Defence capability and Equipment Plan Contents

Conclusions and recommendations

1.The government has still not taken the strategic decisions required to establish an affordable Equipment Plan and deliver the crucial military capabilities needed by our Armed Forces. The Department’s lamentable failure to get a grip on the Equipment Plan continues, despite this Committee and the NAO consistently highlighting serious affordability issues in the Plan year after year. The Equipment Plan has been unaffordable for the last three years, echoing the wider, longer-term pressures on a fundamentally unbalanced defence budget. As the Equipment Plan accounts for around 40% of the total budget, the impact of these funding shortfalls has negative consequences across the Department’s activities – for example, by limiting investment in areas such as estate maintenance or training. These problems will persist until the government agrees an affordable multi-year investment programme for military capabilities. We urge the government to avoid the mistakes made in the last two strategic reviews in 2010 and 2015, and this time set a balanced defence budget that reflects new priorities and ambitions in developing capabilities to meet the evolving threats of modern warfare. It will need to engage widely across Whitehall, exploit new technologies, and establish cross-government initiatives in areas such as cyber and space. The Department told us the Integrated Review of Security, Defence, Development and Foreign Policy (the Integrated Review) had been delayed until 2021 due to the COVID-19 pandemic. In the interim, it is seeking to provide industry with a stable investment programme.

Recommendation: The Department must demonstrate financial prudence by developing the next Equipment Plan with affordability and long-term sustainability at its core. The Department should write to the Committee within one month of the publication of the next Equipment Plan to explain what it has done differently in order to reduce the Plan’s affordability gap.

Recommendation: The government’s promised Integrated Review must balance ambitions for future military capabilities with an affordable long-term investment programme. Given the Review has been delayed, in the interim, the government should provide as much certainty as possible on as many defence programmes as possible.

2.The Department’s focus on managing financial pressures on an annual basis creates bigger problems for future years as the budgetary imbalance grows, and slows the development of military capabilities. The Department has missed the last two opportunities (the Modernising Defence Programme and the Spending Review 2019) to develop an affordable Equipment Plan. As a result, it has focused on living within its in-year budget and, as the Accounting Officer emphasised, complying with government accounting standards. For example, additional funding from HM Treasury in 2018 and 2019 plugged annual funding shortfalls in existing programmes, but failed to reflect longer-term thinking. This short-termism comes at a huge cost for longer-term projects, which often have to be stopped, descoped or delayed. We are deeply concerned that the problems are getting worse as the budgetary imbalance continues, leading to reduced military capabilities and higher overall costs. The frontline commands have already made investment prioritisation decisions on some equipment projects but are facing a tighter financial position than in previous years, reducing their flexibility to manage a portfolio of projects within annual approval limits. This increases costs and represents poor value for money. We are also not convinced that any adequate consequences are in place for Accounting Officers’ failure to meet budgets.

Recommendation: In line with our recent recommendation on nuclear infrastructure programmes, we urge the Department and HM Treasury to consider greater flexibility to manage strategic programmes on a multi-year basis. Such an approach should be introduced cautiously, with the Department demonstrating why it should be trusted. Together they should report to us by 31 December 2020 on the progress of discussions to this end.

3.The Department’s ways of working have not helped it to deliver capabilities effectively, and its ambitions for the reform of capability delivery will be undermined if it does not change an internal culture that focuses on milestones and cost constraints but appears not to prioritise progress towards delivery against those two measures. In its Acquisition Review, the Department has acknowledged that over the years its Head Office has encouraged a culture which prioritises passing review points and approvals above delivery of programme outputs and outcomes. In addition, delivery teams have often been keen to press on regardless of progress against formal milestones, so long as the equipment is deemed safe. The Department is implementing a range of initiatives to improve delivery but is not yet clear what practices would replace managing to the rigid set of milestones traditionally used to manage programmes. The Department wants to adopt more agile procurement methods that might formalise such an approach, but it is not clear how it will keep track of the capability that is available as a result.

Recommendation: The Department should decide how it is going to measure and demonstrate progress in transforming capability in a way that optimises delivery of results without undermining budgetary controls. It should report to the Committee on measures taken to combat poor practice in programme reporting and delivery by 31 December 2020.

4.The impact of COVID-19 will increase the widespread delays to deliveries of equipment and weaken the resilience of key suppliers. The Department says that it has worked to minimise the impact of the virus on its suppliers and equipment programme. It has been paying significant sums to suppliers in advance of work done, which has been particularly valuable to suppliers where orders from private sector customers have dried up. However, the Department is concerned about the financial resilience of some suppliers. It had already begun to look at these issues prior to the pandemic as part of its work for the recently announced Integrated Review. These financial concerns, together with the ability of suppliers to continue working through the pandemic, even given their designation as key workers, will only worsen the already lengthy delays to the delivery of many key capabilities. The Department has not yet quantified the impact of delays to the delivery of key capabilities caused by the pandemic.

Recommendation: The defence and security industrial strategy offers the Department an opportunity to reset the relationship with its key suppliers. In return for commitments to support the defence industry as part of this strategy, it should set out its expectations of how the industry will improve its performance to address the endemic delivery and quality issues that afflict the sector. The Department should write to the Committee by 31 December 2020 on what steps it has taken to enhance contractor performance.

5.The Department is full of good intentions as to how it will transform capability delivery, but it is unclear how it will know if this has happened. The Department is focusing its transformation activities on becoming more agile by reducing the elapsed time from project inception to approval for demonstration and manufacture, perhaps by several years for major procurements. However, after many years of reporting on defence procurements, we are well aware that delays occur at all stages, not just in this developmental phase. The Department is not sure what metrics it will set to demonstrate that significant improvements are being achieved, or how quickly real improvements will be seen.

Recommendation: The Department should set out clear metrics indicating what progress it expects to have made, and by when, against its objectives of improving the effectiveness of the reformed procurement process. It should report to the Committee on this by 31 December 2020.

6.The Department has not yet established a stable basis for assessing the Equipment Plan affordability gap or a realistic approach to delivering efficiency savings. The Department’s methodology for assessing the funding shortfalls changed again in 2019 and prevented a comparison with the previous year. It has not yet established a stable approach to cost forecasting and has again made over-optimistic adjustments which make the Plan look less unaffordable. The Department accepts that unrealistic plans to achieve efficiency savings in the 2015 Strategic Defence and Security Review have contributed to today’s funding shortfalls, yet these practices persist. For example, it included £4.7 billion of efficiency savings in the 2019 Plan for which it had no plans. It also has inconsistent and unrealistic expectations of what savings the frontline commands can achieve, and when. The Department has not made any real progress in strengthening its financial capabilities, despite our previous recommendations on the need to develop financial skills. The Committee will continue to hold the Department to account for its performance in managing its equipment budget and improving cost forecasting.

Recommendation: The Department should write to the Committee as soon as possible setting out its approach—agreed with the NAO—for reporting on the Equipment Plan 2020–2030. It should also provide details of a stable methodology for assessing the affordability gap, and its plans for measuring efficiency savings realistically and improving financial capabilities as soon as possible. In due course, the Department should write to the Committee on the impact of the Integrated Review.

Published: 15 July 2020