LONDON — Indications are that Britain’s 10-year defense-equipment procurement plan will remain affordable for at least the remainder of the decade, but risks could emerge from some high-value programs still in their early stages and from underestimated support costs, the National Audit Office (NAO) said in a report released Thursday.Oct 22.
The 10-year equipment program, updated by the MoD on a rolling, yearly basis, forecasts defense-equipment and support spending of £166.4 billion (US $257 billion) over the period to 2025, £3.5 billion higher than last year’s plan.
That increase, though, is mainly the result of bringing 2025 into the planning period, rather than of an increase in program costs, the NAO said.
But equipment costs across the 17 major projects investigated to validate the 10-year defense report rose by £700 million for the nine-year period that the two reporting periods had in common, though said the government spending watchdog.
"There was little sign of in-year cost growth or increase in forecast costs of the 10-year equipment planning period," the NAO said overall. "There are also indications that the equipment plan will remain affordable for the rest of the Parliament [to 2020] if this stability is maintained, based on the level of funding which seems likely to be made available."
The NAO began auditing the affordability of the 10-year equipment plan in 2013 as part of the previous Conservative led-coalition government's effort to keep a rein on defense spending, which had crashed out of control when the Labour Party were in power pre-2010.
The results of the upcoming strategic defense and security review and the government's spending review will determine whether funding levels will be adequate for the needs of the armed forces in the future, the NAO said.
The government confirmed in July that defense would get an annual one percent equipment spending hike up to 2020.
The equipment and support budget is planned to reach £14.6 billion next year, rising to £17.3 billion in the 2024/25 financial year.
The plan forecasts include surface warship spending of £19 billion over the 10 years. Submarine spending will total £43 billion, land equipment £17 billion, complex weapons £13.2 billion, combat air £17.4 billion, ISTAR £3.2 billion, information systems and services £18.9 billion, air support £12.6 billion and helicopters £10.6 billion.
While the 2015-2024 plan looks more stable than last year, the NAO warned the MoD would have to remain vigilant on spending as a result of uncertainties over future cost increases in some big programs now coming up for approval.
Principal among those projects is the Successor nuclear missile submarine program. Jon Thompson, the permanent undersecretary at the MoD, acknowledged to the Parliamentary Public Accounts Committee on Oct. 14 that estimating the cost of the program is a hugely complex task and the largest single financial risk facing the department.
The audit office report also pointed out other areas where there was cause for concern on future equipment spending.
Estimates by the MoD’s cost assurance and analysis service reckon that procurement costs could be underestimated by as much as £2 billion. Three-quarters of that figure is were attributable to four programs, including Successor, the Astute hunter-killer nuclear submarine and the Type 26 frigate program. The fourth project was not named.
The NAO also pointed to support costs as a possible problem for the spending plans. According to the report, the cost-assurance service estimates that the level of understatement of support costs within the equipment plan is £2.8 billion.
"Uncertainties about future cost increases of some very high-value projects that are still at the pre-contract stage together with the department's need to make room in its budget for a range of new equipment currently being procured show that the drivers of cost increases remain present," the NAO warned.
NAO boss Amyas Morse said in a statement that the "equipment plan looks more stabler than last year and there are indications that it will remain affordable for the rest of the Parliament if this stability is maintained. However, the MoD’s need to make room in its budget for the support costs of a range of new equipment is just one of the future challenges it faces."
The NAO publishes an annual look at the affordability of the government's 10-year defense equipment spending plans alongside an investigation of the procurement performance of the MoD based on 17 major projects up to the end of March 2014.
After years of major cost overruns and slippages in the delivery of equipment, performance at the Defence Equipment & Support organization has been steadily improving recently. That trend continued last year, with overall project costs falling by £247 million, and the Astute hunter-killer submarine program being the only notable project to buck the trend, the NAO said.
Time slippages also declined last year, with the one notable exception being a 52-month deferment of the final stage of nuclear core production capability due to the unforeseen need to replace the power plant for the nuclear missile submarine HMS Vanguard and to retain the option to do the same for the HMS Victorious for safety reasons.
Defence Procurement Minister Philip Dunne said the performance of the MoD had taken a huge swing upwards.
"This is the third consecutive year of improving performance," Dunne said. "The NAO report we inherited recorded a £1.2 billion in year overspend and 93 months in-year project overruns. By contrast, today's report for 2014/15 shows an in-year cost reduction of £247 million and underlying delivery eight months over forecast — a remarkable turnaround by any standards."
Email: achuter@defensenews.com
Andrew Chuter is the United Kingdom correspondent for Defense News.
