Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 40 - 59)




  40. Do not bank on it, Mr Tebbit, we have not given up yet!
  (Mr Tebbit) I thought I would chance my luck there!

  41. You must tell the Baroness that we have not forgotten the debate we are having.
  (Mr Tebbit) The only point I would like to make about DERA is that it is not dependent on simply getting in £250 million. We are doing the privatisation, the PPP of DERA for its own sake. The timing is not critical in relation to the budget. If it takes a bit longer, I expect the Treasury to be understanding.

  42. By 2010 will be perfectly acceptable to us.
  (Mr Tebbit) It happens to be one of our key targets, but there we are.

Mr Cann

  43. Can I ask four brief but I think practical questions. Just coming back to something earlier, we have got here a list of your expenditure in given years. We have got an original cash limit, an adjustment Spring Supplementary and then a revised cash limit. I was in local government for 12 years as a local councillor. I have never heard of a revised cash limit. Can you tell me what that is? A cash limit to me was always a cash limit.
  (Mr Tebbit) We do have to take on additional monies for operations that are unforeseen. If we have to go to a war or something then it has to be taken into the budget.

  44. In 1997-98 it was Bosnia and that produced another £13 million, taking off the five from the previous year, but you have got a revised cash limit which gives you a £225 million surplus. I do not understand the mechanism. I thought a cash limit was a cash limit.
  (Mr Balmer) A cash limit at the start of the year is what it says it is. During the course of the year the Government sometimes gives us more money and increases our cash limit.

  45. That is from the contingency fund?
  (Mr Balmer) It comes from the Reserve and the areas in which it has happened in recent years is, first of all, extra money for Bosnia and Kosovo and, secondly, money for underspend that has been carried forward. That takes the form of an increase in our cash limit so that we can spend it in the next year.

  46. That produced an underspend of £225 million. I do not understand that.
  (Mr Tebbit) It did not produce an underspend. It is two separate things. You revise the cash limit to take on in your budget things that happen during the year. At the end of the year it is still possible to underspend because, as I explained earlier, we have to do end year management so that we do not overspend and, as I say, with £23 billion expenditure, that sort of massaging becomes necessary. It has got nothing to do with the level of the programme.

  47. In local government you spend it all in March on the roads.
  (Mr Tebbit) We do not do that sort of thing. The Treasury looks very carefully to make sure there is not a surge in March.

  48. Can I go on to the three questions which I am supposed to be asking you. Firstly, you have got an increase in real terms through to 2003-04 on capital spending of about 11%, and a reduction in current expenditure of 2% in real terms. Can you tell me what that capital expenditure is going to be spent on? Are we talking about ships and planes here or are we talking about IT communications, or the beefs we have had from people we go and see in places like Bosnia?
  (Mr Tebbit) You are talking about all of those things. You are also talking about housing.

  49. What is the priority?
  (Mr Tebbit) The priority is equipment. We are in the peak period of delivery for big new equipments and Eurofighter, for example, will be at its high period of delivery at that stage, so will assault ships, so will Apache Attack Helicopters. It just happens that that coincides with the very high delivery rate from equipment that is already proven and is being churned out at the factories. In addition to that, we do have quite a lot of IT expenditure in that period as the Defence Logistics Organisation "spends to save" in terms of more efficient supply systems and it will be a period where we are doing quite a lot to our estate, particularly in the housing area.

  50. What about spares? We read so many horror stories about spares on this Committee.
  (Mr Balmer) Spares purchasing comes from the resource budget area. One of the difficulties we have in presenting the figures at the moment is that we are in the process of change to resource accounting, and our resource accounting purchasing of spares does not feature formally in the resource budget. That scores the consumption of spares as they are used, so formally within these figures you cannot find the money we will spend on buying new spares. You can define the amount of money you will spend on consuming spares, and in the capital budget line you will find the money you are spending on buying new capital assets.

  51. When we had to make our direct labour organisation efficient because we were forced to—it was good really—we found we had got spares for things that had not been used for 40 years. Have you had a good comb out?
  (Mr Tebbit) We found the same. SDR recommendations get rid of £2.2 billion worth of spares holding. That is going to be finished by 1 April this year. We have got an awful lot of stuff we do not need and do not use. Getting better at supporting equipment does not necessarily mean buying more spares. When we get a more transparent supply system we will know what we can get from industry, when we know how long it will take—

  52. Next day delivery, that sort of stuff?
  (Mr Tebbit) Exactly. We are doing all of that type of thing. When you said spares, we will not be spending much more on spares because it will be offset by getting rid of an awful lot of unnecessary spares in our inventory that we have at present and getting more efficient in having a more transparent system through from the factory to the main spares depot to the front-line. The problem we have at present is we go to war with the right number of spares but we often over-insure because people do not know how long they are going to have to wait to get them.

  53. It is not very easy in Kuwait.
  (Mr Tebbit) We also have not known previously the cost of those spares. We know how many we have and where they are, but not how much they cost because we have not been using resource accounting.

  54. You are not quite up to Tesco's standard?
  (Mr Tebbit) We are getting there, but it does cost a bit of money with the investment programme.

  55. May I move on. From our figures, but I assume we got them from you basically—next financial year there is a capital increase of 2.6% in real terms, the next year 1.4% in real terms, and then a jump in the year after—2003-04 of 6.7%. Can I assume that is when the main capital expenditure starts to happen?
  (Mr Tebbit) I would not make it quite such a direct link as that. It is not quite such a sharp cliff as that. We have limited ability to move money between the capital expenditure programme and the operating plan, so there is some degree of flexibility.

  56. Is the operating plan revenue?
  (Mr Tebbit) Operating costs, activity, operations, that sort of thing. We have some limited ability. So I would not want you to think it was quite such a sharp thing as that.

  57. This moves me on to the last question. As I said, I am from a local government background. I found that capital expenditure automatically means increased revenue expenditure one way or another. Two new carriers with two new air groups on them, 40 or 50 planes, compared to the Invincible class, with one air group, would imply to me a significant increase in revenue costs of operating the comparative groups, and yet you are proposing under what we understand an increase in capital terms of 11% a decrease in revenue terms of 2%. How do you square that?
  (Mr Tebbit) I know there is some scepticism but we are getting more efficient all the time in our operations, in the way we work, in our general performance, in the efficiencies we are generating, and we will expect that to be continuing. We do tend to go for equipment that is less labour-intensive than previous generations, so it does follow that the new carrier will need half as many people required for it as the old, so those trends do also come into effect.

  58. When we get you back in 2003-04 and we have got a revised cash limit, what is it going to say?
  (Mr Tebbit) It will look a little different, obviously, because it is a plan and it changes as you move down the line. I would still expect us to have this big investment strategy going on in line with government policy. This is, after all, the Chancellor's' investment plan as well.

  Chairman: We have learnt more about Ipswich than the MoD in the last ten minutes. Can we keep away from our constituencies and I promise to join in on that. Julian Brazier?

Mr Brazier

  59. I will ask you the first two questions together as we are fairly short of time. What efficiency percentage are you expecting to achieve in the current year and next year? As a backdrop to that question we were told all along you had very challenging efficiency targets—and we certainly thought they were challenging—but you have in the past few years easily achieved them. What is the reason for that?
  (Mr Tebbit) The efficiency figure stemming from the SDR is 3%. Next year it will still be 3%. That is the efficiency challenge. That does not mean to say it is cut from the budget, it is just that the budget levels assume that we will be making those efficiencies, and that is about fair. We do not go about getting it on a crude basis across the board. Some bits of the organisation generate higher efficiencies and some much lower. The front line generates lower efficiencies and places like the Defence Logistics Organisation, which is a key area of our modernisation and transformation strategy, has a higher target attached to it. Why is it that we do so well with efficiencies and yet we are still very tight in terms of budgets? I think the problem is two-fold. Firstly, they are not net efficiencies. It does not take into account rising pressures in other parts of the budget which offset these. Secondly, I have to say that I am concerned that our efficiency drive has tended to get a little detached from the output end of the organisation.

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