Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 120 - 139)



  120. The largest element on your balance sheet are fixed assets, there is also a lot of subjective valuation, which changes all of the time.
  (Mr Tebbit) Even somebody holding defence land will now be paying a capital charge on the land holding and he will have a new incentive to get rid of it or use it to the full. We are already finding budget holders' behaviour is changing and they are actively managing their budgets in a way they never bothered with in the past.

  121. That is why we got rid of so few of the TA training centres!
  (Mr Tebbit) Last year we realised £289 million worth of land disposal, it is the highest we have ever done. Nothing important has gone.


  122. Two concepts this Committee will view in observing the Ministry of Defence in giving evidence to us, certainly a balanced score card is one, which at the moment shows 150 to nil score in favour of the Ministry of Defence. Certainly a disclaimed opinion is something that we will be able to use after every session. Maybe we should have a vote as to whether we can give an adverse opinion, a qualified opinion or even a disclaimed opinion.
  (Mr Tebbit) I thought it was my concept of "falling forwards", but I have to use it for the department because the amount of effort that has been put into this and the strain on our financial staff is huge.

  123. Did you anticipate this?
  (Mr Tebbit) Yes.

  124. When do you think the National Audit Office will give a high vote of confidence in the information provided?
  (Mr Tebbit) When you see the report from Sir John Bourne that in itself will be positive. Next year it is going to have to be right. We will have a big challenge to meet.

  125. Thank you. The last question on this, we pushed the MoD to introduce, as soon as is practical, output costs for the various aspects of military capabilities and for different force elements—tank regiments and aircraft squadrons. What is your latest estimate of when we may be likely to see such data? Will your accounting difficulties delay the production of such output costs?
  (Mr Tebbit) The accounting difficulties have delayed it. Putting it in place has meant four years of doing that rather than changing to an output. As you have heard, there are bits of the department that operate on output costing principles already. I ought to be asking the PFO, but I would be very disappointed if in three years' time we did not have a much clearer set of output costs in the organisation. The system we are using, which was delivered to time and cost, called Capital, has the capacity for doing this. It has another code on it for attaching expenditure to specific outputs. All we have to do is link it up and start using it. We cannot do it until we have this first transition done.

Mr Cohen

  126. I want to raise the issue of Smart Procurement. You have increased the amount that can be saved from projected savings from Smart Procurement.
  (Mr Tebbit) Yes and no.

  127. What is your estimate of the savings that will flow from Smart Procurement over ten years? I see from the Public Accounts Committee they say 60% comes from programme cost reduction, which is good. I presume 20% for switching to PFI and PPP in the long-term may not make such savings but 20% was from rescheduling when the expenditure will be incurred, that is about delays. How much of your savings or your projected savings come about from pushing some of those programmes beyond the 2008 date?
  (Mr Tebbit) You are right, we only have a transitional measure at the moment. There are three different things going on, the first is the simple measure. We have calculated that we will save £2 billion already in the period 1998 to 2008 as a financial planning exercise the integrated project teams have done in conjunction with our Central customer. That is a financial planning exercise. They have gone through the totality of what are management plans and saved that by looking at hundreds of individual either existing programmes or possible programmes that have yet to have ministerial approval. As you say, we have also looked at the phasing of the timing of payments and have said we can save £2 billion. That is clearly very broadbrush and that is not going to be enough. There is another target, which is this £750 million savings over a period of the settlement 2001 to 2004. That would look as if it is increasing the target by £50 million each year. Actually it is a slightly different figure, because it includes not just the equipment but also the associated overheads and supply and support costs. We are not absolutely clear, I am not absolutely clear what the precise relationship is between that target and the total target, but work to identify that £750 million over the three year period is pretty well advanced. I suspect we are two thirds of the way there.
  (Mr Gould) I would suspect something like that.
  (Mr Tebbit) Then there will be the third matter, which is a much more detailed analysis of the major programmes that we expect to have, the ones that are going to be spending over £100 million. There we are developing a more sophisticated model, looking at quality and reliability, as it were, as well as time and cost. We are working out that particular model and that will properly be a sophisticated way of measuring these gains. You are right, I would not pretend that what we have done so far is more than a transitional way of satisfying ourselves that we are getting a grip on these costs. The evidence is that we are. The historic bow wave from the past is still suggesting we have lots of cost and time overruns, but the future programme is looking very different. The current programme is also coming down.

  128. I think a lot of progress is being made and has been made, when do you think we will have this fuller analysis? When do you think that will be available for more public consumption or for the Committee's consumption?
  (Mr Gould) The DPA is working on it now. There are two answers. As the projects which are major contributors to the procurement savings in the acquisition phase—that is the £2 billion figure that came up in the SDR—move to contract then you can be confident that you are going to make cost savings, that happens progressively as we get down the road. One of the biggest ones that is in that £2 billion figure is the huge satellite communication system SKYNET 5, that is a generation satellite, where a large part of the savings come from moving to a PPP approach so that we are using a shared service. The provider company is taking on the risk and responsibility of the satellite launch, and all of those things. The current prospect is that we should be able to go to contract on that roundabout the end of this calender year. You can see that will then account for a very large part of the two billion. A lot of it comes in a large range of very small projects. The previous major project of the reporting system that the National Audit Office do and discuss with the Public Accounts Committee tend to concentrate on those 30 major projects. A lot of the £2 billion will come from projects that are outside those 30 major projects. What I am developing within the DPA now is a performance system that encompasses projects in the lower category, the 100 or so bigger projects, but outside the 30.

  129. If something goes wrong the accounting will take that into account so that we do not just get the savings that were successful, but it will be net?
  (Mr Tebbit) This is net. These figures are all net.
  (Mr Gould) If we do not achieve the target we will know.
  (Mr Tebbit) In some cases we are doing spend to save. In some areas we are increasing costs because we can see lifetime support and savings downstream. That is why we call it Smart Acquisition. It is the total life of the project, another phrase for you, Mr Chairman.

  Chairman: We do not mind you answering questions you are asked, but when you start answering questions you are about to be asked we resent it! Mr Viggers' question on the renaming of Smart Procurement has been eliminated.

Mr Gapes

  130. If we are quickening the acquisition process does that mean that you might have to put the brakes on to slow down individual projects to ensure that your procurement programme remains affordable and you do not get into a situation of achieving your procurement faster than you can pay for it?
  (Mr Tebbit) You are absolutely right. One of the reasons I know that Smart Procurement is working is because things are being delivered now to time and to cost. The bills are hitting us faster, which is as it should be, of course. Making adjustments and saying, "This is not going to come in this year", is a thing of the past. It is a bit of challenge. That is one of the key reasons why you see this increased investment profile in the budget, because we expect that to happen more over the next three years as we get better at this.

  131. The proportion of the MoD budget spent year-on-year on equipment will go up?
  (Mr Tebbit) Yes. In the short-term, yes. It will not happen in the long-term because the programme stays the same size and things are going to be coming in on time.

  132. Unless you have failure to meet your targets of recruiting and, therefore, you have less people to pay.
  (Mr Tebbit) Or there could be technical failures in industry. By and large, things are now coming through faster.

Mr Viggers

  133. In your comment on rebranding Smart Procurement you hinted at the point I wanted to probe, if your intention is to address the in-service support aspects of the initiative would you be devising new savings targets to reflect the savings and support costs through the life of the items?
  (Mr Tebbit) We already have them. We already have clear targets for the defence logistics organisation, including output targets. They have a very challenging target of reducing their output costs by 20% between now and, I think, 2005. That is beginning to show in the budget allocations they are getting. That is a very demanding target for them.
  (Mr Gould) The hard and stretched targets I referred to earlier are through life cost targets, they do include the support phase as well as the acquisition phase.

  134. You are aiming for savings from the customer supplier reviews that you are undertaking by the Equipment Capabilities customers. I assume you will be aiming for savings in that area, if there are savings resulting from a change in specification of the item being procured, would it be fair to take that as a saving? Will you be doing so?
  (Mr Tebbit) Yes. I see no reason why not. If the capability at the end is the level we require, increasingly we are not prescribing the detailed specification of equipment to industry, we are saying, this is the capability we want, this is the output we want to deliver, you can go away and you will have freedom to design the right solution for us. That is one of the principles of Smart Procurement actually. That is perfectly legitimate and, indeed, part and parcel of this process.

  135. Even though the equipment will be less capable in the broadest comprehensive sense.
  (Mr Tebbit) If it was less capable that would be different. I am saying, as long as the capability is met the detailed specification of how it is delivered can change. We are talking about a given level of capability.

  136. Yes.
  (Mr Tebbit) I was not going that far.


  137. We are rattling through to the end almost, just a few questions on defence logistics. How much progress has the Defence Logistics Organisation made towards its target of cutting its stock levels by April 2001? What sorts of stocks in particular have provided most scope for thinning-out?
  (Mr Tebbit) We mentioned that earlier. This inventory reduction is on target and they should reach £2.2 million of stock savings by 1st April this year.

  138. What sort of basis are they operating on in deciding what to scrap, what to sell, what to give away and what to keep? Are you satisfied they are not throwing away stuff that in more than a ten day war might be useful?
  (Mr Tebbit) They are applying various criteria. One is, how much equipment in stock do we still have. The other one is, how fast could the industry supply it if we needed it. The principles are good. Mr Gould has just come from that organisation and he was setting up that particular study.
  (Mr Gould) The main thing to look at is the rate at which stock turns over. If it is moving very, very slowly, quite a lot of it is, you probably do not need as much as you have.

Mr Brazier

  139. Good grief!
  (Mr Gould) It sounds simple.

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