LONDON — British Ministry of Defence plans to invest £166 billion (US $257 billion) in buying new equipment and support over the next 10ten years have been labeled largely affordable by the National Audit Office (NAO).
The government spending watchdog warns, though, that while the ten10-year equipment plan looks more stable than it did last year, challenges remain.
The audit organisation highlights under-estimated support costs and the risks posed by some high-value programs not yet under contract as being areas of concern.
The NAO annually runs the rule over the 10-year equipment plan to check how MoD's numbers actually stack up.
This is the third time the watchdog has audited the affordability of the equipment plan as part of the government's effort to keep a rein on defense spending, which had crashed out of control when the Labour Party was in power pre-2010.
The NAO publishes its findings on the equipment plan in parallel with its annual investigation into whether major defense programs are running to time and budget. Publication of the documents comes just weeks before the government is set to roll out its spending review, followed within days by a strategic defense and security review.
The NAO makes no comment on whether the spending plan is adequate for military needs, only whether it is affordable.
The government confirmed in July that defense would get an annual one1 percent equipment spending hike in real terms up to 2020, and despite a favorable settlement in the summer budget, it is expected some tough decisions will have to be made if the military is to fill key capability gaps, such as like a fleet of new maritime patrol aircraft.
Jon Thompson, the MoD’s top civil servant, has already signaled the government-wide spending review will demand big efficiency savings from the department.
Thompson, the permanent undersecretary, told a parliamentary Public Accounts Committee hearing recently that "tThere is more taxpayer value to be driven out [of the MoD]. I would expect us in the spending review to come forward with a significant further financial efficiency package of between £15 billion and £20 billion over the next 10 years," the permanent undersecretary he said.
Under the plans outlined for defense by the chancellor in the summer, some of those savings could be plowed back into equipment and other spending.
Despite some caveats, the plan for the 2015-2025 period generally got the thumbs up from the auditors.
"The equipment plan looks more stable than last year and there are indications that it will remain affordable for the rest of the Parliament [which ends in 2020] if this stability is maintained," NAO boss Amyas Morse said. "However, the department'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 in maintaining the affordability of the plan." said Morse.
Howard Wheeldon, of Wheeldon Strategic, said it was welcome to hear the fact the NAO has express far less concern over MoD spending than it has for a long time. was welcome.
"But it does not harbor any room for complacency," he said. "The last five years have been spent balancing the books, adjusting, reorganizing and making defense more affordable and efficient. The next five years in terms of procurement will all be about capability enhancement, making our armed forces more resilient, providing more capacity and filling serious capability gaps." he said.
The equipment plan envisages spending £84 billion on support and £69 billion on procurement over the 10-year period, about 40 percent of the MoD's total budget for that time.
Other important finance numbers to know are that the MoD holds a central contingency reserve fund of £4.3 billion and an unallocated equipment budget of £9.5 billion.
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 10-year equipment program, updated by the MoD on a rolling, yearly basis, forecasts defense equipment and support spending of £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 a rise in program costs, the NAO said.
"There was little sign of in-year cost growth or increase in forecast costs of the 10-year equipment planning period," the audit team said.
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.
Principal among those projects is the Successor nuclear missile submarine program. Thompson acknowledged to the Public Accounts Committee that estimating the cost of the program is a hugely complex task and the largest 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 attributable to four programs: including Successor, the Astute hunter-killer nuclear submarine, and the Type 26 frigate program. The and a fourth project that 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.
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 upward.
"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.
