1Addressing affordability of the Plan
1.On the basis of a report by the Comptroller and Auditor General, we took evidence from the Ministry of Defence (the Department) on its Equipment Plan 2018 to 2028 (the Plan).2
2.The Plan sets out the Department’s 10-year budget for its equipment and support programmes. Following a period of poor financial management, the Department has published this annual statement since 2012.3
3.The Department sets the Plan budget as part of its defence-wide annual budgeting exercise. Its Head Office oversees this process, while fiscal responsibility for projects within the Plan is delegated to the four front-line military commands, the Defence Nuclear Organisation, and the Strategic Programmes Directorate, collectively known as Top Level Budgets (TLBs). Head Office can adjust these budgets to achieve a balanced position across the whole of defence. Delivery organisations such as Defence Equipment & Support (DE&S) and the Submarine Delivery Agency (SDA), manage equipment and support projects on behalf of the TLBs.4
4.For the 10 years from 1 April 2018 to 31 March 2028, the Equipment Plan budget is £186.4 billion, including procurement (£88.8 billion), support (£91.1 billion) and contingency (£6.2 billion). For the same period, the Department estimates the forecast cost to be £193.3 billion, which results in a most likely £7.0 billion ‘affordability gap’ or difference between costs and budget. This gap is after taking into account contingencies and expected efficiencies. However, the Department estimates that, should all identified risks materialise, the budget and cost difference for the Plan would widen to £14.8 billion, although this could still be optimistic. The Plan is funded from the Department’s overall budget and makes up more than 40% of its planned expenditure.5
5.In January 2018, the Government announced the Modernising Defence Programme (MDP). Among other things, the Department expected that this work would address the affordability challenge. At the time of our evidence session, the MDP had not concluded and so had not fed into the 2018 Plan.6 In March 2018 the Department indicated to us that it would publish initial financial implications of the MDP in Autumn 2018, but this is now likely to form part of the Spending Review 2019. In December 2018, the Department issued ‘a final update’ on the MDP.7
Making the decisions needed
6.The Equipment Plan remains unaffordable, and with 84% of the £7 billion difference between costs and budget falling in the first four years of the 10-year Plan, the Department faces an immediate affordability challenge.8 The Department recognised this and told us it must either be given increased funding, run more efficiently or do less with the money available. Without a fundamentally different financial settlement, the Department described how it would have to ‘de-scope, defer or delete’ projects. Its preference would be to do the latter, given that delaying programmes often increased costs and complexity. Although the Department confirmed it would have to stop some projects it was unwilling to give specific examples.9
7.We questioned the Department about its constant cycle of reviews and the failure to make decisions. It has been formally reviewing its defence capabilities since the announcement of the National Security and Capability Review (NSCR) in July 2017. The MDP, a more detailed defence review, was subsequently announced in January 2018.10 In March 2018, the Department told us that it would publish emerging MDP conclusions in early summer, with cost information available in autumn. It also committed to achieving the Secretary of State’s ambition for a “strategically affordable” Plan by the end of the MDP.11 We expressed concern with the lack of progress. Financial information has not yet been made available, and these important decisions have been further delayed.12 Despite this, the Department’s December 2018 MDP statement did not make reference to any programme-related decisions to make the plan affordable.13
8.Following the NSCR and the MDP, the Department now expects it will make important programme decisions affecting the affordability of the Plan as part of the Spending Review 2019.14 Given the timing of this, the Department will not be able to reflect any financial decisions in the Equipment Plan 2019–2029, which is therefore likely to remain unaffordable. Concerns about delays to the Comprehensive Spending Review 2019 would exacerbate this. Instead, the Department said it aimed to have an affordable Equipment Plan in 2020.15 It was unable to confirm if there will be a Security Defence and Spending Review in 2020, despite this being less than two years away. The Department assured us that all these reviews would align.16
9.The Department said that although it was uncomfortable with the current size of the affordability gap, it did not aim for a completely balanced Plan. Instead it favoured “a prudent level of over-programming.” Other than recognising the level would be “a lot less” than presently, and would decrease year on year, it could not tell us what a prudent level might look like.17
Impact on industry
10.The Department recognises the importance of having clear and flexible relationships with its industrial partners, including open conversations on security threats and defence requirements. Although the Department felt it was better at this than five years ago, it highlighted improved supplier management as a key priority within the MDP. In particular, it considered it would get best value where industry had confidence in longer-term funding being available.18 We asked the Department how the lack of timely project decisions and uncertainty affected industry. It told us there would always be uncertainty where resource constraints existed and there was a Spending Review planned, but that 95% of its Plan was funded. It is seeking to improve its relationships with suppliers by taking a more strategic approach to them and by working with the Cabinet Office.19
11.The Department wants to ensure that the UK can act independently by having a “sovereign choice” of contractors with the required skills and capabilities. It explained that in a limited number of areas, government support was needed to maintain certain contractor skills, but that this support was not offered “at any cost”.20 It provided the example of maintaining the “very rare and very sophisticated skills” required to develop fighter aircraft. We also heard concerns about the lack of government investment in radar-related skills and the age-profile of those engineers working in this field. The Department told us this was one area where it needed to ensure government’s funding was available to help meet our sovereign requirements.21
12.We asked the Department whether it discussed industrial strategy and support for industry with other government bodies. It confirmed it did, for example across aerospace, but acknowledged it should do more. The Department considers these discussions were more effective at a sector level such as shipbuilding but would consider more specialist discussions for critical capabilities such as radar.22
Government budgeting framework
13.The Department’s Permanent Secretary described his responsibility for ensuring that each year the Department spends less than the funding allocated by HM Treasury.23 For 2018–19, it expects to balance its budget by holding TLBs to account for staying within the tight budgets set, prioritising, and not incurring certain costs.24 It stated it had limited flexibility to move resources around the Department, particularly in the short-term.25
14.The Department agreed with us that it was hampered by having to balance the budget each year, rather than being able to carry over any excess funds into later years. While it respects the principle of annularity, it considers that given many of its equipment programmes were volatile and capital-intensive, constant trade-offs were inevitable.26 The Department told us that being able to move funds between years, as is permitted for some programmes across government, would be helpful.27 The National Audit Office has reported recently that HM Treasury agreed five-year settlements with both Network Rail and Highways England, with the aim of increasing funding certainty.28 The Department told us it had set out to HM Treasury its case for multi-year arrangements across nuclear programmes which would be considered as part of the Spending Review 2019.29
15.The Department recognised the challenges of balancing short-term budget decisions against longer-term value for money considerations and accepted that it did not always get this right.30 It could not give us assurance that the short-term decisions needed to balance the Plan would never have a detrimental impact on military capability, although it said it did what it could to ensure this did not happen.31
16.The Department considered that HM Treasury’s autumn 2018 statement showed it recognised the difficult decisions the Department has to make.32 It told us that it approached the Budget with the aim of being “transparent and clear” on the severe financial challenges it faced, and would look at this as part of the spending review next year.33 It recognised that the additional money announced in the autumn statement did not balance the Plan. It felt it secured enough funding to avoid having to make decisions in 2018–19 and 2019–20 that would impact on the Joint Force 2025 programme.34
2 Report by the Comptroller and Auditor General, The Equipment Plan 2018 to 2028, Session 2017–19, HC 1621, 5 November 2018
3 C&AG’s Report, paras 1.2–1.3
4 C&AG’s Report, paras 1.4–1.6
5 C&AG’s Report, paras 1–2, 8, 1.10, 2.1, 3.2
6 Q10; C&AG’s Report, paras 3, 6
7 Q 16; C&AG’s Report, para 3.9; Ministry of Defence, Mobilising, Modernising and Transforming Defence: A report on the Modernising Defence Programme, 18 December 2018
8 Q 1
9 Qq 3–6
10 Qq 10, 18, 20; C&AG’s Report, paras 3.7, 3.8, figure 13
11 Committee of Public Accounts, The Defence Equipment Plan 2017–2027, Session 2017–19, HC 880, 11 May 2018
12 Qq 1–2, 8, 10, 14, 18
13 Qq 13–14, Ministry of Defence, Mobilising, Modernising and Transforming Defence: A report on the Modernising Defence Programme, 18 December 2018
14 Qq 16, 18–21
15 Qq 27–30
16 Qq 10–13
17 Qq 34–40
18 Qq 46, 54, 58
19 Qq 55–56, 58
20 Qq 57- 60
21 Qq 61, 75–80
22 Q 81
23 Q 42
24 Q 31
25 Q 44
26 Q 67
27 Q 69
28 C&AG’s Report, Improving government’s planning and spending framework, Session 2017–19, HC 1679, 26 November 2018
29 Qq 70–72
30 Q 54
31 Q 62
32 Q 1
33 Q 2
34 Qq 18–20, 27
Published: 01/02/2019