A report released by the NAO warns that the MoD’s ten year Equipment Plan is ‘not affordable and does not provide a realistic forecast of the costs the Department will have to meet over the next 10 years buying and supporting the equipment it has determined the Armed Forces need’.
“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.” – Amyas Morse, head of the National Audit Office, 31 January 2018
According to the report, spending on equipment and associated support in the 2017 Plan is projected to be £179.7 billion, including a £6 billion contingency. But even after assuming the contingency will be used, the NAO has calculated a minimum affordability gap of £4.9 billion.
“There is an additional potential affordability gap of £15.9 billion if all risks of cost growth materialise and the Department does not achieve any of the savings assumed in the Plan. Overall, the potential affordability gap could be £20.8 billion.”
There are also significant risks to the cost of the Equipment Plan: over-optimism in forecast costs of £3.2 billion as calculated by the Department’s independent Cost Assurance and Analysis Service; and the risk of increased costs of £4.6 billion due to the Department not using foreign currency exchange rates that reflect market rates say the NAO.
The MoD, say the report, is also relying on ambitious savings to help fund the Plan. The Department reports that it has achieved savings of approximately £7.9 billion against an increased savings target of £16 billion, with approximately £8.1 billion 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.
The report also claims that the MoD 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. Our past work has identified an £8.5 billion funding gap for managing the Department’s estate. Also, the Department faces challenges in managing its staff budget.”