The Defence Equipment Plan 2017–2027 Contents

1The affordability of the Equipment 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 the Department’s Equipment Plan 2017 to 2027 (the Plan).1

2.Since 2012, the Department has published an annual Statement on the affordability of its Equipment Plan. It began to report this after a period of poor financial management, during which a significant gap had developed between its forecast funding and the cost of the defence programme as a whole. The Plan covers forecast spend for 10 years and is updated annually. For the period 2017 to 2027, the budget is £179.7 billion, made up of equipment procurement (£84.8 billion) and support (£88.9 billion) budgets, and a central contingency provision (£6 billion). The Plan is funded from the Department’s overall budget, and makes up more than 40% of its planned spend.2

3.The Department’s Head Office is responsible for overseeing the Equipment Plan. Fiscal responsibility for projects within the Plan is delegated to the four front-line military commands of Air, Army, Navy and Joint Forces, and the Strategic Programmes and Nuclear Directorates within the Department’s Head Office (collectively known as the Commands). The Commands specify their equipment requirements and manage equipment budgets to secure those requirements. Head Office adjusts costs and budgets to achieve a balanced position across defence. Defence Equipment and Support (DE&S) and Information Systems and Services (ISS) manage equipment projects on behalf of the Commands.3

4.In July 2017, the government announced a review of national security capabilities in support of the ongoing implementation of the National Security Strategy and the Strategic Defence and Security Review 2015. This recommended that a programme of further work, known as the Modernising Defence Programme, be undertaken, including an assessment of defence capabilities. The Department aims to publish the outcome of this Modernising Defence Programme, the findings of which might impact on the Department’s future plans for equipment.4

The affordability gap

5.The Department is facing a minimum affordability gap of £4.9 billion, which could rise to £20.8 billion if all identified financial risks of cost growth materialise and the Department does not achieve any of the savings assumed in the Plan.5 The Department agreed that there is an affordability challenge and set out that there is significant financial risk in the Equipment Plan, which has increased from previous years and has become more difficult to manage and mitigate against.6 We asked the Department to set out their assessment of the size of the affordability gap, but were informed that this is “an impossible question to answer”, although it is “likely that the affordability challenge sitting here in the next 10 years is in the billions—that is for sure”.7

6.The Department felt that it had enough money to cover the risks within the Equipment Plan, although it stated that it did not “fundamentally disagree with the ranges and the plausible scenarios” that the National Audit Office (NAO) had highlighted in its report.8 The Department’s own Cost Assurance and Analysis Service (CAAS) assessed that costs in the Plan could be understated by £3.2 billion, but the Department said it expected to only consume around a third to half of this.9 The Department also set out that while it is likely to use some of the £9.6 billion additional forecast costs it would not be a large amount.10 As the Department was providing us with numbers and descriptions concerning the affordability gap that were not clearly the same as those in the NAO report, we asked again if the Department agreed with the numbers and ranges in the NAO report, to which it confirmed that it did.11

7.The National and Security Capability Review had 12 strands. The defence strand was the biggest and has been extended and expanded into the Modernising Defence Programme which is due to report emerging findings in the summer.12 The Modernising Defence Programme is in part a response to the challenge the Department faces with growing financial pressures.13 The Department set out that it is committed to achieving the Secretary of State’s ambition of the Plan being “strategically affordable” by the end of the Modernising Defence Programme, which is expected to feed into the Autumn Budget.14

Cost forecasts

8.The Department did not account for £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. The Department did not complete the budgeting exercise for the Plan until May 2017, two months after the start of the 2017–18 financial year, due to significant difficulties in reaching agreement on the best approach to manage the affordability gap that had arisen in the defence programme.15 The Department admitted that it has not assessed which projects are in that £9.6 billion and what “TLBs [Top Level Budgets—the frontline commands and other operating units] are actually doing to bring down those costs”. The Department told us that it is implementing a different approach to capturing these costs within the current planning round.16 The Department blamed timing for not including the Type 31e costs in the Plan, but gave assurance that these costs would be included in the subsequent Equipment Plan.17 The Department also told us that it has also reviewed its policy of costing at the P50 and is now updating its guidance.18 It said that it has not been explicit in the past about where a different approach to percentile costing should be adopted and there is inconsistency in how data is being collected and how it is applying its P50 policy.

9.The Department told us that the projects they worry about most within the Equipment Plan are the nuclear programmes including Dreadnought and Astute. It set out that there are some very complicated and immature assumptions in these programmes, and because of the nature of the long-term design and implementation of those programmes, it is very easy for them to experience big cost changes throughout their life cycle.19 As costs have increased for Dreadnought and Astute by £941 million since the 2016 Plan, we asked if we should expect further cost increases. The Department informed us that it has just been through a lessons learned process for Dreadnought and Astute in particular, and has identified some issues, including: project control; the way in which it has used commercial contracts; and the need to engage further with suppliers.20 The Department told us that Dreadnought will not cost more than the expected £31 billion, although it could not guarantee that it would not call on the additional £10 billion contingency. The Department said that the Dreadnought project needed to be re-profiled, with more being spent in the earlier years.21 The Department told us that it would be “very transparent” in its reporting to Parliament about seeking to bring money forward across the 30-year programme.22 We also asked about the risk of cost increasing for the weaponry that goes on Dreadnought. The Department agreed that the costs were more than just the submarine and that there had been “well-documented cost increases in some of the facilities at AWE, which are fundamentally about building the UK’s independent nuclear warheads, and those can be very big”.23

10.The rates the Department used to forecast costs in the Plan denominated in foreign currency were 24% above the US dollar rate at 1 April 2017, and 2% above the rate for the euro at the same date.24 We asked the Department when it will start using realistic foreign exchange rates in the Plan, given the more volatile situation since the vote to leave the EU. The Department told us it mitigates foreign exchange risk in the Plan through hedging and also holds a contingency provision in head office of £1.8 billion for foreign exchange risk. The £1.8 billion contingency sits outside the Plan, but worryingly this information was not shared with the NAO during its audit.25 We have previously raised concerns about foreign exchange exposure and asked the Department where it has got to in discussions with HM Treasury in its attempts to mitigate against this. The Department set out that there has been no movement from HM Treasury and it has not been successful in getting any central relief.26

Transparency for Parliament and the taxpayer

11.The Department’s Equipment Plan Statement for 2017 to 2027 was published at the end of January 2018, 10 months after the start of the Plan.27 The Plan does not provide sufficient information about the affordability challenges the Department faces and there is insufficient detail to understand the Department’s progress in identifying the source of the savings assumed within the Plan.28 The Department mentioned two particular areas where it needed to improve significantly its monitoring and analysis, which were around the £9.6 billion additional costs not included in the Plan and in relation to the management of its savings targets.29 We asked if the next Plan would be a full and honest Plan, without the gaps we have seen this year. The Department responded that it commits to being as “forthright, honest and straightforward as we must be to the nation and Parliament when we are putting these plans forward.”30

12.The Department set out that it is important to have timely, transparent reporting to Parliament, with more information in the annual report and accounts on future spending commitments, and reducing the gap between the start of the financial year and when Parliament receives the Equipment Plan.31 The Department committed to a timetable of producing the Equipment Plan in early autumn (September).32 It also set out that it has committed to emerging conclusions from the Modernising Defence Programme by early summer, suggesting this may coincide with the NATO summit in the second week of July.33 The Department acknowledged that transparency is a real area for the Department to do better on, recognising a need to present information more intelligibly.34 We specifically raised questions on the provision of cost information on the F-35 Lightning fighter aircraft, frustratingly having received more information during a recent discussion with the Joint Programme Office in the United States of America than we have from the Department itself.35

1 Report by the Comptroller and Auditor General, The Equipment Plan 2017 to 2027, Session 2017–19, HC 717, 31 January 2018

2 C&AG’s Report, paras 1–3

3 C&AG’s Report, paras 1.3–1.4

4 C&AG’s Report, para 5

5 C&AG’s Report, para 6

6 Q 21

7 Qq 22–23

8 Qq 25–26

9 Q 24, C&AG’s Report, para 9

10 Q 24

11 Qq 27–29

12 Qq 3–7, 67

13 Qq 21, 31

14 Qq 57, 73, 75

15 C&AG’s Report, para 4.2–4.3

16 Q 55

17 Qq 33, 34

18 Qq 49, 54; P50—Where costs are modelled to calculate a range of possible costs, the Department normally determines project cost estimates in the Plan to be set at the median of the potential cost range (50th percentile). At this point, each project is considered to be equally likely to cost less or more than this estimate.

19 Q 46

20 Q 47

21 Qq 81–85

22 Q 86

23 Q 97

24 C&AG’s Report, para 9

25 Qq 24, 37–38, 42

26 Qq 39–42; Committee of Public Accounts, The Defence Equipment Plan, Fifty-sixth Report of Session 2016–17, HC 957, 25 April 2017

27 Ministry of Defence, The Defence Equipment Plan 2017, 31 January 2018

28 C&AG’s Report, para 4.8

29 Q 55

30 Q 36