THE MOD'S PROGRESS IN IMPLEMENTING
RAB
29. Our predecessor Committee briefly reviewed progress
with RAB within the MoD in its report on Defence Spending,[64]
and looked to the next Committee to consider the new style reporting
documents, including Resource Estimates. When the current Committee
was appointed in 1997, we determined to monitor closely the development
of RAB in the MoD (known internally as 'Project Capital'), with
a view to utilising fully the new data on costs and performance
in scrutinising the performance of the Department. We have pursued
developments in a number of ways, including—
- briefings and discussions with the MoD; on 28
October 1998 on the MoD's progress generally, and on 30 March
1999 on the structure of the new Estimates.
- addressing RAB issues as part of our regular
scrutiny of the MoD's reporting documents, including evidence
taken on the 1997-98 Ministry of Defence Performance Report,
and indeed now also on its 1998-99 Report.
30. This has permitted us to review the new structure
of the MoD's Estimates. As with other government departments,
the MoD's Estimates will follow a different format under RAB.
They will include not only a new 'resource requirement' but also
a net 'cash requirement' with separate information on capital
expenditure.[65]
In the MoD, however, the new format also reflects other changes
affecting the Department. With changes arising from the Strategic
Defence Review, from 1999-2000 the Estimates have had fewer subheads,
or 'lines', than before. The three logistics commands, each with
their own subhead, are being replaced by a single Defence Logistics
Organisation. A single figure now covers the merged 2nd Permanent
Under-Secretary and Vice Chief of the Defence Staff, but the Chief
of Joint Operations has been being upgraded as a Top Level Budget
command, with its own account line. Lastly, the upheaval caused
by the reorganisation of the Procurement Executive and its re-establishment
as the Defence Procurement Agency, along with the introduction
of the smart procurement initiative (paragraph 129), means that
seven separate areas of equipment procurement expenditure have
been lumped together.[66]
However, capital expenditure information on the face of the Resource
Estimates will be supported by new information in capital expenditure
plans,[67]
and we were told that 'information on financial plans [for the
equipment programme] will be available from other sources, and
that overall there will be no loss of visibility of the Department's
spending plans'.[68]
We will be looking carefully to see whether this assertion
proves correct.
31. The Treasury is following a staged approach for
monitoring progress with RAB implementation across Whitehall,
taking stock at four key 'trigger points':
- Trigger-One: This
involved the Treasury receiving from departments a meaningful
illustrative Resource Account, a departmental Resource Accounting
Manual, confirmation from a department's Principal Finance Officer
about the adequacy of accounting systems (including the NAO's
preliminary view), and a project implementation plan.
- Trigger-Two: This
involved an assessment of departments' opening balance sheets
for 1999-2000.
- Trigger-Three: The
audit by the NAO of departments' dry-run 1998-99 Resource Accounts,
upon which departments' principal finance officers will provide
the Treasury with a 'letter of assurance' about progress in implementing
RAB.
- Trigger-Four: This
will involve 'shadow' Resource Estimates being produced for 2000-01
in May 2000, which will be made available for scrutiny by departmental
select committees.
Trigger-Four was introduced following concerns by
the Committee of Public Accounts that the phasing out of the existing
controls over cash Supply should not take place before there were
equally effective or better arrangements to replace them[69]
and to head-off the prospect raised by that Committee of the Government
having to allow a longer period of dual-running of the old and
new procedures. By July this year, the Treasury will make their
final assessment of whether resource-based Estimates are sufficiently
robust to allow cash-based Estimates to be dispensed with, and
to make a firm commitment to proceed with the next Spending Review
(for the three year period beginning 2001-02) on a resource basis
for the first time.
32. So far, most departments have been able to meet
the 'trigger points'. The MoD, in common with all departments,
satisfied the first two trigger points. We raised the MoD's progress
with trigger-three—the production of dry-run Resource Accounts
for 1998-99—with the Department's Principal Finance Officer
on 12 January 2000. He told us that the MoD were then in the process
of producing its report to the Treasury on the basis of the NAO's
audit of the dry-run Resource Account.[70]
He drew attention to accounting difficulties in regard to stocks
and fixed assets,[71]
and that overall—
We are not yet producing
sufficiently reliable figures. Our 1998-99 accounts are not good
enough to rely on, either for our own [management] purposes 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 ... That is a judgment
we are having to reach now and clearly there are some areas where
we will have some difficulty ... [in guaranteeing] that we will
have a series of statements which present a true and fair view.
We also have ... to be able to convince the Treasury, not just
that our accounts will be sound by 2001-02, but that the figures
we are about to feed into the spending review for 2000 ... are
themselves reliable enough for the Government to make judgments
about our future budget.[72]
33. Since we took that evidence, the Treasury have
submitted their latest progress report, drawing together trigger-three
results across Whitehall.[73]
They state that—
The vast majority of departments
have succeeded in providing clear cut evidence that they have
met the third trigger point criteria ... there is no overriding
reason to conclude at this stage that completion of the RAB project
in accordance with the planned timetable is not deliverable.[74]
In regard to the MoD, the Treasury concluded that—
The NAO's examination ...
found that major problems remain... in validating accounting information
for stock from the department's existing supply systems, which
form a significant proportion of the Department's accounts. There
are also difficulties with establishing full audit trails in some
areas, and with valuations of certain categories of fighting equipment.
The MoD has put in place a comprehensive strategy to deal with
these issues, and the Treasury considers the Department's training
plan to be appropriate for supporting this work ... The MoD has
not met all of the TP3 criteria, and [the Treasury] will keep
the situation under review in the light of progress made on the
1999-2000 accounts.[75]
34. At the trigger-one stage, the NAO had expressed
concerns about the MoD's ability to produce the Schedule-5 statement,[76]
and for 1998-99 the MoD used an interim system of apportioning
costs to the departmental outputs.[77]
The MoD expected to make progress in 1999-2000 towards an integrated
output costing system, and was producing resource-based internal
plans for 2000-01 in anticipation of the resource-based Spending
Review for the following year.[78]
They also told us, however, that while it will ultimately be able
to produce costs of force elements (such as frigates, aircraft
squadrons or armoured brigades), the published Schedule-5 statements
would only show three separate cost figures: for military capability,
department of state activities and for procurement of new equipment.[79]
They conceded that it will therefore "not be a terribly helpful
set of information at this stage, for Parliament or the public".[80]
This is a disappointing admission. The MoD's PFO thought
'it will be a year or two yet before we are ... able to produce
reliable figures on the basis [of the component elements of military
capability—individual frontline force elements]'.[81]
The level of such force elements to which costs will ultimately
be attached, whether this will be at battalion level or brigade
level for example, will evolve over the next "three to four
years".[82]
35. We explored the link between the MoD's OPAs and
SPAs when we took evidence from the Department's Principal Finance
Officer on the MoD's 1997-98 Performance Report.[83]
It was clear at that time that much work still remained to be
done in terms of defining the basis on which the MoD's performance
would be measured. The Department told us then that it would be
refining the PSA targets and the OPA measures over the coming
months, and it would incorporate the OPAs into the Departmental
Performance Report published each autumn.[84]
We were told last month that—
What we have still not produced
is detailed Output and Performance Analyses 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 ... 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, useful and good information across all aspects of defence.[85]
When we asked about the eventual availability of
costed force elements, the PFO told us—
The Output and Performance
Analysis, which will underpin these accounts, ... we intend to
publish. Thinking in the Treasury and in government generally
is still evolving on the format for those documents. 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.[86]
36. We recognise that OPAs are still developing,
and that this may take some time. Clearly these are an important
component of the improved accountability that RAB seeks to deliver,
and they must be published in due course, along with the Department's
performance against these targets. More immediately, however,
we call on the MoD to provide more information on its emerging
OPA measures, and report progress in developing them more generally,
in the Department's main reporting documents. There is some anticipation
that information on the costs of defence aims could provide a
new insight into the Department's activities, and a statement
with only three figures (and only one figure for military capability)
will disappoint. The MoD should expand that information as much,
and as soon, as possible.
37. The proponents of RAB claim many benefits will
arise from its introduction across all government accounting.
Some scepticism has been expressed about these advantages, and
in the light of the high costs of its introduction (consultancy
fees alone for the MoD in the last three years amounted to £80
million[87])
it will need to show some dramatic results to justify these. While
the potential benefits of RAB for management decision-making and
for departments' accountability have been relatively well rehearsed,
there may be wider implications which have yet to be fully addressed.
Under accruals accounting, capital expenditure will be a less
useful lever for adjusting expenditures to stay within budget,
for example, and in-year management attention will be likely to
shift to changing activity levels. If 'customer' budget-holders
within the Department (frontline commands, for example) are made
answerable for the costs of services 'bought' from 'supplier'
commands (in the logistics and personnel disciplines), there may
be pressure to seek alternative sources if the value of those
services is perceived to be less than their cost. In time, there
may be pressure to give greater importance to the horizontal customer/supplier
links across the MoD than to existing functional chains of commands
that run vertically through the current budget-holder hierarchies.
Ultimately, this might conceivably lead to the top management
of the MoD focussing primarily on front-line commands, leaving
those areas to deal with the other commands in the support disciplines.
Perhaps more significantly, RAB data could highlight more clearly,
both within the Department and for the public at large, the costs
of particular military capabilities, adding a sharper edge to
debates on what the UK can or should afford to do. Resource Accounting
will flag up the perhaps significantly greater cost of running
new equipment and weapon systems compared with those they will
replace, and in making the case for acquiring new equipment the
MoD may have to be more confident and persuasive about how the
operational value of having such improvements would exceed
their monetary cost.[88]
Some of these challenges may not materialise or else not present
the MoD with significant consequences, but they will have to be
recognised and addressed in a timely way. If the MoD does not,
there is a danger that RAB might prove a burden for the Department
rather than the invaluable management tool it can and should be.
38. We now turn to an examination of what this year's
annual reporting cycle tells us about the MoD's performance and
achievements since the SDR was published in July 1998.
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