Examination of Witnesses (Questions 420
- 437)
WEDNESDAY 12 JANUARY 2000 (Morning)
MR COLIN
BALMER, MAJOR
GENERAL JOHN
KISZELY AND
MR TREVOR
WOOLLEY
420. I did not say call all of them in.
(Mr Balmer) That is exactly my point. That is why
we do not have a full list of 1,300 measures. I do not feel it
necessary to call them all in to check them. We do get reported
in some numbers and we can look at what we have available in the
centre, which is easily available, and make that available to
the Committee from which you can either judge that that list still
is not big enough and we will have a another debate or you can
say, "This looks reasonable, let us now attack or examine
however many you want to examine," and we can do that in
some detail.
Chairman: We will do that Mr Balmer.
You give it your best shot and we will reserve the right to elicit
more information if necessary.
Mr Brazier
421. Just a quick statistical footnote on that.
With as many as 1,200 or 1,300 the 80:20 rule on normal curves
should apply. By looking at one-fifth of the projects you should
be able to tell us where four-fifths of the money is being saved.
(Mr Balmer) Exactly.
Chairman: Resource accounting and budgeting.
Tell us all you know in five minutes! Jimmy Hood is quite knowledgeable
and Harry is an accountant.
Mr Hood
422. My source of expertise is that I chaired
the first meeting of the General Resource Accounting and Budgeting
Bill Committee in Standing Committee yesterday. The question I
have asked in previous discussions and I would like to ask you
is who makes the judgments? Who checks the judgments that have
been made and provided to Parliament? Where is the auditing process
because you made a comment earlier on, and I wrote it down, that
the Treasury relies on MoD assessments. Who makes judgments on
the MoD assessments? Is it the NAO?
(Mr Balmer) When it comes to accounting and statutory
accounting we have to produce accounts which the National Audit
Office then have to audit. Their audit is dictated by their own
practices including in what level of detail, how frequently and
so on. So they have decades of experience of auditing our appropriation
accounts which record the cash flow which is what we have done
for the last 150 years and the National Audit Office audit our
systems and the way in which the computers are recording expenditure
using sampling techniques and normal good audit practice. They
are the ones who assure Parliament under a certificate from the
Comptroller and Auditor General that our accounts are proper.
When we move on to resource accounting it is a more difficult
set of accounts to audit because rather than just a series of
cash transactions which can be factually ticked, there are many
more judgments involved. There are valuations of assets and valuations
of stocks, there are evaluations of provisions made against future
expenditure, there are debtors and creditors figures to be analysed.
These are judgments people will have made, "I think this
asset is worth this. This is why I think it is. I have an evaluation
conducted by an independent expert and this is my best judgment
as to what this is worth." The National Audit office now,
in addition to checking all the individual transactions, have
to come along and agree all the judgments we have made are right.
They say, "Show us why you think this asset is worth what
you say it is worth," and they then decide whether they agree
with that. They apply the rules laid out in the manual which the
Treasury has drawn up and which has been approved by the Financial
Reporting Advisory Board which advises the Treasury which generally
speaking follows UK generally accepted accounting practice with
one or two changes where it is necessary for public sector purposes.
So Parliament in future will be able to rely on the National Audit
Office having conducted a further audit of all the figures in
our accounts to achieve what in future will have to be a true
and fair view certificate in the same way good commercial practice
would require.
423. Will the NAO look at cash flow expenditure
or will they look at what is the difference between an efficiency
saving and a cut as Members have been examining in the last few
questions?
(Mr Balmer) The National Audit Office even today before
we move on to resource accounting and budgeting have two prime
roles. One is the role I have described to audit the appropriation
accounts to ensure they are accurate. Quite separately and indeed
most of their staff are engaged in what they describe as value
for money audits where they investigate a particular activity
or a particular function and they have complete access to all
of our books and all of our people to question and analyse whether
we are doing things properly and whether we are achieving good
value for money and en passant to ensure we are not telling
lies, that if we have told Parliament something is true that they
can check it. This is their role, that is what they do all day
long and they produce value for money reports on all government
departments and because of the size of the Ministry of Defence
they produce quite a few on us. In a typical year they maybe produce
a dozen such reports. They have not conducted one of their studies
specifically into the efficiency programme but in looking at different
aspects of operations, for instance on repairs of vehicles, or
as they have just recently conducted a review of the way in which
we did a private finance deal for RAF vehicles, they will have
looked at the processes we have been engaged in and insofar as
we have scored an efficiency saving in that process they will
have had a chance to look at that and check it. Parliament can
rely on that process as well as the formal audit of the accounts.
424. It may not sound the sexiest of subjects
but I am sure it will be appreciated that it is a very, very important
subject that Parliament will want to return to in even greater
detail than we have done hitherto. As you are aware, the latest
"trigger point" for monitoring the departments' progress
in implementing Resource Accounting and Budgeting—"trigger
point 3"—is the production of "dry-run" resource
accounts in 1998/99. What is the MoD's progress against trigger
point 3 and when are the dry-run accounts going to be ready for
this Committee to examine?
(Mr Balmer) The trigger point 3 timetable originally
required departments to report in just before Christmas. The Treasury
eased that timetable in the light of the pressures on the audit
process in the autumn. Currently we are required to report to
Treasury by the end of this week. The accounting officer has to
produce his report of his judgment of our state of progress. The
Treasury will then analyse all departments' returns and produce
a memorandum for Parliament and I think their current hope is
that they will be able to achieve that by the end of next week.
That depends on departments achieving the end of this week timetable.
As of today I have not got available the accounting officer's
judgment. He and I are discussing our state of progress and I
am in the process of reporting to him and debating with him what
his approach should be to the Treasury's return. That will become
available quite soon as I have intimated and the accounts themselves
for 1998/99 clearly have been completed. They have not been formally
audited but the National Audit Office have gone through a mock
audit process. The intention is that once the memorandum has been
prepared for Parliament by the Treasury covering all central government,
at that point all the accounts will be made available to select
committees. So again I would hope that if the memorandum is finalised
and available to Parliament around the end of next week very shortly
thereafter I can let this Committee have in confidence, I think
the agreement is, a copy of the accounts and of course I am very
happy then to explore the details of the figure work and the notes
with the Committee. But the Government's position is that it does
not want to publish those accounts because it is very much a dry
run and the figures will not be reliable enough for public consumption.
Clearly we want to ensure that the Committee understand both the
problems we are facing in producing reliable numbers and begin
to explore what will be in the accounts and what will be more
helpful to Parliament in future to help inform the debate—
Chairman
425. Can we get the letter of assurance as well?
(Mr Balmer) The current intention is that the Treasury
will produce a memorandum which will summarise the position for
all departments. I do not think they were intending to publish
the individual letters of assurance from the accounting officers.
426. Can you explain the reason why?
(Mr Balmer) I do not think so other than clearly it
will give when it is finalised a lot of detail of problem areas
and awkward figures which we would be reluctant to put in the
public domain. I suspect that if the Committee were to press me—
427. Which we will.
(Mr Balmer) Which you will that I could suggest to
the Treasury and to the accounting officer that that is a document
that the Committee might want to see because clearly in talking
about the accounts, which I am very happy to do, we will be exposing
exactly those issues so it might help the Committee to have that
letter to focus on.
Chairman: It might be helpful.
Mr Hood
428. Could I refer to your memo at paragraph
32.7[10]
where you refer to an outstanding issue as the audit on the dry-run
resource accounts and you tell us that the NAO audit is now largely
complete and discussions are taking place on the draft management
letter. What are the issues that still have to be resolved with
the NAO?
(Mr Balmer) We have now finalised our
discussions so we have completed the accounts and the NAO has
written a management letter. As I have said, it is not a formal
audit process so there will not be a certificate from the Comptroller
and Auditor General but I have had a management letter from the
director concerned at the National Audit Office which tells me
the sorts of things we would have had difficulty with had it been
a formal audit. It is an advisory letter and that now exists and
forms the basis of my advice to the accounting officer. As to
the areas where we are having difficulty there are several. I
think I have told the Committee on previous occasions that our
position on stocks is a difficult one. All three services have
a variety of systems (usually computer driven) to record the existence
and movement of stock. All those systems were created several
years ago and their purpose was to be able to control the movement
of stock so that people understood what was available, whether
it could be got to the right place at the right time. There was
never a requirement to produce accounting information from this
so values and certainly reliable values quite often were not in
the system. We have had a lot of difficulty in the process of
valuing hundreds of thousands of items reliably and well enough
to pass audit. It is certainly the case at the moment that all
three of the Service systems which are now all owned by the Defence
Logistics Organisation are not producing sufficiently reliable
information to pass audit. They would not get a clean certificate
from an auditor. We have had some problems with some of our fixed
assets partly because in the Army's case a lot of them are held
in the same sort of system as the stocks and the same problems
apply. The Quartermaster General historically has collected information
on the existence of a tank but the computers did not record the
value attached to that tank or the depreciation to date so creating
that information anew has proved difficult. We had some problems
with the evaluation of some of our aircraft. That was more to
do with the fact that a lot of aircraft are very old and we simply
could not find documents to prove what we paid for them so we
had a valuer to assess what that value should be. That process
took too long so in the accounts the figures were unreliable.
We think we have solved that problem and so the current year's
figure will be a lot better.
429. How confident are you that these issues
are going to be resolved in time so as not to delay the implementation
of RAB?
(Mr Balmer) That is exactly the issue we are now debating.
Clearly we are not yet producing sufficiently reliable figures.
Our 1998/99 accounts are not good enough to rely on either for
our own purposes to manage by or for Parliament to rely on as
a record of what we have done. The question is are we making sufficient
progress sufficiently quickly so that by 2001/02, which is the
first year we would be asking Parliament to vote us money on this
basis and they rely on our accounts on this basis, for the figures
to be reliable enough by that date? That is a judgment we are
having to reach now and clearly there are some areas where we
will have some difficulty, like the stocks area, in being able
to guarantee that we will have a series of statements which present
a true and fair view. We also have as part of trigger point 3
to be able to convince the Treasury not just by 2001/02 that our
accounts will be sound but that the figures we are about to feed
into the spending review for 2000 which is getting under way now
are themselves reliable enough for the Government to make judgments
about our future budget. That is more difficult because that is
happening now and we are having to use the information we have
got. It is those two judgments which the accounting officer and
I have to form during the course of this week as to how much progress
we are making.
430. What level of detail can we expect to see
in the costed outputs presented in schedule 5?
(Mr Balmer) Schedule 5 which is part of the accounts
is at the moment a single page because we have only identified
three main outputs of defence. One is department of state activities,
one is producing military capabilities which is far and away most
of what we do, and then the third output is procurement of new
equipment. Because there are only three broad headings there are
only three figures so the page is not very long and it is not
a terribly helpful set of information at this stage to inform
Parliament or the public about the cost of our outputs. What we
will be trying to do over the next several years is gradually
to improve our own understanding of the costs of our outputs,
to move to the position of having understood the cost of our inputs
better by being able to produce decent resource accounts for them,
we can attach that information to outputs and therefore generate
meaningful figures not just for the total military capability
but individual component elements of it, frontline force elements,
battalions, brigades, squadrons of aircraft, ships and so on.
I think it will be a year or two yet before we get to the stage
of being able to produce reliable figures on that basis. What
will appear on schedule 5 of the accounts is really rather thin.
431. Will the accounts, or other documents such
as the annual performance report, present costed information for
each force element?
(Mr Balmer) Not yet. Internally we hope to be able
to attach costs to significant force elements although not to
every single one. I do not think it would ever be worth our while
attaching costs to every individual company. Whether we do it
at battalion level or brigade level is a debate we must have internally
of what is the most useful management information to collect.
We will then have to spend some years yet perfecting our process
for identifying what the cost of those force elements genuinely
is in an auditable fashion, in a fashion where we are confident
the figures are valid and where the National Audit Office would
be prepared to take a view that we have done that process properly.
It is something that will evolve over the next three to four years.
Chairman
432. Will we get this information as well, if
we press you?
(Mr Balmer) Yes. The output and performance analysis
which will underpin these accounts is something which we intend
to publish. Thinking in the Treasury and in government generally
is still evolving on the format for those documents and the nature
of our public service agreement is likely to change compared to
the first example we had so that we can get a more comprehensive
coverage on the outputs we are generating. It would certainly
be our intention to share that with this Committee and I hope
with Parliament and the public more generally.
Mr Hood
433. Just one final question on the military
capabilities costs which are going to be provided aggregated to
selected service levels. Is that the separate aggregate figures
only for each of the Royal Navy, Army and RAF?
(Mr Balmer) At the moment schedule 5 simply produces
a single figure for defence capability in total. It does not break
it down between the three Services. I think over the next year
or two we want to evolve arrangements, as I have described, where
we can identify the best way of collecting information. That may
be by service or it may be better to look below the level of the
whole service and identify capability areas such as anti-submarine
warfare or strategic deployment and collect information that way.
We have not yet done the work necessary to decide how best to
collect that information and present it.
Mr Hepburn
434. When the Committee last took evidence last
year on the MoD's Performance Report for 1997/98 we were told
that information on Output and Performance Analyses would be included
in future reports. Obviously it is not included this time. Can
you tell us when we will get that information?
(Mr Balmer) What we have tried to do in these two
documents is gradually move forward our ability to produce output
based information. As you were saying at the start of the session,
Chairman, these documents are not wonderfully helpful partly because
the timing of the production of the annual Defence White Paper
was affected, first of all, by the Kosovo operations and then
by Lord Robertson's departure. In parallel we therefore thought
we would produce our Performance Report and attach it to give
more detail so the Performance Report has more in it about our
performance and there is more information. What we have still
not produced is detailed Output and Performance Analysis across
the whole range of defence. We are not yet able to do that in
any reliable way but we will gradually improve our coverage here
and, as I have described, I think the way in which we are about
to engage in debate with the Treasury over the next public service
agreement to follow on from the existing agreement will help shape
the way in which we set objectives in public terms and then measure
performance against them. This is an evolving process where we
are trying to get both better internal and external presentation
but it will take some years before we are producing reliable and
useful and good information across all aspects of defence.
Chairman
435. Perhaps in your Performance report you
could have an additional section, recommendations of the Defence
Committee accepted in full, in part, totally ignored, kicked into
touch or glossed over. Would you give some consideration to that?
(Mr Balmer) I will, Chairman!
Chairman: It will be a fairly short section.
Mr Blunt: It will be rather a long section,
I fear.
Chairman: The honour of the last question
goes to Mr Cohen.
Mr Cohen
436. Most of the questions have been asked anyway
quite rightly but while you are trying to get the Resource Accounting
and Budgeting proposals implemented, the administrative procedure
is not holding still. I understand that the Treasury is trying
to implement some new service delivery agreements again in relation
to outputs. How is that affecting your approach? Has that had
an impact?
(Mr Balmer) Yes, as I have described, the thought
process both in the Treasury and departments generally is evolving.
None of us has attempted to write a precise blueprint of the perfect
way of presenting this information so when the RAB process began
we envisaged an Output and Performance Analysis statement which
might be attached to the accounts even if it did not formally
form part of them. In a sense that was overtaken by the creation
of the public service agreement which flowed from the Comprehensive
Spending Review of 1998. The concept of the public service agreement
has now taken hold as a much more positive one. The thinking which
is going on at the moment suggests that we might divide that into
two broad types, the short public service agreement and then perhaps
supported by a service delivery agreement and other terms being
used to provide a broader coverage on the outputs we are generating.
If we can produce those sorts of models in a meaningful way they
replace the need for the sort of Output and Performance Analyses
which were originally envisaged as part of RAB. It is not an additional
set of work we are looking at. It is an evolution and in some
ways a replacement set of work but in parallel we still have to
grind on with being able to produce the figures which will support
whatever sort of agreement we have.
437. Are you seeing a discernable change, a
discernable impact amongst yourself and in your department and
those of the top budget holders as a result of RAB coming on stream?
(Mr Balmer) Yes, without a doubt. What I cannot yet
claim is that people are able to use all the information available
for management purposes because, as I described, the figures are
not yet reliable enough. But there is lots of anecdotal evidence
around of the sorts of issues which people have noticed for the
first time by going through the process of identifying assets
and evaluating them. Information which people had previously not
had about stock consumption is now available for those who are
consuming stock. Even though the figures themselves might not
be reliable enough for audit nonetheless it is having very beneficial
effects on those who are thinking about consumption of these things.
We have examples of budget holders at quite senior level required
to be part of the accounting process now and required to sign
off their accounts who because they are getting engaged in debate
and discussion with some finance staff they might not previously
have explored in this detail are themselves discovering things
about the programmes that they may not previously have known.
Just the generation of the underlying data is in itself having
a beneficial effect. Once we can produce reliable information
from that data then we expect to get a lot more benefit.
Mr Cohen: Thank you.
Chairman: When the MoD are really happy
about something that is the time we should be on our guard! Mr
Balmer, gentlemen, thank you very much. I appreciate you coming
in especially because it involves you experiencing some discomfort.
We are deeply grateful to you all. Thank you very much.
10 See p. 164. Back
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