By: Paul Emanuelli
This article is an excerpt from the 2021 edition of The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its February 2020 report entitled The Equipment Plan 2019 to 2029, the UK Comptroller and Auditor General found that the UK’s long-term military procurement projects continue to face significant underfunding. As noted by the Auditor General, the report is one in a series of annual review processes that assesses the ongoing long-term affordability of major Ministry of Defence projects:
Each year, the Ministry of Defence (the Department) publishes its Equipment Plan report (the Plan), setting out its spending plans for the next 10 years. It assesses whether its equipment and support programmes are affordable and sets out its expected expenditure on projects to equip the Armed Forces. The Plan summarises the Department’s investment programme over a 10-year period because of the long-term nature of large, complex defence projects. It includes equipment already in use, such as the Hercules aircraft, and in development, such as the Type 26 global combat ship.
As the Auditor General noted, it has “reported for the past two years that the Equipment Plan is unaffordable, with the largest funding shortfalls in the early years of the Plans” and that the Department “needed to make decisions to develop an affordable long-term Plan, as its focus on short-term financial management was risking longer-term value for money.” The Auditor General’s key finding included the conclusion that the “Equipment Plan remains unaffordable, with the Department estimating that costs will be £2.9 billion higher than its budget between 2019 and 2029”, that the “shortfall of £2.9 billion is still likely to be understated”, and that the Department “continues to face significant funding shortfalls over the next five years and is locked into a cycle of responding to short-term financial pressures.”
The Auditor General warned that the Department continued to focus on “managing in-year cost pressures to live within its annual budget” and that it now had “less flexibility to respond to short-term financial pressures.” In summary, the report found the Department “has still not taken the necessary decisions to establish an affordable long-term investment programme to develop future military capabilities” and that it has instead engaged in tactical responses to address “immediate funding pressures by strengthening its management of annual budgets and establishing controls on future expenditure on equipment and support projects.” The Auditor General found that this reactive tactical response was compromising long-term value-for-money objectives:
…the Department has become locked into a cycle of managing its annual budgets to address urgent affordability pressures at the expense of longer-term strategic planning, and is introducing new commitments without fully understanding the impact on the affordability of the Plan. It is not, therefore, using the Equipment Plan as a long‑term financial management tool, as it was originally designed to be. The Department’s continued short-term decision-making is now leading to higher costs and reduced capabilities. There is evidence that these problems are growing and increasingly affecting the Armed Forces’ ability to maintain and enhance their capabilities. As a result, there are increasing risks to value for money from the Department’s management of the Equipment Plan.
The Auditor General warned that the Department still needs to develop “a more realistic assessment of affordability but has not yet addressed inconsistencies in the cost forecasts which support it.” Given the strong correlation between underfunding projects and downstream project failures, this report serves as another example of how the optimism bias continues to adversely impact major procurement projects through the underestimation of project costs and how that optimism bias puts the success of future projects in peril.
