Examination of Witnesses (Questions 263
- 279)
WEDNESDAY 12 JANUARY 2000 (Morning)
MR COLIN
BALMER, MAJOR
GENERAL JOHN
KISZELY AND
MR TREVOR
WOOLLEY
Chairman
263. Welcome, gentlemen. Mr Balmer, I have had
experience of witnesses prevaricating for 20 years and their ability
to find new excuses for not answering questions is limitless,
and I understand that you have been pretty ill, but I must warn
you against collapsing in the next two-and-a-half hours, although
this would introduce a new approach to avoiding questions. Welcome,
and I am sorry that you have been dragged out of your sick bed
with the dreaded flu to appear before us.
(Mr Balmer) Thank you, Chairman. I am
just appealing for the sympathy vote.
264. Introducing your team would be superfluous
as you are the usual suspects dragged in on an occasion like this.
Thank you very much for coming. This is the first of our four
public sessions on the Defence White Paper. We will be producing
a report before the end of the month in time for the House to
debate the White Paper, though I must say Volume 2 is infinitely
superior to Volume 1, which does seem, despite its new pictures,
to be not the most communicative or substantial of documents but
is partly redeemed by the additional information to what was seen
as Volume 2. Introducing a slight note of cynicism, when my colleague
Michael Colvin chaired the last Defence Committee, in a notable
paragraph we indicated our displeasure at the defence budget having
inexorably fallen, and we said, two-and-a-half or three years
ago, that any further cuts in the defence budget would endanger
the defence the realm. Small cuts were made, and I hope that today
and next week you will be able to convince us that although we
are now down to—you can tell us—2.4 per cent of GDP
(maybe falling even further) we do live up to what the Defence
White Paper said, that we have amongst the best armed forces in
the world. Those armed forces remain amongst the best when they
are sufficiently numerous, when they are operating the best equipment
that money can buy, when they are well-trained and they are well-led,
at political level and amongst the military themselves. I think
we need convincing that the Government's aspirations of still
being amongst the best in the world is more than empty rhetoric.
The first question I would like to ask is this: for the last two
years the Ministry of Defence seems to have had considerable difficulty
in spending all of the funds budgeted for equipment. You underspent
about £225 million in 1997/98 and underspent by £331
million against the original provision for 1998/99. What can we
make of this?
(Mr Balmer) I think, Chairman, the figures need to
be, as usual, treated with some care because during the course
of each of those years we have, inevitably, changed the provision
with which we started out. In the case of both the last two years
we had carry forward from the previous years to take into account.
We also had operations in Bosnia which led to extra resources
being made available from the Government reserve, and so the totals
themselves have to be treated with some caution. It is also the
case that inevitably in managing a budget of this size there are
constant swings and roundabouts in the way in which budget holders
manage their affairs during the course of the year. Our role is
to set budgets at the start of the year which we think are taut
and reasonable for people to deliver the outputs they are required
to deliver, but, inevitably, as time moves on during the year,
different things happen and different cost pressures arise. One
of the particular factors that happens on the equipment vote—the
old Vote 3, which we had until last year—is that during
the course of the year we quite often find that a project matures
to the stage where it is ready to be transferred to the responsibility
of the logisticians —" in our new organisation the
Chief of Defence Logistics. At that point we would transfer funds
from the equipment procurement vote, Vote 3, into the logistics
vote, the old Vote 2. That happened in each of those years. The
same factor is happening in the current year although it is not
so obvious because they are no longer separate votes. I think
it is inevitably a difficult judgment for those who run, particularly,
the equipment procurement vote, having looked at the whole range
of projects they are required to deliver in the course of the
year, to determine exactly what programmes are delayed and exactly
how well industry will deliver and, therefore, how much we will
pay in the way of bills. That is a juggling act. We certainly
have a long tradition of recognising that even when all the individual
projects have been properly screened and scrutinised, in aggregate
we never spend that total amount of money—something, somewhere
goes wrong unexpectedly. So the Chief of Defence Procurement (who,
I think, you are seeing this afternoon) and his predecessors have
a long history of block adjusting the total of the vote so that
it more accurately reflects what he thinks they will in aggregate
spend.
265. So you are fairly relaxed about the figures?
(Mr Balmer) I would not say we are relaxed about them,
because we have to manage within a total and we are not allowed
to exceed that total. If we do the Public Accounts Committee,
quite rightly, calls us to account for that. Three years ago we
did, indeed, overspend the total budget. In the last two years,
in trying to manage within the total of the budget we have come
close to that, in particular in 1998/99. The underspend on the
whole defence budget was £74 million, but that reflected
some overspending on the operational vote and a very small overspend
on the logistic vote, offset by some underspending on the equipment
vote. It is that balance that we have to get right during the
course of the year. It is a difficult task, and in the last year
we came quite close; £74 million is quite a small percentage
to be adrift of the absolute total. In the current year we are
similarly experiencing a very taut position.
266. Despite your very logical explanation,
when people like myself are saying "We are not spending enough
on defence and we are not spending enough on equipment" it
does seem rather embarrassing when journalists would argue "Look,
they have not even spent the money they have been allocated".
You think the explanation is sufficient that it is simply not
possible to be bang on target every single financial year.
(Mr Balmer) That is my argument, particularly since
we are not allowed to, or it would be unsafe to, aim to spend
exactly the total, because given that there must be a margin of
error, there is a chance we would overspend and we are not allowed
to overspend. We have to so manage our affairs that we do not
overspend, which means, inevitably, the probability if not the
certainty that there will be some measure of underspending in
any given year. The good news is that under the current Government
arrangements we are allowed to carry forward the underspending
into next year.
267. So what kind of dodges would you have got
up to in the old days when you could not carry over? What was
the down-side of the system? I see a wry grin on your face, and
it was not your responsibility then, but what would your predecessors
have done in order to have been bang on target?
(Mr Balmer) I was smiling at the word "dodges",
Chairman, which I will, of course, resist. We have been able to
carry forward underspend on the equipment vote for a number of
years now—it was actually in the mid-1980s that that facility
was first introduced. At the time it was limited to 5 per cent
of total vote, but even that we found manageable because that
was several hundred million pounds. So we now have experience,
over 14 or 15 years, of managing this way, and carrying forward
underspending into the following year, where we have the time
to programme it, either to cover particular bills which may have
slipped from March to April, or if we detect that, actually, the
programme was somewhat over-funded and there is some spare cash
to reprogramme that into speeding up other programmes.
268. How far ahead can you tell if there is
going to be an underspend?
(Mr Balmer) It depends on the fineness of the margin.
Clearly, if we are several hundred millions under that becomes
apparent quite early in the year, and sometimes we are able to
add programmes in during the course of the year to cover that.
In years where we are tight, like last year and the current year,
it is very difficult to predict what the final outturn will be,
because it depends on what bills we pay during March, and that
depends on what bills industry submits for payment during March.
Clearly, those in charge of the delivery of projects have the
responsibility of assessing what that will be, but come the day
if a particular contractor does not submit an invoice or manages
to complete a piece of work slightly quicker than expected and
puts in an invoice quickly at the beginning of March then we will
pay it. So judging the fineness of that rate of spend is one of
the difficult tasks we have, and it is why three years ago we
overspent, because some of our reporting mechanisms were not quite
accurate enough.
269. Having developed a degree of cynicism over
the last 20 years, is there any advantage in underspending, in
the sense that now we are continuously engaged in surprise operations,
is there any attempt to hold back something on one account to
give advantage, if we are engaged in a Kosovo-type situation,
so that at least you can carry forward from one year to the next?
(Mr Balmer) Our normal expectation, for unplanned
operations—the unexpected deployments of the likes of Bosnia
and Kosovo in recent years—we do not make provision in public
spending totals. The defence budget is judged to be sufficient
to have the capability to have the armed forces in place with
appropriate training, with appropriate equipment holding, and
so on. So that if we then incur extra costs through deployment
and having to fight an operation that would be extra cost. Where
it is significant we would then expect, in discussion with the
Treasury, to appeal for funds from the reserve. That debate, in
any given year, will depend on the state of the budget overall.
Clearly, if we were underspending in a given year the Treasury
would expect us to try to use that to accommodate the extra costs
of operations. So in the current year some of the smaller extra
costs of operations, such as the enforcement of the No Fly Zone
over Iraq, such as the minor costs of East Timor, we are absorbing
within our budget, but for the major programmes, in Bosnia and
Kosovo, for several years now we have been given extra provision
for the extra costs that we have incurred.
Chairman: We will come on to that later
on.
Mr Colvin
270. For how many years can you carry forward?
When we did our inquiry into some of the overdue projects—Horizon
is an obvious one, the Type 45, Bowman is another and ASTOR—there
are a number of projects which are steadily moving to the right,
which makes it quite difficult for somebody else to balance the
books. However, we are assured that Smart Procurement is beginning
to work and all these things are going to come back on stream.
It obviously must help you, to a certain amount, to see it going
to the right but how far can you go? How long can you carry forward
the money that is currently allocated for those programmes which
are running seriously over time?
(Mr Balmer) The arrangements we have with the Treasury
do not allocate carry forward money to specific projects. We do
not say "We have underspent by X million pounds on a particular
project, therefore we are carrying it forward. It is measured
against our total budget.
271. Do you not think you should do that?
(Mr Balmer) We could, and, indeed, internally, that
is part of the juggling act we have to go through each year in
looking at our forward programme and adjusting the cash provision
we expect to be needed by each project. If a project is in trouble
and it is slipping several years to the right, that usually means
there is extra cash available to deal with the projects which
are more in that year. That juggling act, as I describe it, is
a difficult process that we have to go through each year. I do
not think it would make sense to allocate a bunch of resources
to a particular project and ring-fence them in some way so that
they could never be moved. We find it better to take a view of
all the projects against the total provision we have, to ensure
that we can ensure that they have the right amount of provision
that they will need in any given year. The carry forward facility
that we have is judged against our total budget and that is taken
year-by-year; so in each year if we underspend by £50 million
or £100 million then we can move that into the next year.
272. On the question of the overall financial
position, we have read some fairly disquieting things in the press
suggesting that there is going to be a £500 million deficit,
and I just want to put some questions to you on this because at
the halfway point of this year, 1999/2000, your budget was running
4.3 per cent above forecast. We calculated that if that continued
until the end of the year you would be overspent by £950
million. I just wondered what areas, other than the unprogrammed
which we will be coming on to later, account for the overspending?
What is causing it?
(Mr Balmer) I do not recognise the detailed figures
you are reading from, which have clearly come from press reports.
It is certainly the case that we have found, in the early part
of this year, that we were spending money at a higher rate than
anticipated, and so we had to look hard at the areas where this
was occurring. It was occurring in one or two of our Top Level
Budget areas but, also, on the expenditure on the new equipment
programme. It is not clear whether that was being caused by Smart
Procurement having beneficial effects earlier thanwe expected,
in the sense that things were being delivered which we thought
might not have been delivered.
Chairman
273. You will tell us if that happens?
(Mr Balmer) We will indeed tell you the moment that
happens.
Mr Colvin
274. Can you give us any example of that happening
at the moment?
(Mr Balmer) There are certainly some projects where,
under the Smart Procurement initiative, we have found ways in
which we can share benefits with a contractor who has found a
different way of doing something. I do not think I can point to
an example where that has caused us, yet, to spend in the current
year a significant amount of more money. Sir Robert Walmsley this
afternoon might be able to think of a better example, if you would
like to ask him.
275. There must be many more projects that are
going in the opposite direction, so the net balance should be
a saving rather than the other way round.
(Mr Balmer) Except that, as I tried to describe, we
aim off for that phenomenon; we expect, in the nature of things,
that some projects will, indeed, slip, and we aim off for that
and do not make provision for what we do not expect to spend.
However, in the current year we have found that we are spending
slightly faster than expected so we did a full survey, as usual,
with our budget holders at certain points during the year (in
midsummer and in the autumn) to ensure that they could so organise
their affairs that they would not overspend their allocations;
in the same way that the Treasury and Parliament gives us an absolute
limit we give limits to our individual budget holders in turn.
That analysis caused us to move some provision from the logistics
area, where the rate of expenditure was rather slower, and some
out of the procurement area, because that rate was going too fast.
Some of those bills will now, effectively, be slipped into next
year—maybe a couple of hundred million pounds' worth—and
other budget holders have had to tighten their belts in one or
two areas. There have been one or two examples of exercises being
cancelled or curtailed, and there have been press reports of one
or two examples of ships being tied up for slightly longer than
they might otherwise have been. Generally speaking, however, the
tempo of activity, particularly with all the operational activity
that is going on, has been high, and that has caused people to
be able to rein back in other areas of their budget which, in
a more stable period, they might have been spending money on.
The position remains tight, but the measures that have been taken,
primarily on the procurement budget, to move money on bills into
the early part of next year, we are confident should enable us
to stay within our overall cash limit. The position is tight.
276. You touched on the question of exercises
and I will come on to that in a minute, but in terms of planned
operations and training and other deployments, what have been
cut in order to help you stay within budget?
(Mr Balmer) I might ask General Kiszely to give you
some examples here, but the first point to make is that because
of the operations in Kosovo, in particular, quite a large number
of exercises—particularly for the Army but also for the
Royal Air Force which they would otherwise have undertaken -were
cancelled simply because the troops were deployed in an operational
theatre. The same is true, to some extent, for the Navy. So of
all the various exercises that have not taken place, most are
driven by the requirements of Kosovo. Some have been driven by
the effect of the slight squeeze on the budget.
(Major General Kiszely) Yes, that is right. In the
period covered by the report there were two major United Kingdom
NATO exercises that were cancelled because of operational reasons.
However, in-year there have been some eight NATO or United Nations
exercises cancelled, largely due to operational commitments as
well, because the troops that would have been taking part in them
were either in Kosovo or deploying for operations or returning
from operations.
277. Do you have a figure for the sort of money
that is being saved as a result of those exercises?
(Mr Balmer) No, I do not, and primarily, of course,
it was not for savings reasons that these exercises were cancelled.
Mr Hancock
278. Have any of them at all been cut just for
the sake of making a saving?
(Mr Balmer) There is certainly one example, which
is the Royal Marines deployment to Norway which was planned. I
think there is a point worth making about savings from exercises,
that the extra cost of exercising tend not to be very high because
the troops are being employed anyway, so their salaries are covered.
It tends to be the cost of the actual deployment and, maybe, some
locally incurred costs. So although we have, indeed, trimmed back
on one or two exercises, like the Marines' deployment, to save
money, it does not save a huge amount in itself.
279. £78 million to take the Army to Canada
is a substantial sum of money.
(Mr Balmer) The figures for the cost of deploying
troops on exercises, again, we have to be careful about because
that is something we expect to do anyway. We expect to fly our
C130 aircraft and our VC10 aircraft, and so using those sorts
of facilities to send people on exercises we would not regard
as an extra cost. It is part and parcel of our normal defence
budget.
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