Risk and uncertainty in the Norwegian Armed Forces’ future materiel operating costs

Norway is making significant investments in the Armed Forces in the coming years. For the Armed Forces to maximize their defense capability from this initiative, the operating costs resulting from these investments must be estimated accurately. This will ensure that the Armed Forces can budget with sufficient funds to operate the equipment.
Previous research and evaluations have shown that we know too little about future operating costs. This lack of knowledge has resulted in the Armed Forces not being able to maintain desirable levels of activity. To alleviate this issue, we study risk and uncertainty tied to future material operating costs. We focus on costs arising from new investments and costs expected to come in the remaining years of the long-term plan (2026–2036). We estimate numerical risk in future operating costs due to exchange rate risk and map uncertainty arising from how cost estimates are made, used, and compiled. Moreover, we assess the uncertainty in estimates developed before projects are formed and conduct interviews and workshops with stakeholders in the sector. We find that outdated exchange rate assumptions in cost estimates lead to operating costs being underestimated by 150 million NOK annually. Furthermore, we find that the Armed Forces have a persistently high exposure to exchange rate risk, which can lead to additional costs of 20.5 billion NOK during the period. Lastly, we find that operating costs are associated with three non-quantifiable uncertainties:
1. The Armed Forces lack an overview of future operating costs of the equipment, which is likely to lead to moderate underestimation. This lack of overview is a result of projects and portfolio managers having different tasks and objectives.
2. The accuracy of the operating cost estimates is unknown, which leads to significant uncertainty. The unknown accuracy is a result of varying cost breakdown structures between project estimates and accounting data.
3. Many project estimates related to equipment operation are outdated, which leads to significant uncertainty. Out-dated estimates are due to a lack of reporting requirements and resources.
Overall, underestimation, risk, and uncertainty can lead to substantial reductions in the defense capability if adjustments are not made. We propose six measures that together will make the Armed Forces handling risk and uncertainty better:
1. Strengthening the operating cost perspective in portfolio management.
2. Adjusting operating cost estimates at the portfolio level for known underestimations.
3. Considering and planning for risk in the implementation of the long-term plan.
4. Expanding ambitions for centralization and availability of operating cost data.
5. Setting requirements for updating operating cost estimates in projects.
6. Ensuring that the accuracy of operating cost estimates in projects is measured.
Together, these measures will lead to the Armed Forces both having a better overview of risk and uncertainty and being better prepared to adjust if adverse outcomes occur.