Watchdog: U.K. MoD Equipment Plan Low-Balls Costs

Jan. 30, 2013 By ANDREW CHUTER – Defense News

Last year, Defence Secretary Philip Hammond put the 159 billion pound price tag on equipment spending up until 2022 and has since made political capital at the expense of the Labour opposition with his claim to have balanced the budget with an affordable procurement plan.

Claims by the British Ministry of Defence that it now has an affordable 10-year equipment plan have been challenged by a report from the government spending watchdog that says that the department is still underestimating the impact cost overruns could have on the procurement and support program.

“The evidence strongly indicated that the department’s approach to risk is still over-optimistic. ... The costs are not sufficiently robust to support the affordability assertion,” said the National Audit Office in its “Equipment Plan 2012 to 2022” report set to be released Jan. 31 in London.

Publication of the investigation by the NAO coincides with the release by the MoD of outline procurement and support spending plans for the next decade which show that investment in Britain’s nuclear deterrent and attack submarine fleets during the period dwarfs other areas of spending.

The 10-year, 159 billion pound equipment spending plan includes 4.8 billion pounds put into a centrally held contingency fund, and 8 billion pounds of unallocated cash to be used for new equipment outside of the current core program which comprises the bulk of the budget.

The new contingency fund is in additional to the 8.4 billion pounds of risk-related cash already held by individual programs.

The NAO said 4.8 billion pounds was “potentially insufficient to cope with cost growth due to the combined effects of over-optimism and risk materialization above that included in the project costs.”

In 2011, the MoD’s own Cost Assurance and Analysis Service, an expert cost-assurance function estimated that the procurement cost of the armed forces’ top 40 projects was understated by 12.5 billion pounds.

That’s a figure the MoD declines to accept.

Margaret Hodge, the chairwomen of the powerful Parliamentary Public Accounts Committee, hit out at the MoD’s failure to grasp the problem of risk.

“I am dismayed that the MoD is still taking an over-optimistic view to putting a price on risk and uncertainty. The Ministry’s own internal review warned that this plan understates costs by as much as 12.5 billion pounds. If this is the case, it will eat up the entire 8 billion pound unallocated budget viewed by the Chief of the Defence Staff as necessary to deliver the full intent behind the future shape of the armed forces as set out in Future Force 2020,” said Hodge in a statement.

The report said the MoD might have to use some of the 8 billion pounds of unallocated equipment funds to keep existing core programs on track if cost growth exhausts contingency funds.

That could have an impact on capabilities and programs, warns the report.

The report points up two omissions in its investigations which will likely also impact the issue of affordability.

The NAO hasn’t included equipment support programs in it analysis — although it will in future reports. Support accounts for about half the 10-year spending.

The analysis also doesn’t include costs for the return and ongoing support of possibly billions of pounds of equipment purchased with money from Treasury reserves under urgent operational requirements for Afghanistan.

The report also said the MoD faced further capability shortfalls and would be unable to fully implement plans to restructure the armed forces in a program known as Future Force 2020, if the government fails to stick to a current commitment to fund 1 percent annually in real growth to the equipment plan for the years between 2015 and 2020.

Reports are already emerging of MoD concerns that 750 million pounds of defense cuts ordered by the Treasury late last year in a new round of government belt tightening will affect the baseline from which the 1 percent hike will be calculated.

The Daily Telegraph reported Jan. 30 that that the MoD and Treasury were in a clinch over the impact reducing the baseline would have on capabilities and programs.

The NAO’s affordability report published figures showing just how sensitive equipment-plan funding is to changes in underlying budget numbers.

The 159 billion pound equipment plan is based on a 3.7 percent uplift in real terms from 2015, but if that spending increase is reduced to 2.7 percent the equipment budget falls by 4.4 billion pounds.

If the equipment budget increase is reduced to just 1.7 percent over the period to 2022, the money available falls by 8.6 billion pounds.

The NAO report comes just weeks after the watchdog organization published its annual study into the progress of 16 major MoD projects which found that cost growth and program delays remain at unsatisfactory levels.

The latest report wasn’t all bad news for the MoD, though.

The NAO acknowledged the department had made considerable progress in repairing the damage caused by years of poor budget management.

The MoD had taken “significant positive steps designed to deal with the accumulated affordability gap and lay the foundations for stability going forward…and had taken difficult decisions to address what was estimated to be a 74 billion pound gap between it’s forecast funding and cost,” said the report.

Hodge said the equipment plan was a “welcome step towards trying to close between the Ministry’s defense ambitions and forecast funding but it must now deliver.”

Analysts and industry executives said the report illustrated the MoD had made large strides towards putting management of its equipment plan finances in order but it also demonstrated there was much left to do to keep budgets on track.

It’s the first time the watchdog has scrutinized the affordability of the 10-year equipment plan in what will become an annual investigation.

The move follows an announcement by the Conservative-led coalition Government last year that it had balanced the books on procurement and support spending after having cut nearly 74 billion pounds from the defense budget after coming into office in 2010.

That black hole in the overall defense budget was due to a 38 billion pound unfunded commitment to equipment programs left by the previous Labour Government. The remainder was from reductions imposed as part of the current Administration’s austerity cuts.

Last year, Defence Secretary Philip Hammond put the 159 billion pound price tag on equipment spending up until 2022 and has since made political capital at the expense of the Labour opposition with his claim to have balanced the budget with an affordable procurement plan.

Figures in the MoD’s equipment plan published Jan 31 show that as of May 2012, the forecast for equipment and support spending could rise to 18.8 billion pounds by 2021 from 13.2 billion pounds this year.

The MoD said that on current plans it forecasts that by the end of the decade the equipment and support spending as a portion of the total budget will have risen from 40 percent today to 45 percent.

Over the next ten years, the MoD plans to spend 60 billion pounds on new equipment — most of which is already committed — some 68 billion pounds on the support of existing equipment and 18 billion pounds on new equipment entering service during the period.

Across the sectors of the armed forces the MoD said it will over the 10 years spend:

• 18.5 billion pound on fast jets, unmanned aerial vehicles and military flight training.

• 13.9 billion on air support — including transport, air-to-air refueling and large ISTAR platforms.

• 12.1 billion pounds on helicopters — including Chinooks, delivery of Wildcat Lynx to the Royal Navy and the British Army, capability sustainment for the Apache attack helicopter, and optimizing the Merlin Mk3 for amphibious duties with the Royal Marines.

• 4.4 billion pounds on ISTAR — including CBRN detection programs and special forces equipment.

• 12.3 billion pounds on land equipment — including scout and utility vehicles and upgrades to the Warrior infantry fighting vehicle.

• Surface ships — including the two aircraft carriers and Type 26 frigates— gets 17.4 billion pound

• Attack submarines and the nuclear deterrent replacement program will receive around 35.8 billion pounds

• Weapons like the Sea Captor missile and the Future Air-to-Surface Guided Weapon (Heavy) will get around 11.4 billion pounds.