The Ministry of Defence (MoD) could be facing a £20bn shortfall in the cash it needs to equip the armed forces for the next decade according to a report from the National Audit Office (NAO), which says its plans are not affordable and is scathing about the department’s forecasting and budgeting
The audit watchdog says spending on equipment and associated support in the department’s ten year equipment plan is projected to be £179.bn, including a £6bn contingency. But even after assuming the contingency will be used, the NAO has calculated a minimum affordability gap of £4.9bn.
There is an additional potential affordability gap of £15.9bn if all risks of cost growth materialise and the department does not achieve any of the savings assumed in the plan, putting the overall potential affordability gap at £20.8bn.
The NAO report found that the department has not included £9.6bn 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.
In addition, the NAO found that the department has understated forecast costs by at least a further £1.3bn as the planned cost of buying five Type 31e frigates are not included, while the cost of nuclear-related projects continues to grow.
There are also significant risks to the cost of the equipment plan. The NAO said it had identified over-optimism in forecast costs of £3.2bn as calculated by the department, plus the risk of increased costs of £4.6 billion due to the department not using foreign currency exchange rates that reflect market rates at the date of the plan.
The department is also relying on ambitious savings to help fund the Plan. It says that it has achieved savings of approximately £7.9bn against an increased savings target of £16bn, with approximately £8.1bn still to be achieved by 2027. However, there is a lack of transparency on the full amount of savings included in the plan and the department does not have evidence to support all the savings it has claimed to date.
NAO says the department has limited flexibility to use other budgets to address the funding shortfall for equipment and support. It was unable to agree a balanced defence budget for 2017-18 and is now managing a significant projected overspend in 2017-18. In addition, past work by the NAO identified an £8.5bn funding gap for managing the department’s estate, as well as challenges in managing its staff budget.
Amyas Morse, NAO head, said: ‘The Department’s equipment plan is not affordable. At present the affordability gap ranges from a minimum of £4.9bn to £20.8bn if financial risks materialise and ambitious savings are not achieved.’
NAO report, MoD equipment plan 2017 to 2027 is here.
Report by Pat Sweet
