Select Committee on Defence Written Evidence

Letter from the Secretary of State for Defence on the Structure of MoD Main Supply Estimates 1999-2000

  I am writing to bring you up to date on recent work in my Department on the Accounting Officer arrangements for Defence Votes and the structure of Main Supply Estimates for 1999-2000. My officials have reached agreement with the Treasury that from 1 April 1999 the Permanent Secretary (PUS) will be the Department's sole Treasury-appointed Accounting Officer and that the number of Defence Votes will be reduced from four to two. These changes, which are explained in detail below, are aimed at facilitating the introduction of key Strategic Defence Review (SDR) initiatives and preparing the way for the introduction of Resource Accounting and Budgeting (RAB). As a result of these changes there will, in some areas, most particularly the equipment programme, be a reduction in the breakdown of detailed expenditure information shown on the face of the Vote. I wish to assure you and your colleagues on the Committee that information on financial plans in these areas will be available from other sources and that overall there will be no loss of visibility of the Department's spending plans.

THE INTRODUCTION OF RESOURCE ACCOUNTING AND BUDGETING

  With the formal introduction of RAB only two years away we have been giving consideration to the arrangements for Departmental Accounting Officers. The Department currently has two Treasury appointed Accounting Officers, PUS and the Chief of Defence Procurement. In addition to his overall responsibilities as Principal Accounting Officer, the PUS accounts for Vote 1 (operating and support costs) and Vote 4 (Armed Forces retired pay, pensions, etc). CDP is responsible for Vote 2 (logistics services) and Vote 3 (systems procurement and research).

  Under RAB, the way in which Departments seek the authority of Parliament for resources, and report on how they are used, will change. Instead of approving provision Vote by Vote, Parliament will vote two expenditure totals for each Department: the forecast annual resources budget, or annual operating costs of the department, which will include depreciation and a capital charge; and the related net cash requirement, which will take account of the cash consequences of the procurement of new capital items. The Department's capital expenditure budget will also be visible on the face of the resource-based Supply Estimates and will be supported by new information contained in capital expenditure plans. It is expected that the Treasury will introduce rules about viring between capital expenditure and the resource budget.

  We have concluded that for defence the logical approach under these new arrangements will be to submit a single Request for Resources (RfR) to reflect the Defence Block Budget, rather than to replicate the existing division into three separate Votes (Votes 1, 2 and 3). A separate RfR would be submitted to cover expenditure on the current Vote 4. It follows from this that when the first RfRs are presented to Parliament, in early 2001, the most appropriate Accounting Officer for each RfR would be the PUS.

SDR INITIATIVES

  At the same time, we have been considering the implications for the current Accounting Officer arrangements and the structure of Main Supply Estimates 1999-2000 of the important organisational changes announced in the SDR White Paper. Chief amongst these are: the elevation to Top Level Budget (TLB) holder status for the Chief of Joint Operations (CJO; currently a Higher Level Budget (HLB) holder within the Vice Chief of the Defence Staff (VCDS) TLB); the creation of the Chief of Defence Logistics (CDL) to take charge of all expenditure on logistic services currently shown on Vote 2; and the transfer of the Procurement Executive (PE) to Agency status. It has also been decided to amalgamate the VCDS TLB with the 2nd Permanent Under Secretary of State (2nd PUS) TLB to form a single central budget area under the 2nd PUS.

IMPLICATIONS FOR ACCOUNTING OFFICER ARRANGEMENTS AND MAIN SUPPLY ESTIMATES

  We have concluded that with the introduction of these major initiatives the current Accounting Officer arrangements would no longer be appropriate. The appointment of the CDL and related changes have removed the case for CDP remaining Accounting Officer for the logistics area (currently Vote 2). As Chief Executive of the new Defence Procurement Agency, CDP will have responsibilities analogous to those of Accounting Officers. Removal of CDP's Additional Accounting Officer delegations for the expenditure of the Agency is therefore a logical consequence of his becoming Chief Executive. My officials have agreed with Treasury officials that the move to a single Treasury-appointed Accounting Officer should take place on 1 April 1999. This paves the way for a major rationalisation and simplification of Defence Votes 1, 2 and 3. For 1999-2000 these three Votes will be replaced by a single Vote and the total number of subheads will be reduced. I attach a mock-up of what the single Vote would look like (further work is required on various aspects).[7] A consequence of these changes will be to reduce the number of Vote Cash Limits from four (the Defence Block Budget and Votes 1, 2 and 3 individually) to one. The Department will, however, continue to be subject to an operating cost control limit.

  The new Vote structure gives clear visibility to the key SDR initiatives. The creation of the CJO TLB (subhead E on the mock-up) and the amalgamation of the VCDS and 2nd PUS TLBs are straightforward. Expenditure by the single Service heads of logistics, the Chief of Fleet Support, the Quartermaster General and the Air Officer Commanding-in-Chief RAF Logistics Command, which are currently shown separately on Vote 2, will be drawn together under the new CDL subhead F. The creation of the new Joint logistics organisation will involve considerable structural change during the course of 1999-2000 and we do not expect to be in a position to provide a more detailed breakdown of expenditure by the time Main Estimates drafts are finalised.

  The transfer of the PE to Agency status and the contemporaneous introduction of the Smart Procurement Initiative are also the cause of considerable upheaval to current organisational arrangements. The new structures will not be agreed until after the deadline for finalising changes to Estimates for the next financial year. To facilitate these important developments we are therefore pulling the entire equipment procurement budget currently shown under Vote 3 subheads C to I together under a single defence systems procurement subhead in the new Vote. I realise that this last change will reduce visibility of the procurement budget but would point out that the new Defence Procurement Agency will publish a variety of documents, such as a Framework Document, Corporate Plans and, in due course, annual accounts, which will significantly increase the amount of financial information available for scrutiny. We are also considering including an additional breakdown of procurement expenditure in the 1999 MOD Departmental Report which will be published next spring alongside the Estimates if this information is available in time to meet publication schedules. If it is not, we will make arrangements for a supplementary report to the Committee.

  These changes to the structure of Main Supply Estimates for 1999-2000 do not affect the current Vote 4, which will continue to be dealt with separately.

CONCLUSION

  These are important changes aimed at smoothing the way for the introduction of RAB whilst at the same time bringing cash Estimates into line with our evolving post-SDR organisational structure. They will also provide much needed flexibility to facilitate the introduction of major changes in organisation and working practices, and they indicate clearly and publicly that we are making progress with the implementation of important SDR decisions. My Principal Finance Officer, Colin Balmer, will be approaching you shortly to offer more detailed briefing on how the Supply Estimates will change under RAB. In the meantime, please let me know if you would like further information on the impact of these changes.

2 February 1999

DEFENCE: OPERATIONAL AND SUPPORT COSTS; LOGISTIC SERVICES; AND SYSTEMS PROCUREMENT AND RESEARCH

PART I  £ . . .

  Amount required in the year ending 31 March 2000 for expenditure by the Ministry of Defence on personnel costs etc of the armed forces and their reserves and cadet forces, etc; personnel costs etc of Defence Ministers and of civilian staff employed by the Ministry of Defence; movements; charter of ships; logistics services for the armed forces; repair, maintenance, stores and supply services; associated capital facilities and works; contractors' redundancy costs; plant and machinery; expenditure by the Defence Procurement Agency in operating its headquarters and establishments and for its common services; procurement including development and production of equipment and weapon systems for the armed forces; purchases for sale abroad; research etc by contract; sundry other procurement services including those on repayment terms; lands and building; works services; contingent liabilities; services provided by other Government departments; sundry services, subscriptions, grants, and other payments including those abroad such as assistance to Foreign and Commonwealth Governments for defence related purposes; and set-up costs and loans to trading funds.

The Ministry of Defence will account for this Vote.

	£
Net total
Allocated in the Vote on Account (HC 1134)	10,007,988,000
Balance to complete
*In the Vote on Account, this Vote was entitled Defence: operational and support costs. This Vote also includes the services shown in the Vote on Account as Class VI, Vote 2 (Defence: logistic services) and Class VI, Vote 3 (Defence: systems procurement and research).

PART II  SUBHEAD DETAIL

Direct Expenditure			Grants and transfers					£'000
1 Running Costs	2 Other current	3 Capital	4 Current	5 Capital	Gross total	Z Approp-riations in aid	Net total	Total net provision 1998-99	Net outturn 1997-98
Departmental expenditure in Departmental Expenditure Limits
Central government's own expenditure
A.	Commander-in-Chief Fleet
B.	General Officer Commanding (Northern Ireland)
C.	Commander-in-Chief Land Command
D.	Air Officer Commanding-in-Chief RAF Strike Command
E.	Chief of Joint Operations
F.	Chief of Defence Logistics
G.	2nd Sea Lord/Commander-in-Chief Naval Home Command
H.	Adjutant General (Personnel and Training Command)
I.	Air Officer Commanding-in-Chief RAF Personnel and Training Command
J.	2nd Permanent Under Secretary of State
K.	Defence Procurement Agency operating costs
L.	Defence systems procurement
M.	Major Customers' Research Budgets
N.	Loans and grants to and repayments from the Hydrographic Office Defence Agency
O.	Loans and grants to and repayment from the Meteorological Office
P.	Loans and grants to and repayment from DERA Sale of Married Quarters
Other expenditure outside Departmental Expenditure Limits
Q.	Chief of Defence Logistics
R.	2nd Permanent Under Secretary of State
Total	*
* Amount that may be applied as appropriations in aid in addition to the net total, arising from the provision of medical, education, training, administrative, accommodation, works, fuel and other support and technical services and goods and sales, loans, hire or disposal of sea, land and air systems, associated equipment, spares and other stores to exchequer and non-exchequer customers and other governments; sales and disposal of surpluses including land, buildings			and equipment; recoveries of rents and other charges for the use of MOD facilities; refunds of overpayments in prior years; the recovery of departmental expenses and recoveries and refunds in respect of services provided by personnel and for personnel on loan; receipts from the CAA; receipts from Portsmouth Heritage Trust; repayments and recoveries from service and civilian personnel including purchase of discharge, pension and pay			adjustment; receipts and refunds from the European Community; receipts and refunds from NATO and other Governments, including recoveries for services provided for US forces; capital assistance rentals; refunds and receipts from contractors; receipts and refunds from various research and development activities, levies and commercial exploitation agreements; instalments in repayment of working capital loans; recovery of input VAT.

PART III  EXTRA RECEIPTS PAYABLE TO THE CONSOLIDATED FUND£'000

In addition to appropriations in aid there are the following estimated receipts:

Mainly accrued interest: on short term bank deposits, net gain on foreign currencyexchange rate transactions, accrued interest on advances held by an agency or a foreign government forcontractual reasons, interest receivable on trading fund loans, and receipts arising from the sale of certain assets etc.

Sale of Married Quarters

Total

Notes:
	The following subheads contain provision sought under the sole authority of Part I of the Confirming Appropriation Act:
		£'000
F2	Grant in aid to the Scott Polar Research Institute
G2	Royal Navy and Royal Marine Sports Control Board
H2	Army Sports Control Board
I2	RAF Sports Control Board
J2	The Royal British Legion
J4	Subscription to the European Meteorological Satellite Programme
J4	Subscription to the Association of the Army Chiefs of Staff of France, Italy, Spain, the Netherlands, Germany, Belgium, United Kingdom and Luxembourg (FINABEL)
K2	Contributions to Export Credit Guarantee Department (ECGD) in the connection with credit arrangements for certain defence export sales

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7   See p. 180. Back

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Prepared 10 February 2000