Tony Osborne London

Auditors examining the U.K.'s defense equipment procurement plans for 2012-22 say the Defense Ministry is likely to struggle to control its costs over the next decade.

London solidified its defense spending plans last month, publishing—for the first time—a Defense Equipment Plan detailing almost £160 billion ($250 billion) worth of new ships, aircraft and vehicles over the next decade. The publication comes eight months after the release of Planning Round 12 in which the ministry announced it had filled what was then thought to be a £38 billion gap in its finances.

Officials say the report puts the Defense Ministry in a “strong position” to deliver on its plans, noting the creation of £4.8 billion contingency provision within the budget aimed at protecting against program cost overruns. Furthermore, a £8 billion of unallocated “risk funding”will allow the department to fund new programs that are urgently needed by the armed forces, according to officials. A regularly updated “Capability Priority List” will define what those needs are, depending on threats and emerging technologies.

But, while welcoming the report, the U.K. National Audit Office (NAO) has highlighted a series of concerns with the plan. When the coalition government took power in 2010, ministers reported a £38 billion gap in defense finances, dubbed the Defense Ministry's “black hole” by the media. The NAO found that the situation was in fact markedly worse—it has now been estimated to have been almost twice as large, at £78 billion.

While it says the Defense Ministry is examining spending on a more “prudent basis,” NAO points out that it has not been able to audit the report in its entirety because it agreed with the ministry that it would not review equipment support costs. According to the NAO, those represent just over half the equipment plan's value: £86 billion over 10 years. But the NAO hopes the Defense Ministry's 2013 equipment report will allow it to report on this critical area.

The NAO also says that while the addition of the £4.8 billion contingency provision is a “positive step,” it points out that it is less than historical trends of cost growth seen in the past. Just a 0.5% increase in inflation in 2012-22 would increase costs £3.7 billion. The report says “the department's approach to risk is still over-optimistic with no portfolio analysis. The costings are not sufficiently robust to support the affordability assertion.”

The NAO's concern is that if the £4.8 billion is not enough to cover program cost overruns, the Defense Ministry may be forced to dive into the £8 billion unallocated budget, which auditors say is “essential” to deliver the Future Force 2020 plans. Using the unallocated fund to protect the core program would “result in capability gaps,” they say.