Defence Equipment Plan 2016 – An EEF Overview

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Introduction

The 2010 Strategic Defence and Security Review (SDSR) committed the Ministry of Defence (MOD) to developing a ‘balanced and affordable’ Equipment Plan that would ensure that the UK armed forces receives the right kit at the right time, without allowing short-term necessities to compromise long-term strategic ambitions.

The Equipment Plan is a rolling 10-year forecast comprising a budget to fund the ‘core programme’ of committed equipment projects (both in-service capabilities and those in development) and a contingency fund to cover unforeseen requirements corresponding to emerging threat assessments.

MOD publishes a year-on-year statement to demonstrate continued affordability and deliverability, and to provide the defence industry more information on which to plan. Since its inception, the National Audit Office (NAO), at the request of MOD and with access to Departmental records, has conducted an independent assessment of the Equipment Plan, providing a view on its robustness.

On 27th January 2017 the MOD released to Parliament its fifth annual summary, the ‘2016 Defence Equipment Plan’. It covers the period FY16/17 to FY25/26. Planning assumptions reflect the capability decisions announced in the 2015 SDSR, making it the first to provide a review of progress towards the envisaged future force structure known as ‘Joint Force 2025’.

2016 Defence Equipment Plan in numbers

The 2016 plan sets the 10-year budget at £178Bn, comprising £82Bn procurement, £91Bn support and £5Bn contingency. This is a 7% growth on the 2015 report, which forecast spending of £166bn on capabilities over the planning period out to 2025, this includes a £6.4Bn cash injection taken from the budget allocated to the new cross-departmental Joint Security Fund, created by the SDSR.

Such year-on-year cost growth is unprecedented, comparing to an increase of only 1.2% between the 2013 and 2015 plans. The spending profile shows accelerated costs in the years from FY19/20. MOD has justified this by claiming greater certainty in the wider budget following the 2015 SDSR and corresponding HMT Spending Review, which has allowed for new committed spend.

However, the 7% cost growth accounts for only half of the £24.4Bn in new commitments. The balance of this is to be found from within the existing budget. The 2016 plan allocates to the core equipment programme £7.3Bn previously held as ‘headroom’ (a continuation of funding, separate from contingency, held back to ensure the Department can meet its long-term equipment objectives), £3.4Bn of centrally-held funds and £1.5Bn from wider Departmental efficiency savings. In addition, £5.8Bn of new efficiencies have been identified from within the core programme.

New programmes with budget commitments attached include the Mechanised Infantry Vehicle and the P-8 Maritime Patrol Aircraft, both announced in the 2015 SDSR. In addition, budget uplifts were announced to certain programmes, including a life extension of the Typhoon tranche-1 aircraft and an accelerated purchase of F-35 Lightening II.

Analysis

The projected spend on new equipment has risen more sharply than is comfortable, and this is evident within the figures. This 2016 plan draws down on all of the headroom allocated in 2015, leaving little capacity to address unexpected challenges – at a time when the costings for new projects such as the Dreadnaught submarine and the Type 31 frigate are far from robust. The claimed efficiency savings lack any detail and are also, one must assume, as yet unallocated, this is on top of already demanding efficiency measures across the Department mandated in the 2015 SDSR.

Critically, the Department has taken no account of the risks associated with Sterling volatility in light of the EU Referendum result. MOD claims that hedging on sterling (priced before the referendum) means the Department is insulated from the drop of the pound for the next two years, though my private understanding is that even this will be challenging given the scale of the £/$ deficit. Moreover, beyond this period, there is no provision for currency fluctuation despite expenditure on key US-import programmes extending throughout the ten-year period.

One conclusion would be that MOD has taken on more in commitments than can be justified by the budget and, as a result, may be forced to review, scale back and/or delay core programmes in future years. The 2010 SDSR was a punishing but realistic plan for the Defence budget that made difficult capability choices in order to close the budget hole; the Coalition Government made significant political capital on their prudence in delivering such plan, which was sold to industry as being ultimately to their advantage given the increased confidence in the newly-realistic programme. There is a severe danger that the 2015 SDSR, as evidenced by the 2016 Equipment Plan, is too ambitious and, due to unaffordability, will see a return to old habits of delay and cancellation.

Taking into account the statistics above, NAO has been particularly withering in its conclusions. Amyas Morse, head of the NAO was quoted as saying that "the affordability of the Equipment Plan is at greater risk than at any time since its inception. There is little room for unplanned cost growth and the MOD must actively guard against the risk of a return to previous practice where affordability could only be maintained by delaying or reducing the scope of projects." The extent of the criticism has led commentators to speculate on the reason behind the MOD decision, announced within the 2016 plan, that this will be the final edition against which the NAO will provide an independent report. In future this will be done by the MOD’s in-house Cost Assurance and Analysis Service.

EEF Response

The five-yearly SDSR cycle, supported by annual Equipment Plan statements is a model that has worked well since 2010 and EEF will continue to welcome willingness from MOD to be forthcoming about long-term spending plans. This helps to provide industry with a higher level of confidence in

future investment by the prominent customer. As a result, industry is better placed to invest in research and development, with investment decisions supported by confidence in MOD expectations.

Nevertheless, we share the NAO’s concern that the 2016 plan contains insufficient margin to counter unplanned cost-growth. It would not be in our members’ interests to see a return to a cycle of project delays to balance short-term budget shortfalls. This decreases confidence in the plan overall and will make industry investment in technology sustainment and R&D less certain.

In ending the formal association with the NAO, who have provided an independent critical view of the robustness of the MOD’s planning assumptions, MOD must ensure that confidence in the voracity of the Equipment Plan is maintained; EEF supports the process but our members need to have confidence in the output.

Links to Reference Documents

National Security Strategy and Strategic Defence and Security Review 2015

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/478933/52309_Cm_9161_NSS_SD_Review_web_only.pdf

The Defence Equipment Plan 2016

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/592765/Defence_Equipment_Plan_2016_final_version.pdf

The Equipment Plan 2016 to 2026 – Report by the National Audit Office

https://www.nao.org.uk/wp-content/uploads/2017/01/The-Equipment-Plan-2016-2026.pdf

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