NAO Overview of the MOD – Key Themes for the Defence Sector

The National Audit Office has published this year’s departmental overview for the Ministry of Defence, an annual review by the NAO which has particular relevance this year given the broader political context of the government’s public spending audit and the Strategic Defence Review (SDR).

The SDR is due to be published in the first half of 2025, and promises a “root and branch” review of UK defence. One of its priorities is to “consider the need for prioritisation of objectives, and therefore investments and activity, to set out a deliverable and affordable plan for Defence”. The key word here is “affordable” – as the NAO Overview recognises, MOD has some of the most costly procurement programmes in government, with 50 in the 2023-24 Government Major Projects Portfolio (GMPP). Notably, it also reminds us that the NAO’s December 2023 evaluation of the MOD’s Equipment Plan 2023-2033 concluded that there is a 6% (£16.9bn) deficit between the commitments made by, and the funding made available for, the Equipment Plan. 

With this in mind, both customers and suppliers within the industry are understandably awaiting the outcome of the SDR with some trepidation given the budgetary black hole and the resulting perception that some programmes face being scaled back or even scrapped completely. There is currently very little information about the likely magnitude of any cutbacks or which programmes will be impacted.

In the context of this uncertainty, does the NAO Overview give us any clues as to the direction the SDR may take? As you might expect, the answer is – not really. But it does pull together and give some insight into the features of MOD operation that are likely to draw the attention of reviewers - in particular, the NAO recognises a number of key trends and issues that it anticipates either becoming or remaining prominent within UK defence: 

• Shifts in investment strategy – the government has committed to spending 2.5% of GDP on defence where economic conditions allow it, with the NAO noting that “it is likely that these increasing resources will be invested differently to the past”, with lessons to be learned from the war in Ukraine, and “the need to move away from basing acquisition primarily on large, multi-year physical equipment ‘platforms’. Instead, investment should be prioritised in software as much as hardware, including cutting-edge technologies (e.g. autonomous vehicles and direct energy weapons) and research (e.g. Artificial Intelligence), as well as in the new domains of cyber and space capabilities”.
• Nuclear deterrent – the government has reaffirmed its “total commitment to the independent UK nuclear deterrent” as one of its parameters within which the SDR will take place. The NAO states that the nuclear deterrent is likely to occupy “an increasing proportion of total defence spending” over time.
• Reform of the MOD – the NAO noted that the 2023 Defence Command Paper stated that additional resource alone would not be sufficient to meet the challenges faced by the MOD, and that reform is necessary, particularly in relation to procurement. The NAO highlights two current reforms as being worth looking out for:
  • Acquisition reform, anticipated following the launch of the Integrated Procurement Model in February 2024, which “set out procurement reforms to increase the pace and agility of equipment acquisition, including, for example, by reducing bureaucracy and embedding ‘spiral’ development, whereby projects deploy a minimum capacity more quickly and iterate the design over the project life”. The NAO notes that the SDR will evaluate that approach “with the aim of building on them to drive more pace and better value for money in equipment acquisition in future years”
  • Enhancing international partnerships, with the government emphasising the need to enhance the UK’s defence partnerships, which includes planning for a UK-EU security pact. Existing international programmes including AUKUS, a trilateral security partnership between the UK, the US, and Australia, and the Global Combat Air Programme (GCAP), a partnership with Italy and Japan to build a next generation fighter aircraft, have also received explicit support from the new government.
• Supporting Armed Forces communities – the government has committed to put the Armed Forces Covenant fully into law and establish an independent Armed Forces Commissioner. This aligns with statements within the SDR Terms of Reference that “all Defence personnel – in and out of uniform – are at the heart of Defence’s plans”, with improvements to service life (including recruitment, education, training and retention) being explicitly recognised as an objective of the SDR. 

Ultimately, we will have to wait for the SDR to answer the most pressing questions about the future of existing programmes and those in the defence pipeline. In the meantime, if you would like to discuss any aspect of this article or any other legal or commercial issues with our team of defence experts, please get in touch.

This article was written by Lucy Owens and Liam Edwards