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U.K. Cuts Funding Hole in Military-Equipment Plan

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Feb. 13 (Bloomberg) -- The U.K. Ministry of Defence has reduced by 65 percent a gap between the 164 billion pounds ($272 billion) planned for equipment purchases over 10 years and available funds, though a risk of cost overruns remains, the National Audit Office said.

The funding mismatch has shrunk to 4.4 billion pounds from 12.5 billion pounds last year, as some programs have been dropped and the government has gained greater confidence in its estimates, the NAO said in a report published today. Uncertainty remains, particularly on services contracts, reflecting about half of the budget, the auditors said.

The U.K. is trying to end an era in which unrealistic financial and schedule assumptions derailed major projects as budget gaps emerged. The government, which last year set out a 10-year plan it said was balanced, said it would have the NAO validate its assumptions.

“It is good that MoD’s efforts over the last year have improved their ability to maintain an affordable equipment plan, although significant risks remain,” Margaret Hodge, the opposition Labour Party lawmaker who heads Parliament’s Public Accounts Committee, said in a statement. “Despite progress, MoD still need to get a better grip on the risks to which they are exposed.”

One of the signs the government still has gaps in its financial planning is a 1.2 billion-pound underspend last year that is not fully understood, the NAO said.

‘Stronger Position’

“Unlike the past, we do not have to make short-term cuts that delay programs to simply live within our means,” Defense Secretary Philip Hammond said in a statement in response to the report. “Balancing the budget and providing a clearer and more accurate forecast of our future requirements and resources has put the MoD in a stronger position to respond to unforeseen changes and negotiate a better deal with industry.”

In parallel, the NAO also released its annual review of the performance of major defense projects, which saw total costs rise by 1.4 percent, or 708 million pounds, across the largest 11 programs. Costs for the the U.K.’s new aircraft carriers increased by 754 million pounds, with other areas showing savings.

The price to build the two carriers, led by BAE Systems Plc, Babcock International Group Plc and Thales SA, rose on schedule delays and to reflect extra work.

The defense ministry and BAE agreed last year on new contract terms in which the companies would take on some of the risk of overruns. The cost of the program was capped at 6.2 billion pounds.

To contact the reporter on this story: Robert Wall in London at rwall6@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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