Examination of witnesses (Questions 1
- 19)
MONDAY 30 MARCH 1998
SIR
RICHARD
MOTTRAM,
KCB
and SIR
ROBERT
WALMSLEY
and MR
FRANK
MARTIN
Chairman
1. This afternoon we are taking evidence
on the Comptroller & Auditor General's Report on the 1996-97
Ministry of Defence Appropriation Accounts. The witnesses are
Sir Richard Mottram, Permanent Under-Secretary of State for the
Ministry of Defence, and Sir Robert Walmsley, Chief of Defence
Procurement. Good afternoon, gentlemen. Welcome again. Sir Richard,
I will kick off with my first question to you. You have overall
financial responsibility for financial management in the MoD.
In 1996-97 you overspent the Block Cash Limit and your Operating
Cash Limit and spent more money than had been authorised by Parliament.
No other Government Department incurred Excess Votes. What went
wrong?
(Sir Richard Mottram) Chairman, perhaps I could
begin by apologising for having overspent on each of the Votes.
The reason it went wrong was because—and I think we are
unique in this respect in relation to other Government Departments—we
have a very difficult job of trying to forecast, for reasons I
could explain, and we forecast to what we regard to be quite fine
tolerances. Our forecast turned out to be marginally wrong and
we overspent.
2. This is a ceiling, not a target. Forecasting
expenditure is a key tool of management in the public sector.
Paragraphs 16 and 17 of the report say you do not have robust
financial control mechanisms and information systems in place.
Why is that?
(Sir Richard Mottram) Is that a valid fact[1]?
3. That is what it says in paragraphs 16
and 17.
(Sir Richard Mottram) What we have is a set of
processes at both the departmental level and at the level of each
of the individual budget holders which attempt to get this right.
The problem we face is, for example, in 1996-97 we paid out some
1.6 million invoices, we paid out 1.8 million local purchase orders,
and we had all of our responsibilities for pay and so on which
is obviously relatively easier to do. We were forecasting all
the time against two sets of considerations. One was the rate
of progress on our work by 20,000 contractors with 100,000 contracts,
and the other was the rate at which they would present their bills
to us. We have quite sophisticated means of trying to do this
at both the departmental level and at lower levels. They obviously
were not sophisticated enough because we got it wrong.
4. I will leave that for the moment, but
I am sure others will want to come back on that because the paragraphs
in the report point out the lack of robust financial control mechanisms.
Can I just turn to Sir Robert. Most of the overspending occurred
on your two Votes. Paragraph 11 says that in March 1997 you were
forecasting an underspend of £129.3 million but at the end
of the same month you had overspent by more than £200 million.
How do you account for this large discrepancy?
(Sir Robert Walmsley) It is right to say that
we were caught out by some bills which we did not expect to pay
in the financial year 1996-97 and those related to work that had
properly been done. I would just like to emphasise this variability
in the submission of bills from contractors. The average process
from us certifying that the work has been accomplished takes six
weeks to pay money due under the bill. The minimum is one week.
25 per cent of bills take between six weeks and three months and
nine per cent of bills take more than three months. So superimposed
on the variability of industry's performance we have this uncertainty
of when bills will actually come forward.
5. I am quite sure other members of the
Committee will want to come back on the excess expenditure issue
in some detail. I will just observe in passing that large numbers
of large organisations face cash-flow control episodes which exactly
replicate this and they seem to manage it. We will move on. I
will come back to you, Sir Richard, on the Waltham Abbey Royal
Gunpowder Mills. On the Waltham Abbey project, decontamination
costs escalated from £7 million to £16 million partly
because work was done on a time charged basis, with no performance
measures and at rates not exposed to competition. Why did your
financial procedures not prevent this happening?
(Sir Richard Mottram) I think what happened, Chairman,
was that we did not give enough attention to the way in which
this programme was escalating in cost, so there was a failure
of our procedures. It was a double failure because we did not
think enough about how we were going to control the cost and,
secondly, as the report brings out, when it was clear that it
would exceed our delegated approval from the Treasury we failed
to get Treasury approval. So we failed twice.
6. Could you explain the second failure[2]?
As you say, you incurred expenditure outwith your authority on
this project. Why did you not approach the Treasury on that?
(Sir Richard Mottram) I cannot answer that, Chairman,
because we look back and it is just an administrative oversight.
In the period concerned there was a recognition that there might
be a need to go to the Treasury. The files are then silent about
why it was not done. It was just overlooked.
7. Sir Richard, do you accept that the management
weaknesses on this project set out in paragraph 35 go right to
the heart of contracting and project management and really that
it is unforgivable that such occurrences should occur?
(Sir Richard Mottram) What I found quite difficult
is to know precisely how much public money, if any, was misspent
as a result of this process. What essentially we have is two contracts
both being let competitively originally and then being allowed
to run and, in the case of the decontamination project, on an
ever-wider basis. We have looked at this twice. We have looked
at it on the basis of a piece of work by our internal auditors—and
all of the C&AG's work is based on our internal audit work—and
we also reviewed it separately with consultants. The consultants
came to the rather double negative conclusion that it was not
possible to conclude that value for money had not been achieved
which possibly means they did not know whether it had been achieved
or not. When I look at it I cannot satisfy myself that value for
money had been achieved and therefore we got into this procedure.
If you look at the project, the project has been a success. There
is no evidence that money was being widely squandered. It was
just put on the wrong contractual basis, as the report brings
out. To that extent it was obviously not satisfactory. In terms
of what was done as a result of the project, I think it is highly
satisfactory since it has produced an excellent result, but we
cannot show it was value for money and therefore that is a weakness.
8. I have memories of you as overlord of
market testing. I have a feeling that the absence of performance
measures and rates not exposed to competition would not have satisfied
you on that. Never mind.
(Sir Richard Mottram) If I can just say one more
thing. These procedures were weak for the reasons that are stated.
We do not operate to these procedures any more.
9. Others will come back on those matters.
I will move on again to the disbursement account issue. The operation
of the Army Pay Disbursement Account (paragraph 41) represents
a fundamental breakdown in financial control. For example, throughout
its eight year life the account has never been reconciled. Why
is that?
(Sir Richard Mottram) Because essentially, Chairman,
it was too ambitious as a basis for running these processes. It
was a very large scale thing. I do not think it probably could
have been reconciled, the way in which it had been put together.
Therefore, it was fundamentally weak. There is, and was, reconciliation
at the level of individual units, but the process through which
the amounts of payment at that level are then batched up and go
up different routes into and out of this account made it impossible
for it to be reconciled. What happened was for many years it ran,
as was expected, somewhat in surplus and therefore, although it
was recognised from 1988-89 by both us and the NAO that there
was a problem, this problem was not as acute as when it started
to go into deficit, but on a number of occasions it was looked
at. The real problem is, for reasons I could come to and explain,
it is not an easy thing to organise, but quite clearly it was
not satisfactorily organised on this basis.
10. I can understand why it should ride
in surplus based on the imprest mechanism used in most regiments,
but we are not talking about a surplus.
(Sir Richard Mottram) No, we are talking about
a deficit.
11. It was a £16.3 million deficit
on an account which is a pay account. In most big organisations
pay accounts are reconciled virtually to the penny for very good
reasons, PAYE reasons and other reasons. After this £16.3
million was written off you then ran up a balance by August 1997
of £9.8 million on the successor account in five months flat.
That hardly indicates a very high degree of control by any measure.
(Sir Richard Mottram) The reason why it is not
straightforward is the reason you will be extremely familiar with,
that actually the British Army is not like most other organisations
in the way in which it operates. Therefore, I can quite see why
it was difficult to run this account successfully. That is not
a reason for us allowing it to get into this situation. I am not
seeking to defend that. The fact that one account was closed and
the next one was opened I absolutely again agree with you is a
very unsatisfactory position that we now find ourselves in. I
can explain, if the Committee want me to later, the efforts that
we are putting in to try and get all of this right. I have to
say that the position still is not satisfactory, but it is not
the case that it is a simple pay account of the kind that you
would find, say, in bits of the Civil Service or other big organisations.
Some of this money is being disbursed on operations. The Army
is geographically very widely spread. There are lots and lots
of people who can access this account—too many actually.
It has many more complications. The Army pay and allowance and
charging system is bigger than almost any other organisation I
have ever come across for better or for worse, so it is not a
straightforward thing. Quite clearly the way in which it was set
up and the way in which it was run was not satisfactory. Superimposed
on this have been a whole series of changes in the organisation
of the Army and the organisation of administrative support of
the Army and they have certainly made it worse in relation to
this account, particularly over the last two or three years, but
that has to be offset against wider benefits we have had from
rationalising various structures. I think that last point may
have contributed to the problems we have had on the successor
account[3].
12. I understand that. I still believe,
and no doubt we will come back to this, that the imprest system
should allow you to reconcile this at a regimental level let alone
at the summary level. I will make one point which I would like
you to pick up during the course of later evidence rather than
immediately and it relates to the same issue. Paragraphs 47 to
51 point to widespread problems in the operation of suspense accounts,
with debit and credit balances each approaching some £2 billion.
When you talk about resolving the pay based systems perhaps you
could also deal with that later on. I am coming to my last question
before I open things up. You are now implementing resource accounting
and are due to produce "dry run" accounts for 1998-99.
Is progress on this in line with targets? If you are having this
much difficulty with cash accounts how comfortable are you feeling
with getting real resource accounts right on time?
(Sir Richard Mottram) The progress on introducing
resource accounting and budgeting is broadly in line with our
targets. I am reasonably confident about our ability to do this.
There are a number of big problems that we are tackling and these
include the scale of the task, which is one of the biggest change
programmes being attempted in Europe, it involves a lot of training
of staff, bringing new people in, so there is a risk on the people
element. Then we have serious problems particularly in relation
to those parts of the system that are tracking spares consumption,
which is certainly an area that I am very nervous about. We have
a strong focus on this at all levels in the Department. We have
a very big programme of implementation going on. We are focusing
on all the risks. We are determined to do it.
Chairman: Thank you.
I will widen it out. Jane Griffiths?
Jane Griffiths
13. Thank you, Chairman. In paragraph 13
of the report it notes that you were not aware that you had incurred
the excess expenditure until after the end of the financial year.
How long after the end of the year was it that you realised that
the excess had been incurred?
(Sir Richard Mottram) I cannot say precisely,
but the reason is that we do not close the accounts for a number
of months after the end of the financial year, so for at least
two months after the end of the financial year we are still booking
to vote things that have occurred during the financial year. We
are required so to proceed, so we have no choice about what we
book to the Votes. As long as it was a valid charge, we paid the
money; we had the receipt in that year, we book it. For at least
two months we carry on. Even after those two months in debate
with the NAO we can, if we want to, re-open the books and allocate
further sums. The end of April is the answer. It would not be
surprising that we did not know at the end of the year the precise
amount for the reason I have just tried to explain. There was
nothing mysterious about this, it is just the way the process
works.
14. Looking at paragraph 6, it is indicated
there that five out of the nine top level budget holders were
responsible for £42.5 million of expenditure in excess of
the estimate. These are presumably eminent individuals who are
the budget holders and it is a bit hard to understand how those
people did not know about the on-going status of their budgets.
Did they want to know? Did they wish that they knew? It is a bit
hard to understand. This is not small change.
(Sir Richard Mottram) I think it is not small
change in two directions. What it is difficult to communicate
in a report of this kind is the scale of the expenditure. It comes
out in numbers but it does not come out in terms of the individual
component parts and what trying to manage those individual component
parts means so that when we put the estimates together we make
the best attempt we can at making provision against a very detailed
set of assumptions about how much expenditure we incurred across
a huge organisation. We are employing three hundred and something
thousand people, we are indirectly employing many many more and
we are trying to forecast expenditure all across these various
categories. Some parts of this are relatively straightforward,
like we should be able to work out within reasonable bands how
many people we will employ and how much we will pay them. When
we come on to other things like the big capital projects or when
we come on to smaller things like buying day-to-day items we get
on to the point that Rob Walmsley was making earlier about the
pace at which bills occur. Each of these people to which you drew
attention is a very senior person in our organisation who has
delegated responsibility from me to make sure that they bring
their expenditure in line with both their gross and their net
provision. All of this is laid down. They have advisers who advise
them who are experts in doing this. It is all taken very seriously.
It was taken very seriously during the year that we were looking
at here. People worked very hard at it. It is just an intrinsically
difficult thing to get precisely right. So it is not a lack of
top management attention or a lack of seriousness about the nature
of the responsibility, it is just intrinsically quite difficult
when you have got big organisations. For instance, on Vote One
there is a huge amount of repayment business which involves other
countries. There are forecasts about the rate at which we will
be selling off surplus lands and buildings. These are quite difficult
things to get right. If you forecast that you are going to do
something in March and you do it in April, under our system of
cash accounting—I am not complaining about this, this is
obviously our obligation to make it work—you are sunk. So
these are quite difficult things to do, that is all. It is not
a lack of seriousness.
15. I was not really suggesting that these
matters were not taken seriously, but you have indicated the guidelines
that there are and the obligations that there are on the budget
holders and this is all a very serious matters, but they did not
do it, did they?
(Sir Richard Mottram) These people did it by one
per cent[4] did they not?
I defer to the Chairman all these things. Actually forecasting
within one per cent1 of a cash flow of this kind is not a wholly
straightforward thing. I am talking about Vote One. Obviously
there are more serious issues that we can come to under the Votes.
Vote One is the easiest to forecast. Generally speaking people
forecast within one per cent.
16. The report is not optimistic (paragraphs
16 and 17) about the Department's ability to forecast correctly
in future. You said previously that the systems that had been
operated were weak in the past. Can you assure the Committee that
the systems which will be in place will provide better forecasting?
(Sir Richard Mottram) We are trying our best all
the time to get better. The fundamental problem we have is the
one that Rob Walmsley touched on earlier, that for much of our
expenditure we have to rely on assessments of both when the work
will be done and when the contractor will present for payment
a duly authorised bill. So we have got to make two sets of forecasts
in relation to those two things for much of our expenditure, not
all of it on Vote One, some of it is relatively straightforward,
but that is our fundamental difficulty. As we explain in the report,
we are trying in a number of ways to get a better handle on this
and certainly to understand better those processes, and we accept
the criticism that perhaps we had not thought enough about those
processes, but while we have cash accounting we will still have
that fundamental problem. When we have resource accounting it
will be slightly different because we will be accruing and we
will be getting invoices and they will be accruing against our
accounts in a slightly different way, but we will still have the
fundamental problem of forecasting the rate of progress on Ministry
of Defence contracts. It is suggested in here, and we absolutely
agree with this, that we should try better to understand and have
a better dialogue with industry about the rate at which they expect
to perform against our contracts. What we have to say to you is
that as we develop that dialogue they are not necessarily better
at doing it than we are and as Rob brought out earlier, they are
very variable in the rate at which they present their bills for
reasons I find somewhat mysterious, but we are trying to get a
handle on both of those things.
17. The Department is not alone in fixing
these figures, a lot of organisations do. As you have said, the
British Army does not operate like other organisations and it
clearly does not. Further on in the report it indicates actions
that your Department is taking and measures which have been proposed
to improve these matters. Are those in place yet?
(Sir Richard Mottram) All of the things that are
described here we are doing, yes.
18. They are being done now?
(Sir Richard Mottram) Yes.
19. Okay. Looking back at paragraph 14 it
tells us that £45 million of the 1996-97 overspend was related
to ground forces in Bosnia.
(Sir Richard Mottram) Yes.
1 Note: See Evidence, Appendix 1, page 23 (PAC
253). Back
2
Note: See Evidence, Appendix 1, page 22, paras 3-8 (PAC
253). Back
3
Note by Witness: The successor account referred to in question
11 was opened in April 1996. Therefore, the balance incurred between
April 1996 and August 1997 was over a period of 17 months, not
five as stated in the question. Back
4
Note by Witness: percentage should be "by point one
per cent", not one per cent. Back
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