By Peggy Hollinger and David Bond

FT.com – 31 January 2018

Britain’s public spending watchdog has issued a damning assessment of how the Ministry of Defence manages its procurement budget, identifying a series of issues that could leave it with a funding gap of up to £21bn over the next decade. The National Audit Office also accused the MoD of lacking evidence for some of its claimed £7.9bn cost savings, which were meant to stretch the £179bn, 10–year equipment budget further. The NAO, in its review of the MoD’s equipment plan for 2017–18, warned that the renewal of Britain’s nuclear deterrent could destabilise the 10–year budget due to its size and complexity. The watchdog’s audit of the Dreadnought and Astute submarine projects found that costs had risen by £941m in just the last year.

Amyas Morse, head of the NAO, said the MoD needed to take “urgent action” to address a funding shortfall identified in the watchdog’s report of between £4.9bn and £20.8bn. Failure to do so would mean that major Defence projects would have to be reduced delayed or cancelled, said an NAO report.  The MoD was already dealing with a “significant projected overspend” this year, added the report.

“The department’s equipment plan is not affordable,”

said Sir Amyas.

The NAO highlighted a failure by the MoD to factor billions of pounds worth of costs into its 10–year budget. Some £9.6bn of forecast costs for various programmes had not been included due to a disagreement within the MoD over how to allocate them. The MoD had also omitted £1.3bn in costs relating to five Type 31e general purpose frigates, a programme launched late last year to introduce greater competition into the procurement of naval vessels.

In one particularly scathing comment on the MoD, the NAO highlighted a risk of £4.6bn in extra costs

“due to the department not using foreign currency exchange rates that reflect market rates at the date of the plan”.

By its own admission, the MoD had been over-optimistic on several other projects, where detailed costing had not been available, leading to a £3.2bn understatement of expenses.  Spending on equipment and support accounts for roughly 40 per cent of the MoD’s overall budget. However, the NAO’s report is merely the latest in a series of damning assessments of the MoD’s management of its resources. This week the watchdog warned the MoD could face a significant uplift in rental costs for married forces after selling its housing to a private company some 20 years ago.

Nevertheless, the NAO’s latest findings are likely to add force to a campaign by Defence Secretary Gavin Williamson and a growing number of MPs for increased military spending. Though it highlighted mismanagement by the MoD in assessing the costs of procurement and support, the NAO also suggested that the ambitions set out in the government’s 2015 Strategic Defence and Security Review may never have been properly funded.

Julian Lewis, chair of the Commons Defence Select Committee, said the NAO’s findings would put further pressure on the government to increase Defence spending.

“Everywhere you turn in Defence you find these gaping black holes,”

he added.

“Even if they ran the most efficient value-for-money operation, there would still be gaping black holes because we are spending too little on Defence.”

Ruth Smeeth, a Labour MP and a member of the Defence Committee, said the NAO report was “timely”, adding:

“The scale of this cannot be fixed by cutting the numbers of the armed forces. We have to look closely at what we are buying and why we are buying it and if we have to spend more then we have to find the money.”

However a senior Defence official insisted that if a funding increase was won it would not simply be used to fill holes in the MoD budget. A senior military officer said any increase should be allocated only to spending on initiatives and equipment that would  fundamentally transform the way the MoD and Armed Forces operate.

Francis Tusa, editor of Defence Analysis, agreed that change was needed:

“For those who think that the solution to the ‘budget black hole’ is simply more money, then the NAO’s report show that behaviours are simply so bad that any extra money would be frittered away, leaving a continuing crisis in equipment procurement and support,”

he said. The MoD said in its defence that the NAO’s worst-case scenario of a £20.8bn shortfall was based on unrealistic assumptions.

“The report’s potential affordability gap of £20.8bn reflects the wholly unlikely and unrealistic situation where all equipment plan financial risks materialise and the MoD achieves none of its efficiency and savings measures,”

said a spokesman.

“We have already saved almost £5bn in efficiencies while making sure our military have the best equipment available and taxpayers get value for money.”