2.2 Due to the long-standing pressures on its equipment budget, examined in our annual reports on the Equipment Plan, the Ministry of Defence (the Department) initiates all its major programmes within tight budget constraints. As a result, any cost increase will have consequences for the programme's affordability, and potentially that of others in the portfolio. The National Audit Office (NAO) and the Committee of Public Accounts have commented regularly on the Department's approach of reducing programme funding through in-year underspends where the programme is not making the expected level of progress; in-year savings measures (against either capital or resource budgets) to avoid spending more than Parliament has authorised; and strategic defence reviews and spending reviews altering priorities.16 These pressures were evident in the programmes we examined.
2.3 Focusing on managing short-term financial pressures in this way leads to higher overall costs, and deferring programmes has created larger funding shortfalls in later years. In 2020-21, the Department continued to defer programmes into future years, despite the additional funding announced in November 2020. Faced with a lack of clarity about the defence programme pipeline, suppliers lose skills and are reluctant to take on risk when contracts are let (see paragraph 3.3).17 The Department has acknowledged this through strategies for shipbuilding (2017) and combat aircraft (2018), and states in its March 2021 industrial strategy that it will give UK companies the confidence to increase investment in their skills and equipment.18
2.4 Within the context of a constrained overall budget, the cost estimates used by the Department in the preparatory stages of programmes are often understated, causing budget pressures once more mature estimates show programmes will exceed their allocated budgets. Reasons for this include:
• the technically complex nature of large defence programmes means that there is a high degree of uncertainty about future costs and requirements;
• companies specialising in supplying UK defence may have an incentive to understate costs owing to the need to gain work from their only customer; and
• the Commands are conscious that they are in competition for funding, and there is a risk they present an overly optimistic scenario to gain approval to proceed.
Much of this behaviour was noted by RAND Europe in a discussion paper that we commissioned. RAND also noted the 'moral hazard' that results when under-performing programmes receive more funding.19
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16 Comptroller and Auditor General, The Equipment Plan 2020 to 2030, Session 2019-2021, HC 1037, National Audit Office, January 2021.
17 For example, see the Offshore Patrol Vessel case study in Comptroller and Auditor General, Defence capabilities - delivering what was promised, Session 2019-2021, HC 106, March 2020.
18 Ministry of Defence, National Shipbuilding Strategy: The Future of Naval Shipbuilding in the UK, September 2017; Ministry of Defence, Combat Air Strategy: An ambitious vision for the future, July 2018.
19 RAND Europe, Persistent Challenges in UK Defence Equipment Acquisition, June 2021. The discussion paper can be found at: www.rand.org/pubs/research_reports/RRA1174-1.html