MoD Equipment Plan 2021-31

The Department appears complacent about the affordability of its Plan and still does not yet have robust arrangements in place to control the cost of its largest programmes. The Department believes that its Spending Review settlement and the decisions it has taken mean its Equipment Plan is now affordable, and that it is striking a better balance between financial and capability risk. We are not convinced that the Plan is as stable as the Department believes, or that it will be able to avoid short-term budget-driven changes to the Plan. The Department clearly finds it difficult to control the costs of the largest programmes and we are concerned that the Department sees the Dreadnought programme ‘contingency’ held by HM Treasury as a blank cheque, freeing it from the need to control costs. This is the Department’s largest programme and it is imperative that cost control is tight. The Department would like to use similar contingency arrangements for the programme to replace the UK’s nuclear warhead. This programme and the Future Combat Air System are at a much earlier stage of development, meaning that costs could be much higher than the current forecast. This uncertainty makes robust cost control still more important. Rising inflation means the cost of delivering projects is likely to rise, particularly if they experience delays. Recommendation: The Department should write to the Committee within the next three months to detail the current cost of the Dreadnought, Replacement Warhead and FCAS programmes and set out how it intends to control the costs of these programmes in future. We recommend that there should be a clearly defined purpose for the Dreadnought contingency and any proposals for a warhead contingency, and that Government 6 Ministry of Defence Equipment Plan 2021–31 should have a robust arrangement in place, including conditions which would have to be met, before HM Treasury would consider providing any additional funds from the contingency. The Departme

The Plan’s affordability relies on the Department achieving a number of different types of savings, including £7 billion of ‘cost reductions’ by 2031. The Top Level Budgets (TLBs) do not yet have plans to achieve £4 billion of the ‘cost reductions’, which is almost as much as the savings expected from capabilities cut as a result of the Integrated Review. Two-thirds of this £4 billion needs to be achieved by March 2025 even though contractual commitments limit the flexibility to make savings in the short term. The Department is relying on a “sense of cost control throughout the Department” to achieve these cuts. Higher inflation means that any decisions to deliberately delay projects would be costly, and the Department told us that in any case it wants the capabilities to be delivered. Without a realistic plan to achieve savings, the Department risks remaining caught in a trap of short-term, affordability-driven decisions. Recommendation: The Department should urgently set TLBs targets to develop and implement concrete plans to achieve the cost reductions allocated to them in the Plan.

Likely additional costs in other areas of departmental spending, such as on its workforce and sizeable estate, may squeeze the Plan’s budget in future years, further threatening its affordability. The Department’s plans to make substantial reductions to its military and civilian workforces over the next 10 years are already harder than expected as fewer personnel have left the armed forces than normal since 2020 because of the pandemic. Similarly, there are as yet no plans to make an additional £2.5 billion cut to workforce costs, which is also already assumed in the Department’s plans. And the Department does not know how it will afford the pay rises likely to be required as a result of higher inflation and wage growth in the wider economy in the next few years. The condition of the Department’s estate is set to continue to decline despite an additional £500m to be spent on ‘preventative’ maintenance. Service accommodation remains in a very bad way which risks harming recruitment and retention of personnel with key skills. Recommendation: The next Equipment Plan report must clearly set out the quantified realistic affordability risk to it posed by the Department’s plans for its other areas of spending.

The Department remains a long way short of having the finance skills it needs to manage the Plan effectively. Strong financial skills are needed to manage the large and complex set of programmes, crucial to a well managed and affordable Plan. But according to HM Treasury, the Department is in the third quartile of government departments in terms of financial capability. The proportion of Finance staff with professional qualifications has only increased from 41% to 43% in two years, against a target of 60%. There are hundreds of gaps in finance staff across the Department. Ministry of Defence Equipment Plan 2021–31 7 We acknowledge that some progress is being made, with around 400 staff studying for qualifications, but progress is very slow even taking account of the disruptive effect of the pandemic over the last two years. Recommendation: The Department should accelerate its efforts to increase its financial skills by making a career in finance more attractive and making qualifying easier. It should aim to be in the top quartile of financial capability within government departments within 3 years and set out a credible plan to achieve this.

The Department has made little impact in its efforts to change its longstanding cultural resistance to change or criticism, which has for many years hindered a clear-eyed view of its equipment procurement performance. Senior officials do not acknowledge the poor state of affairs of current procurement, as outlined in NAO reports and the Infrastructure and Projects Authority’s assessment of the Department’s performance. There is still intolerance of criticism within project teams, and 10% of MoD staff say that they have been subject to or witnessed bullying, harassment or discrimination. The Department has only implemented approximately half of the NAO’s Equipment Plan report recommendations since

On the basis of a report by the Comptroller and Auditor General, we took evidence from the Ministry of Defence (the Department) on the Department’s ten-year Equipment Plan (the Plan) which sets out its plans for the procurement and support of military equipment between 2021 and 2031.1

Outside the Plan, we asked if the proposed cuts to the regular Army to 73,000 from 82,000 meant the UK would not have enough soldiers.10 The Department stressed to us that the UK has “responded positively” to every request from NATO for further support.11 Development of new capabilities

The Department told us that it intended to use the Plan’s increased budget to fund both new capabilities and existing programmes. Significantly the Plan now includes £8.65 billion budget for the Future Combat Air System (FCAS) programme. This is a step change as previous Plans did not include money to develop the programme beyond initial spending on innovation and technology.12 However, the Department told us that the project is at an early stage and the concept phase will take several years. The next outline business case is not due until 2024.13 No decision will be made on a concept until some time after that.14 The Permanent Secretary told us that refining the costs for FCAS will be a priority in the next Spending Review.15

The Department also told us it intends to buy more F-35 aircraft.16 It had previously told us that the 48 F-35 aircraft it is currently purchasing would not be enough to sustain Carrier Strike operations throughout the life of its two aircraft carriers.17 We heard that it now intends to buy an additional 26 aircraft, but these will not start being delivered until the end of the decade. The total of 74 F-35s that the Department is purchasing is considerably less than the 138 it originally planned.18

An example of new funding for more established programmes is the new radar for the Typhoon. Although it had been in development for several years before the decision to buy it was announced in 2015, the Department did not include the cost in recent Plans as it was not affordable.19 The Department told us that the Spending Review settlement allowed it to fund the programme, and since we took evidence has written to us to report that by the end of February 2022 it had spent £701 million on its development.20 But it does not expect the radar to enter service until 2030.21

More widely, the Committee asked whether the Plan was now based on a large number of past assumptions, observing that it does not include funding for capabilities 7 Q2 8 Q8 9 Q86 10 Qq 7–8 11 Q88 12 Q64 13 Q68 14 Q71 15 Q75 16 Q54 17 Committee of Public Accounts, Delivering carrier strike, HC 684, November 2020, paragraph 4 18 Q54 19 C&AG’s report, paragraph 1.8, Qq 62 – 63, Q76 20 Letter to the Committee from the Permanent Secretary, 21 March 2022. 21 Q79 10 Ministry of Defence Equipment Plan 2021–31 other nations are developing such as hypersonic rockets.22 The Department responded that the strategy in developing the Plan was to close current capability gaps and to invest in the technologies “to have the capability required to deter our potential aggressors in the future”. The Department told us it believes it is now placing much more attention on developing new technologies than it did in the 2010 and 2015 Strategic Defence and Security Reviews. It told us it had £4.1 billion set aside in the years after 2025 for further development of new technology.23

However, the NAO report found that in the Plan the Department has only set aside £1.05 billion from 2026–27 to 2030–31 to exploit research to develop usable military capabilities.24 This expenditure is only 0.4% of the Plan’s total budget, although the Department believes the boundary between R&D and exploitation is blurred. The Department also agreed that the cyber threat is changing very rapidly and accepts that this makes it hard to be certain that the money in the Plan to protect against this threat will be enough.25 The Department also acknowledged that its procurement approach does not adequately reflect the notion that “if you want to do something cheaply, you need to do it quickly”.26 22 Q144 23 Q144 24 C&AG’s report, para 2.27 25 Qq 92–93 26 Q31 Ministry of Defence Equipment Plan 2021–31 11 2 The Plan’s affordability

The Department told us that, thanks to the funding increase in the Spending Review and the Integrated Review process, it thinks the Plan is now affordable, although there are financial and capability risks in its delivery.27 The Department also told us that it had a clearer strategy than before, with a Plan whose cost is less over 10 years than its budget.28 It acknowledged that agreeing the Plan had involved difficult decisions, for example to retire some in-service equipment and decisions on profile and timing of replacement projects. The Department’s Permanent Secretary noted that if the Department is to maintain the affordability of the Plan in the future “that kind of discipline needs to be not just a one-off in the integrated review but how we conduct ourselves year in, year out”.29

This is the first time the Department has claimed the Plan is affordable for four years. And given the NAO has repeatedly reported on the Department’s focus on short term affordability at the expense of long-term value for money, we asked how the Department was guarding against accruing capability risk and higher cost in the Plan’s later years, by trying to save money in the early years. The Department acknowledged that, in seeking balance, it has made some decisions to defer a few future capability enhancements that will cost more overall. It noted the NAO’s example of the three-year delay in purchasing a new model of Chinook helicopter which will result in a net cost of £295 million.30 According to the Department, “In a world of low inflation, that is an acceptable management technique”, but a world of high inflation will require changes to the “processes, approvals and mindset” in the way the Plan is put together.31

We asked why the Department is forecasting to spend more than its capital budget in seven of the next 10 years. The Department responded that the differences in those years were quite small and it judged them to be manageable.32 It had taken a conscious decision not to fully “address that pressure”, in order to balance financial and capability risk, given available contingency and the remaining uncertainties in costings and delivery schedules.33 Cost control of the Plan’s largest programmes

We considered the Department’s controls over the costs of the Plan’s largest programmes, in particular the nuclear projects such as Dreadnought submarines and the replacement Warhead programme. As the NAO notes, nuclear projects amount to about £60 billion in the Plan, which is more than a quarter of its value.34 We were particularly concerned that the Department sees the nuclear projects as a blank cheque from HM Treasury, especially the Dreadnought programme which has a £10 billion contingency.35 We noted that, between 2018 and 2020, the NAO had identified over £1 27 Q24 28 Q28 29 Q29 30 NAO report Figure 2 31 Q31 32 Q94 33 Q95 34 NAO report Figure 9 35 Q126 12 Ministry of Defence Equipment Plan 2021–31 billion of unnecessary costs on nuclear projects because of poor management decisions.36 We also noted that the Department’s Cost Assurance and Analysis Service concluded that the Department has under-forecast nuclear project costs in the Plan by £4.8 billion.37

The Department told us that it was confident that the Dreadnought programme would not exceed its lifetime budget of £31 billion plus £10 billion contingency.38 It did not agree that the contingency amounted to a blank cheque, and said that HM Treasury only gave out its funds based on the Department driving the schedule and proving value for money.39 The Department also claimed that there had been significant improvements in management of the nuclear projects in the last two years, primarily as a result of setting up the Submarine Delivery Agency and the Defence Nuclear Organisation, which act effectively as a contractor and client. In addition, the establishment of the ‘Alliance’ relationship with industry should ensure lessons are learned and a proper partnership is in place to aid delivery.40

On the replacement Warhead programme, the Department pointed to its 2021 action to bring the Atomic Weapons Establishment back under direct Government control, to help better control costs. In addition, it is investing in skills in the Defence Nuclear Organisation. But the Department did acknowledge that refinement of costs was needed at the next Spending Review, and that the programme would benefit from having a similar contingency arrangement to the Dreadnought Programme.41 Cost reductions and savings

The Plan’s affordability depends on the Department achieving a number of different types of savings by March 2031. As the NAO reported, these amount to nearly £22 billion, which comprises around £12 billion of ‘management adjustments for realism’, £7 billion of ‘planned cost reductions’ and £2.8 billion of ‘potential efficiencies which project teams have lower confidence in achieving’.42 We asked about the so-called ‘planned cost reductions’, where £4 billion of the £7 billion assumed savings do not have a plan supporting them. The Department told us that it was confident that all the savings would be achieved, and that in setting the overall target the Department attempts to judge the right balance between risk and maximising capability delivery over 10 years.43

Pressed on the £4 billion for which there are no plans yet, the Department explained that the target is based on an assumption of what the TLBs can deliver. The Department told us that Head Office scrutinises about 80 of the 400 projects in setting its savings targets for TLBs, as it is not possible to look at all the Department’s projects across all TLBs in any one year. The £4 billion is based on what it believes TLBs can find in the remaining 320 projects through re-scoping and re-prioritising work. Head Office’s aim is to set ‘taut but realistic’ budgets for each year of the Plan.44 36 Q127; NAO Figure 9 37 NAO report paragraphs 2.10, 2.15 and Figure 9 38 Q122 39 Q126 40 Q129 41 Qq 129–130 42 NAO report Figure 8 43 Q96 44 Q96 Ministry of Defence Equipment Plan 2021–31 13

We noted that £2.6 billion of the £4 billion savings—two thirds of the total—needs to be achieved by March 2025. This is despite the fact that contractual commitments limit TLBs’ flexibility to make savings, for example 62% of Air Command’s spend is already committed over the next ten years. Air Command believes that, as a result, it will need to reduce flying activity considerably, which will have consequences for aviators’ skills.45 The Department said in response it still believes the savings targets are realistic, but it will return to the targets each year to refine them. The latest position will be given in the next Plan, which the Permanent Secretary hopes will be published this Autumn.46 On the question about fewer flying hours, the Department told us that it is up to Air Command on how it manages its priorities, and that the target may reflect the move to more ‘synthetic’ training.47 Other pressures

The Department has made a number of assumptions about how much it will spend on its workforce (and other operating costs) and on its estate and infrastructure over the next 10 years. If it spends more than it currently expects to on these areas, it may have to reduce spending on equipment procurement and support.48 The Department acknowledged that there is an aspect of workforce costs that is directly relevant to the affordability of the equipment programme, but that any reduction in the Plan’s budget or contingency would need to be a decision taken in a spending review planning round.49

The Department plans to make substantial reductions to its military and civilian workforces over the next 10 years. These include reducing the Army from 82,000 to 73,000; other savings equivalent to reducing trained military workforce by 6,350 (and their untrained workforce by 1,450) by 2030; and a 10% further reduction in the cost of the civilian workforce by 2024–25. As reported by the NAO report, the targets are already harder than expected as the uncertain economic outlook of the past two years caused by the pandemic has meant that fewer personnel have left the armed forces than normal.50 But the Department told us that the military reduction plans are now relatively mature, and the civilian reductions are broadly deliverable.51

In addition to these reductions, the Department’s spending plans currently assume further workforce savings of £2.5 billion over the 10 years to March 2031.52 The Department told us that plans had not yet been drawn up to achieve these reductions, and they will be subject to agreement in the next spending review.53 In terms of wages, the Department admitted it does not know how it will afford the pay rises likely to be required as a result of higher inflation and wage growth in the wider economy in the next few years. The Department told us it was looking at a range of options, and now has pay freedoms to recruit more highly skilled staff, particularly in programme and project management.54 45 NAO report, paragraphs 12, 2.17 46 Q97 47 Q101 48 NAO report, paragraph 2.28 49 Q28 50 C&AG’s Report, para 2.29 51 Q102 52 C&AG’s report, para 2.30 53 Q112 54 Q115 14 Ministry of Defence Equipment Plan 2021–31

The condition of the Department’s estate is set to continue to decline despite an additional £500m to be spent on ‘preventative’ maintenance until March 2025.55 Service accommodation remains in a very bad way which risks harming recruitment and retention of personnel with key skills. The Department told us it recognised the need for investment in the estate and that it was a priority. It said that the imminent accommodation strategy would include a clear articulation of standards for service personnel and families.56 55 NAO report, paragraph 2.33 56 Q16, Q24 Ministry of Defence Equipment Plan 2021–31 15 3 Financial capability and Departmental culture

In order to produce a Plan which is effective, realistic and affordable, the Department needs to have in place the right arrangements and capabilities, many of which have previously been absent or incomplete. With such a financially complex Plan, it is vital for the Department’s people to have strong financial skills. And necessary to underpin success is the need for a culture in the Department which is open, collaborative and innovative so that complex problems can be solved imaginatively and decision-makers can have a clear- eyed view of what is happening.57 Financial skills

Strong financial skills are necessary at all levels for good management of the many hundreds of complex projects which make up the Plan. Yet, according to HM Treasury, the Department languishes in the third quartile of government departments in terms of financial capability. And the proportion of professionally trained financial staff in the Department has only increased from 41% to 43% since 2019, against a target of 60%. In July 2021 the Department had 350 vacancies in jobs in finance across the Department.58

We were interested as to why there had been so little progress since last year. The Department acknowledged “we are not where we want to be”, but told us that things were going in the right direction, and that there was a ‘sea change’ in the Department’s sense of cost control this year. The Department said that many staff were currently undertaking qualifications and that 54% of finance staff were either qualified or studying for qualifications. At senior levels the proportions of qualified staff were higher, including 85% of Senior Civil Service finance staff. He also noted that an initiative to roll out a finance career framework later this year would provide more granular information on where gaps lie. Taken together he said, “we are getting people with the right qualifications in the right roles”.59 The Department’s culture

We found that our witnesses did not readily acknowledge the poor state of affairs of current procurement. The Chief Executive of Defence Equipment and Support told us that, while he did not pretend his programmes were perfect, there has been significant improvements in controlling their costs, making efficiencies and delivering to time.60 This is at odds with the Infrastructure and Projects Authority’s assessment of the Department’s performance, where, in its latest report, it rated the majority of large defence equipment projects as either red or amber.61

We were interested to understand why information about project performance does not always seem to flow freely and openly through the Department. The Permanent Secretary told us about the Ajax programme’s Health and Safety Report’s identification 57 C&AG’s report, para 3.3 58 Q116; C&AG’s report, para 3.17 59 Qq 149, 116 60 Q49 61 Qq 38–44; Letter to the Committee from the Permanent Secretary, 21 March 2022. 16 Ministry of Defence Equipment Plan 2021–31 of “a number of serious failings in which information around the project was flowing between constituent parts of the organisation and up to senior decision makers”.62 This failure appears to have even affected the open flow of information to Ministers, who have now called for a judicial inquiry into what officials told them. We noted that the Permanent Secretary is recusing himself from the terms of reference of the inquiry as he was involved in the decision to approve the contract for Ajax when he was in the Department some years ago.63

We asked about the lack of tolerance of those involved in projects to voice their concerns without facing serious repercussions. The Permanent Secretary told us that “there are some particular challenges within the uniform chain of command about how you raise concerns” and he wanted the Department to have “the kind of safety culture where people feel able to raise concerns and have those concerns acted on”.64 He mentioned in particular his worry about the autumn 2021 people survey results for the Department, in which 10% of staff said that they have been subject to or witnessed bullying, harassment or discrimination, up from 9% in the previous year.65

Departmental reform efforts have made limited progress. We note the NAO’s finding that the current Defence Transformation Programme, of which a key element is to change both processes and culture within the Department, is already behind schedule. A July 2021 internal review of the programme found that improvements were needed on nine of its 12 projects, as well as its overall governance and coherence.66 The resistance to change can be seen directly in the way the Plan is managed, where only approximately half of the NAO’s recommendations made since 2015 have been implemented.67

The Permanent Secretary insisted that progress is being made on changing behaviour and culture, but admitted that such changes “are not quick”. He also said that reducing the level of bullying, harassment and discrimination within the Department is a matter of personal priority for him. This is encouraging but he undoubtedly faces an uphill task.68 62 Q136 63 Q140 64 Q143 65 Q152 66 NAO report, paragraph 3.22 67 NAO report, paragraph 3.21 68 Q152 Ministry of Defence Equipment Plan 2021–31 17