cover any shortfall during this period is just £0.5 billion. The Plan’s affordability also relies on some projects being delayed, the Department having reduced project cost forecasts by £13.2 billion to reflect this.
In future Equipment Plans, the Department should explain the uncertainties that exist in its assumptions. It should present the affordability position as a range, based on a full assessment of internal and external uncertainties, and candidly set out what the best- or worst-case scenarios would mean for our Armed Forces’ capabilities.
The Department has ignored the worsening economic environment in its latest Equipment Plan and faces significant financial pressures on its equipment programme. The Department has not included external cost pressures, including inflation and foreign exchange movements, in its central assessment of the Plan’s affordability. This is despite identifying when it produced the Plan that inflation could increase project costs by up to £2.1 billion over ten years. It did not include this inflationary pressure in its affordability analysis despite it being more than 80% of the Plan’s forecast surplus of £2.6 billion. Inflation has since risen higher than the March 2022 forecast, and the Department accepts it will struggle to manage affordability as a result. Further, the pound to dollar exchange rate has remained below the Plan’s worst-case scenario for several months, increasing the cost of several major Plan programmes. In the worsening economic environment, there is an increased possibility that some of the £25 billion of risks that the Department deemed unlikely—and has not included in cost forecasts—may occur, further increasing pressure on the Plan. Cost of living increases caused by rising inflation also mean that the Department might struggle to attract and retain staff with the skills it requires to deliver equipment programmes. We do not think that the Department has sufficiently taken these factors into account when considering the affordability of the plans.
After the Integrated Review refresh, the Department must:
- urgently reassess the affordability of its equipment procurement and support programmes;
- move quickly to achieve the assumed savings; and
- assess the level of headroom it needs to respond promptly to changing external events.
We will seek an update from the Department at an evidence session in 2023. 6. We are concerned that the Department has not yet developed a supply chain that can reliably and quickly deliver the capabilities and stockpiles it needs. The Department has started to replenish stocks gifted to Ukraine; the cost of which HM Treasury will cover through the Reserve. It is also working with HM Treasury on a case-by-case basis to agree on a reasonable replacement when items are no longer in production or where the UK’s requirement has changed. However, the Department does not expect to replenish all depleted stocks, such as NLAW antitank weapons, for at least two years. The Department says that one important lesson from the Ukraine conflict has been the need to shift from its approach of buying batches of munitions to supporting continuous production lines which suppliers can ramp up when required. It says it has started to work with key UK suppliers to secure production lines, and the 2022 Autumn Statement provided an additional £560 million over the next two years to help support this. The Department is also discussing with NATO allies how to stimulate the wider supply chain to meet the alliance’s long-term needs.
The Department should write to us alongside its Treasury Minute response setting out its progress in developing a plan with the wider defence industry to improve the scale and efficiency of its supply chain.
(I will not here repeat the chapters that the PAC has devoted to ‘The Equipment Plan in a More Volatile World’ which takes in many aspects of the impact of Ukraine, or ‘Delivering the Equipment Plan’ except in the case of the latter chapter where this covers Supply Chain and which the PAC Report suggests:
The Department acknowledged that inflation also makes it difficult for suppliers to deliver due to rising staff and material costs.55 As a result, the Department is changing its contractual approach to take account of the inflation risk and avoid suppliers charging a higher premium for continuing to take this risk on.
The Department faces significant challenges replenishing its stocks and delivering new capabilities to meet the threats of a more volatile world. The Department has begun replacing stocks gifted to Ukraine, either on a like-for-like basis or with an equivalent where gifted capabilities are no longer in production or the Department now has different requirements.57 However, we are concerned that replacement is not occurring quickly enough, with, for example, the Department confirming that it will take at least two years to replace NLAW anti-tank weapons gifted to Ukraine.
The Department acknowledged that UK stocks were not sufficient even before gifts to Ukraine. A recent Royal United Services Institute report stated that at the height of fighting in the Donbas, Russia was using more ammunition in two days than the UK held in total. The Department told us that the Ukraine war has shown that its principle of buying munitions and capability in batches is no longer the right approach. It intends to shift to having supply chains with continuous production which can be quickly increased when required, for example in times of war.
HM Treasury has provided the Department with £560 million to restart production lines in UK companies. The Department told us that it is working closely with key suppliers in the UK, including BAE Systems, MBDA and Thales, to invest in long-term strategic capabilities. The Department subsequently wrote to us outlining its acquisition reform initiatives and explaining that DE&S is implementing a refresh of its strategy under its new Chief Executive. Improving the supply chain will also require working with allies. The Department has also placed requests for supply with US companies and has engaged with fellow NATO countries to discuss how they can collectively stimulate the industrial supply chain to meet the alliance’s long-term needs. We note that attempts to increase supply will be challenging given the current inflationary economic environment, particularly given that inflation tends to be higher in the defence industry than the general economy.
(The full report may be found on: https://committees.parliament.uk/publications/38988/documents/191700/default/
CHW (London – 19th April 2023)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785