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| INTRODUCTION AND SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS
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| C&AG's Report (HC 177 of Session 1996-97) paras 1 and 1.1, and Figure 1
| 1. The Ministry of Defence (the Department) spend some £180 million a year in the United Kingdom on energy, mainly electricity, gas and oil (excluding that used for the propulsion of vehicles, aircraft and ships), and on water and sewerage. The Department are one of the largest users of energy and water utilities in the country.
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| HC 177 Evidence, p. 1
| 2. On the basis of a report from the Comptroller and Auditor General, and the Department's supplementary memorandum, our predecessors examined the Department on the management of consumption of utility services, and on how they acquire utility services.
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| 3. Our main conclusions are as follows:
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| On the management of consumption
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| (i) We are pleased to note that the Department reported energy efficiency improvements of 20 per cent for the five years to April 1996, and that these exceeded the Government's 15 per cent target. This is a creditable achievement. We consider, however, that there is still significant scope for further savings, as illustrated, for example, by site surveys undertaken by the Department and the National Audit Office (paragraph 24).
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| (ii) We look to the Department to ensure that they pursue challenging targets for further energy efficiency improvements. We note that in the light of the National Audit Office's work, the Royal Navy's target is for a further 15 per cent improvement over five years, and that the Department's overall target is currently to achieve eight per cent by the year 2000 (paragraph 24).
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| (iii) We consider it particularly unsatisfactory that the Department have given insufficient attention to water consumption. We are concerned that large quantities of water are apparently being lost through leaks. We note that in just one case the losses over a year were enough to supply 1,600 households, cost some £317,000, and that the indications are that leaks are widespread. This points to a seriouse waste of a valuable natural resource which has been in short supply in many parts of the country. The waste has environmental and social consequences as well as financial consequences (paragraph 25).
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| (iv) We therefore welcome the Department's assurance that they are now giving water consumption higher priority, and that to reflect this the responsibilities of their Energy Management Working Group have now been extended to cover water management. We also note that they are taking action to strengthen their monitoring arrangements, including the use of more sophisticated approaches than in the past for identifying leaks (paragraph 26).
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| (v) Where sewerage charges are based on metered water supply, leaks will result in extra sewerage charges (even though the water may not have been returned to the sewer). We note that, in just one case, the Department were trying to recover charges amounting to some £875,000, and that they are also seeking to recover sewerage charges in other cases identified in the Comptroller and Auditor General's report. We look to them to seek repayment of charges in those cases where they identify leaks (paragraph 27).
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| (vi) In view of the potential for identifying significant savings through site surveys, we are concerned that many of the Department's large sites have not been surveyed in recent years. We note that the Department have now issued guidance drawing attention to the importance of energy surveys, and we recommend that they do the same with regard to water surveys (paragraph 28).
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| (vii) We are concerned that the Department are not measuring their performance against available standards for energy and water consumption. We consider that the National Audit Office's analysis of water consumption at individual sites, which suggested that leaks might be widespread, illustrates the value of this technique. We therefore commend it to the Department as an approach they could make greater use of, and in so doing strengthen their arrangements for self-audit (paragraph 29).
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| (viii) We note the Department's view that there are sufficient incentives, financial and otherwise, for budget holders to seek more efficient use of utilities, and that the Department are using and developing a number of approaches to achieving savings. For example, they have appointed utility managers at individual sites; commissioned surveys of some sites and introduced profit sharing arrangements with contractors in some cases; and are developing a programme of annual inspections based on the checklist in the Comptroller and Auditor General's report (paragraph 30).
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| (ix) We look to the Department to ensure that they have effective arrangements for identifying and disseminating the lessons learned from local initiatives. We note the role of focal points in spreading good practice within their own management areas, but we are concerned that the arrangements described by the Department appear to fall short of a robust system for reporting, collating and disseminating good practice throughout the Department (paragraph 31).
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| (x) Whilst we note the Department's view that their arrangements for managing utilities are not as complex as they might seem, in view of the points above, we question whether they have provided the clear focus on energy and water consumption required to achieve the full potential for savings. We look to the Department to give prompt attention in particular to the lack of integration between utilities management and property management, the need for greater professionalism in the management of utilities at smaller sites, the limited impact of Local Energy Efficiency Committees and the divided responsibilities for the management of Army utilities (paragraph 32).
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| On how the Department acquire utility services
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| (xi) We note the good progress made by the Department in getting eligible sites on to competitively-let electricity supply contracts and look to them to ensure that supplies to the remaining eligible sites are subjected to competition as soon as possible (paragraph 45).
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| (xii) We are concerned that the Department have been relatively slow in identifying sites eligible for competitively-let gas supply contracts, and that as a result they have missed savings which, on the Department's estimate, could amount to some £570,000 for sites above the 2,500 therms threshold. To prevent further losses, we look to the Department to get any remaining sites above this threshold onto competitively-let contracts without further delay (paragraph 45).
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| (xiii) We note that when our predecessors took evidence on this subject there were plans for competition to be available to all electricity and gas users in 1998, and that, in Southwestern counties, all gas customers have been able to choose their supplier since April 1996. We are concerned, therefore, that in March 1996 the Department had not taken steps to secure competition for gas supplies to those sites in the southwest below the former 2,500 therms threshold, and that they had yet to plan to take advantage of the wider deregulation in four counties in 1997. We conclude that they may have missed further savings, although we note that they let some contracts in the South West in October 1996 and planned to let more in 1997 (paragraph 46).
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| (xiv) We look to the Department to take early action to obtain the full benefit from the new gas competition opportunities already available to them, and to ensure that they are ready to take advantage of the new arrangements for gas competition scheduled for 1998. We also look to the Department to ensure that they would be in a position to benefit from the removal of thresholds for electricity competition (paragraph 46).
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| (xv) We are concerned that there are significant variations in the unit costs of electricity and gas supplied to sites with similar volumes of usage. We recognise that there may be reasons for this, but we recommend that the Department investigate the variations in case they point to ways in which they could strengthen their procurement processes. For example, in the case of gas, if the Department had done this it might have raised questions about whether they had moved forward quickly enough in letting contracts competitively. So, whilst we accept the Department's view that competition is the basic mechanism for securing minimum prices, we recommend that the Department make greater use of price benchmarking techniques on the lines of those used in the Comptroller and Auditor General's report (paragraph 47).
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| (xvi) We note that the Department's policy is to switch to metered water supplies where this is more cost effective than paying on the basis of rateable value. In view of the potential savings identified by the National Audit Office, we look to the Department to review as quickly as possible those cases where they are still paying on the basis of rateable value. Metering could result in extra charges where leaks occur, but we note that, as a matter of public policy, they would not regard this as reason for continuing to pay charges based on rateable values. We consider that the Department are right to take this approach, and to recognise the role metering could play in identifying new leaks more quickly and in helping conserve water (paragraph 48).
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| (xvii) We note that the National Audit Office report identified ten cases where savings would be possible from taking advantage of large user tariffs for water supply. We welcome the fact that the Department have saved £122,000 from letting contracts for just four of these sites, and their assurance that they are pursuing the other cases. In view of the potential savings, we look to the Department to press ahead with this as quickly as possible and to ensure that they identify any other sites which are eligible for such tariffs (paragraph 49).
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| (xviii) We note that for some sites, the Department have also made significant savings by securing reductions in their sewerage charges. We recommend, therefore, that the Department review the charges for other sites to see whether further savings could be made (paragraph 49).
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| (xix) We are very concerned that when checking bills, the Department have failed to identify basic errors and anomalies, and to assess the need to retain little used supplies. We look to the Department to take corrective action in those cases identified by the National Audit Office, where the possible savings amounted to over £260,000 a year. We note the Department's assurance that they have taken action to reinforce the importance of effective bill checking, and that they are trying to use information systems rather than employ more people (paragraph 50).
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| General |
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| (xx) We are struck by the similarities between this subject and our 1995 report on the Management of Telephones (HC 118, Session 1994-95). Both illustrate the importance of giving management attention to an area which might appear relatively mundane in terms of the Defence budget of some £22 billion, but which nevertheless offers considerable scope for savings (paragraph 51).
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| (xxi) We consider that the Comptroller and Auditor General's report, and the checklist appended to it, offer lessons which would be of value to other government departments, agencies and non-departmental public bodies. We therefore welcome the Treasury's assurance that they will draw the report and checklist to the attention of accounting officers, and the Environment, and that they will draw the issue of water leakage to the attention of accounting officers, and the Environment and Energy Management Directorate of the Department of the Environment, and that they will draw the issue of water leakage to the attention of accounting officers (paragraph 52).
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