Select Committee on Defence Eighth Report



Performance against Public Service Agreement Targets

28. For the first time, the Performance Report for 1999-2000, which was presented to Parliament on 20 December 2000,[77] set out the performance of the Department against its Public Service Agreement (PSA) indicators, agreed with the Treasury.[78] We asked the Secretary of State whether the involvement of the Treasury in setting these targets had sharpened the MoD's performance. He responded that—

    ... the performance targets have been built on in the light of achievements that we wanted in any event ... it is early days yet ... to see whether there will be a close correlation between the setting of those targets and our ability to achieve them ...[79]

This suggests that the MoD does not feel it was given an especially challenging régime of performance indicators this time round—which raises a broader question of the underlying philosophy applied by the government to this type of performance management which we discuss below in relation to the defence executive agencies. Certainly, the Performance Report scores the MoD as having either met or being on target to meet all its key indicators—an assessment with which we take issue on two particular points below.

29. However, the more interesting question is perhaps what influence PSAs will have on the Treasury mindset. It might be hoped that the development of these indicators would presage a move in the direction of planning resources around outputs rather than vice versa. We are not suggesting that a blank cheque should be given to the MoD—but we do need to begin to move away from deciding cash limits first, on a purely historical basis, and designing defence policy around those limits. Recent changes in the defence budget, following Spending Review 2000, may suggest that this is beginning to happen. However, there is scant evidence of this debate between demands and resources in the Expenditure Plans and Performance Report as yet.

30. There were two cases in which the Performance Report owns up to a shortfall against targets. One of those (target 4, on 'manning'), is the admission that the target for achieving 95% of the trained strength requirement of the Army is 'slipping'.[80] We discussed this issue at considerable length in our recent Report on personnel issues,[81] and we shall no doubt return to it.

31. The second target which was neither 'met' nor 'on course' was the establishment of the Joint Rapid Reaction Force by October 2001.[82] The Performance Report goes on to explain—

    Initial Joint Rapid Reaction Force (JRRF) capability was declared on 1 April 1999 and elements of the JRRF pool were deployed effectively soon after as part of the UK's contribution to the NATO operation in Kosovo during June 1999. The lessons drawn from the Kosovo conflict validated the JRRF concept ... Although early implementation milestones were met, the establishment of JRRF operational capability by the current PSA target of October 2001 had slipped to late 2002 at the end of the reporting period due to operational commitments and overstretch. Since then a number of reasons, including delay in the full implementation of the Army's Formation Readiness Cycle, have led to a further revision to late 2002-03 ... By this time delivery of JRRF Phase 2 capability—the ability to mount and sustain a single, non-enduring, medium scale warfighting operation, in addition to continuing commitments in the Balkans—should be achieved.[83]

32. We asked the Secretary of State whether the slippage on this target suggested that the MoD was operating too close to the margins of its ability to generate deployable forces. He replied—

    It is undoubtedly a risk ... but ... there is no point in having training and exercising if we are not in a position to use the Armed Forces who are trained and exercised ... I accept that there is a need for careful judgement about the extent to which we commit ourselves to operations and ... run the risk of neglecting appropriate training and exercising ... but equally I am confident at the moment that we have the balance right ... [84]

33. It is certainly the case that the balance is, at the moment, much better than it was when we reported last year.[85] There are hopeful signs that the government is beginning to think in a more joined-up way about its foreign and security policy goals, the role of the Armed Forces in pursuing them, and the necessity of approaching all these issues from a multinational perspective. The policy paper on Multinational Defence Co-operation is a step in the right direction. There are limits on what the UK can do as a 'force for good', and achieving the full operational capability of the JRRF is an essential prerequisite for being able to act effectively. We trust our successors will be vigilant to detect any future slippage in the target date for the JRRF.

34. The other PSA target on which we queried the MoD's self-assessment was that of achieving a 'substantial improvement ... in medical support'.[86] We tackled the Secretary of State on the claim that the MoD was 'on course' to achieve this target. He responded—

    "On course", but I would say that there is still a lot to do. I am not pretending that there is anything other than a great deal of effort that has to be made in order to deliver effective medical services, so we are starting from a very low base. There have been some signs that measures taken in very recent times are beginning to be successful but I would want to see sustained improvement over a number of years before I am confident of being able to say to you that there are the kind of medical services available to the armed forces that I would like to see.[87]

The Permanent Secretary admitted—

    It is by no means enough but [we] have turned the corner ...[88]

We judge that to be an optimistic assessment of the facts. We will continue to watch developments in the DMS closely.

35. The Performance Report for 1999-2000 sets out the MoD's assessment of its achievements against its Public Service Agreement targets then applicable. As with all government departments, as part of the 2000 Spending Review the MoD has revised its (now fewer) PSA targets, forming a new Service Delivery Agreement.[89] The new PSA targets cover some of the same ground as their predecessors, but there are changes. Some old targets are no longer covered because they have now been delivered—for example: establishing the new Joint Helicopter Command by April 2000;[90] establishing the Defence Logistics Organisation;[91] establishing the first Joint Forces Logistics component;[92] converting the Procurement Executive to an agency.[93] Others are completely new—for example: those concerned with implementing NATO's new Strategic Concept;[94] contributing to the EU 'Headline Goal'; and the conflict prevention target[95] of 'contributing to conflict prevention and management as demonstrated by a reduction in the number of people whose lives are affected by violent conflict and by a reduction in potential sources of future conflict, where the UK can make a significant contribution'. Other targets have been updated—for example for further estate disposal receipts, and setting a figure of £750 million over the three years 2001-02 to 2003-04 for 'the benefits of smart procurement' (paragraph 99).[96]

The "Balanced Scorecard" Approach

36. The MoD's performance management systems have not only had to contend with the introduction, and the revision, of Public Service Agreement targets. It is also introducing a 'Balanced Scorecard' system[97], which, it told us, aims to capture performance drivers in four key areas:

  • Output/Deliverables: is the MoD delivering what the government expects in terms of the ability to conduct operations and produce military capability?

  • Resource Management: how well is the MoD planning and managing its resources, not just financial but people, equipment and reputation?

  • Internal Process Improvement: is the Department organised as well as it can be?

  • Learning and Development: is the MoD developing its people and organisation for the future?[98]

37. The MoD expects this to become in time the 'primary tool for managing Defence'.[99] We were told that the Department had identified 17 strategic objectives, and is developing measures for monitoring progress against them. Already, however, internal reporting within the MoD has been adjusted to reflect these 17 objectives, using a colour coding to alert the Department's Management Board and Ministers[100]—green, amber or red, "according to whether these [objectives] are on track, needing attention, or going badly".[101]

Future MoD Performance Reports will be structured to reflect the Balanced Scorecard.[102] This will be a welcome development if it ties together the Department's internal and external reporting systems, and provided that judgements—whether a particular objective is labelled 'red', 'amber' or 'green'—are applied consistently between the two. The judgements must also demonstrate that the MoD's self-assessment is rigorous and self-critical, not self-serving or complacent.


38. We have examined a range of defence executive agencies over this Parliament—the Defence Evaluation and Research Agency,[103] the Defence Procurement Agency,[104] the Joint Air Reconnaissance Intelligence Centre (JARIC) and Military Survey,[105] the recruitment and training agencies[106] and more recently the Defence Aviation Repair Agency.[107] The latter became a trading fund on 1 April 2001, and the MoD also has plans to convert the Army Base Repair Organisation to a trading fund by April 2002.[108] In other areas, however, the agency programme might appear at first sight to be undergoing a phase of retrenchment. During 1999-2000, the number of agencies reduced by two, and since then has fallen by another six. In the last twelve months four were wound-up—the Army Technical Support Agency, the Defence Clothing and Textiles Agency, RAF Logistics Support Services and the RAF Signals Engineering Establishment—and four merged into two (JARIC and Military Survey merged in April 2000, and the Naval Bases Supply Agency and the Ships Support Agency[109] in April 2001). There are now 36 agencies in the MoD.[110] When questioned on these changes, Mr Tebbit did not attribute any particular significance to the recent downward trend.[111] He explained that—

    Some [agencies] have been absorbed into business units, where we found that the agency was effectively within the chain of command and it did not make much sense to give it a completely independent existence. ... we probably started by creating agencies within the sort of existing structure, and we did not think quite so carefully about the design of agencies around outputs. As we are now looking much more in terms of how to deliver the department's business I would expect to see slightly fewer agencies.[112]

39. Three of the four agencies disbanded since 1999-2000, and two of those that merged, were in the Defence Logistics Organisation.[113] The DLO encompassed 12 of the 42 agencies in March 2000, and seven of the current 36, an indication of the upheaval generated by the establishment of the Organisation. The Secretary of State offered a rationale for the turbulence in the logistics area—

    ... we have looked at, particularly in the logistics area, better ways of organising delivery. Particularly in logistics, in the past we had tended to see vertical organisation of the agencies, but in a sense what we have now with the DLO is a much more horizontal approach looking right across the Department at common functions, particularly between the three services, to try and find ways of organising their work more efficiently. That really explains the reduction in the number.[114]

The Defence Logistics Organisation is a critical component of the post SDR structure in the MoD. It will be essential that its effectiveness can be accurately measured and its performance constantly improved.

40. In our current inquiry we wanted to identify the achievements of the agency programme in the MoD more generally. The Secretary of State told us of his conviction about its utility within the Department—

    ... it [gives] organisations an identity that allows them then to manage their activity more effectively than perhaps would be the case if they were part of a very large organisation like the Ministry of Defence. The fact they have the ability to manage their own affairs has given them a sense of purpose and direction that I suspect they might not have had as part of a much larger organisation. ... Giving this kind of identity to particular government functions and activities has been a success because it has given the people who work in those agencies a real sense of ownership of their own activities in a way that would not otherwise have been the case. That has meant that, in a sense, they also are able to look outwards with more confidence than perhaps they would otherwise, winning business away from their traditional sources of work.[115]

41. In terms of quantifying such benefits, the Performance Report notes that on average 72% of all agencies' targets were met in 1999-2000—a reduction from 78% in the previous year.[116] It attributes this reduction to the imposition of more stretching targets. It also notes that the achievements demanded by recent operational commitments have not been captured by the agencies' targets.[117] Mr Tebbit told us that the MoD had measured trends in the performance of the agencies, the parts of the Department which have been most susceptible to targets, and that the agencies have been delivering efficiencies at about twice the level of the rest of the organisation.[118] However, there is little sense of how these targets were arrived at, how demanding they are, or what level of achievement they really represent.

42. One problem for the external observer is that trends are not clear because some agencies' targets have changed from one year to the next. The Performance Report states that the agencies met or exceeded the performance of the previous year on 80% of those measures where comparison was possible,[119] but that does not tell us whether there was an overall improvement across the common indicators. It also fails to disclose much about whether the targets are meaningful, or sufficiently demanding. We understand that the MoD is doing some 'benchmarking' of agencies' performance targets against outside organisations. These results should be disclosed. More generally, we consider that Parliament should be given a clearer view of the performance required of agencies as a group, and any improvements over time. One way of making this possible might be if targets remained constant (even if these were difficult at first to achieve) or, where revision of targets proved essential, performance against both the original and the revised targets was tabulated in the reporting documents.

The Resource Accounts &c


43. Throughout this parliament we have closely monitored the MoD's outturn against its budget, and adjustments to the budget itself. Such adjustments, most significantly to reflect the additional costs of 'unprogrammed' operations such as those in the Balkans, are presented in the Spring Supplementary Estimates—the last in the financial year. We have sought explanation from the MoD for every Spring Supplementary Estimates, including that for 2000-01.[120] We deal at some length with the results of these Estimate adjustments in the section on the Defence Budget later in this Report.

44. We have commented, on a number of occasions, that these in-year adjustments to take account of contingencies are an unsatisfactory approach to adjusting the defence budget to take account of operational demands. The uncertainty about whether these costs (and what proportions) will be met from the Treasury's contingency reserve can only make medium-term planning more difficult, and put at risk sensible and necessary investment planned for 'discretionary' areas such as service accommodation. We welcome, therefore, the introduction of the 'conflict prevention budget', which we discuss below, if it is intended to be used for such operational contingencies. It is to be hoped, if this works effectively, that it will be a small but useful contribution to rational planning in the MoD's resource allocation in this era of increasingly unpredictable operational demands.


45. The introduction of Resource Accounting and Budgeting (RAB) is supposed to be another step towards improved resource allocation. We reviewed the MoD's progress with RAB in February 2000, in our last annual reporting cycle report.[121] We reported the MoD's progress against the four 'trigger points' being used to monitor RAB implementation. Since then, the fourth trigger (the preparation of shadow Resource Estimates for 2000-01) has been pulled, and the Treasury announced in May 2000 that it would proceed with the full implementation of Resource Accounting and Budgeting.

46. The Public Accounts Committee also reviewed progress with the initiative in July 2000. It noted that the MoD would be one of four departments[122] whose Resource Accounts were likely to be given a 'disclaimer' by the Comptroller and Auditor General.[123] A disclaimed opinion applies 'where, because of a pervasive inability to gain sufficient audit evidence, the auditor is unable to reach a view about the account'; a more serious situation than even an 'adverse' or 'qualified' audit opinion.[124] We had obtained from the MoD further details of the problems it was facing after a dry-run audit of its 1998-99 accounts.[125] Subsequently, the resource accounts for 1999-2000, published in January 2001, included a progress report by the C&AG on the still outstanding issues for that year. The main concerns identified included:

  • Many balance sheet entries for the start of the year contained 'fundamental uncertainties and errors'.[126]

  • The recorded value of married quarters (£383 million) might be understated by more than £20 million.[127] The recorded figure on the sale of surplus properties (£92 million) could be 'misleading', and there was 'uncertainty' about the £144 million value for the stock of surplus properties at the end of the year.[128]

  • There were 'errors and uncertainties' amounting to some £90 million in connection with Army fighting equipment at the end of 1999-2000 (out of a total of £8 billion), though this was a marked improvement over the doubts about £500 million in the previous year's dry run accounts.[129]

  • Weaknesses in inventory and supply systems, including the pricing of stock items, made uncertain balances and transactions worth hundreds of millions of pounds.[130] Most of the £118 million balance of creditors and accruals for the RAF spares purchasing system could not be verified.[131]

47. The C&AG's report on the Resource Accounts recognised the difficulty of introducing RAB in the MoD, and acknowledged the 'very considerable efforts' the Department had made.[132] The C&AG concluded that although the opening balances for 2000-01 contained inaccuracies, 'it seems likely that I shall be in a position to form an audit opinion on the Accounts prepared for 2000-01.'[133] The Permanent Secretary's summary, when he gave evidence to us, was that "although we have a disclaimer, it is a very positive disclaimer."[134] The MoD was actively engaged in tackling the remaining weakness, he told us, and that "next year it is going to have to be right."[135] We welcome the determination to put the MoD's resource accounting onto a sounder footing as soon as possible. We hope our successors will continue to monitor its progress at key stages of the reporting cycle, and that they will ensure that, next year, the MoD will indeed 'be right'.

48. Despite the teething troubles, there are worthwhile potential benefits for the MoD from a system of Resource Accounting and Budgeting, which we described in our last report on the MoD's annual reporting cycle.[136] Indeed, in our current inquiry, the Permanent Secretary told us that—

    [Resource Accounting and Budgeting] will be tremendously valuable for the front line. We will be incentivising and moving equipment and supplies faster through the system into the front line. Once you have a capital charge, once you are bearing the burden of unused assets on your own budget, you just want to get it off and out. The procurement organisation and the logistics organisation will now have an incentive they never had before of moving these items. ... 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.[137]

The behaviour of budget holders in response to the new information they have will be key to the success of RAB. It is not entirely reassuring, however, to learn that their behaviour has changed in response to RAB before the linkage between costs and outputs has become clear. Without that linkage, RAB is just an accounting exercise.

49. The resource accounting data must also be useful for external observers of the Department, including the Defence Committee. We highlighted last year the particular importance of producing costs for defence aims and outputs. We called on the MoD to expand on the meagre three numbers it was able to publish, including only a single figure (£28.7 billion)[138] for the resource cost of military capability.[139] We were told last year that it would be some years before costs could be attached to 'force elements' such as aircraft squadrons or armoured brigades.[140] Accordingly, the MoD had to obtain dispensation from the Treasury for not meeting its requirements for 'Schedule 5' in its 1999-2000 Resource Accounts.[141]

50. In our current inquiry, we sought to establish whether any progress had been made on this disappointing prognosis. It seems that some areas are more developed than others.[142] We were told that the Defence Logistics Organisation had started a project to produce output costs on a resource basis a year ago. Indeed, the DLO's target to reduce output costs by 20 per cent by 2005 (paragraph 93) specifically requires a system for measuring achievement in such terms.[143] It will be in place on 1 April 2001.[144] More generally, however, the MoD's Permanent Secretary acknowledged that—

    We have not managed yet to link outputs more closely to resources ... I would like to have done so much more quickly. I think the problem has been that we have been going through the most fundamental restructuring of our finances over the last four years, with the transition to resource accounts and operating by resources rather than cash. ... That has been such a massive change in the Department I did not feel we could do at the same time a rebasing of our finances around output costing. ... we will be moving towards output costing over the next two or three years ... in phases.[145]

    The accounting difficulties have delayed [output costing]. Putting it in place has meant four years of doing that rather than changing the budget. ... I would be very disappointed if in three years' time we did not have a much clearer set of output costs in the organisation.[146]

The meaningful costing of defence outputs should be a pivotal part of the accountability improvements made possible by Resource Accounting and Budgeting. The MoD needs to put renewed emphasis on this area, to make such data available sooner than the disappointingly drawn out timetable currently envisaged.

Defence Statistics

51. Another component of the reporting of the MoD's performance, though not published in its Performance Report, is the annually produced volume of Defence Statistics prepared by the Defence Analytical Services Agency.[147] This used to accompany the annual Statement on the Defence Estimates, published each May or June. They were split off from the SDE into a separate volume after 1991. Like other government statistics, these are now subject to a degree of external validation under the National Statistics Code of Practice. We have made good use of these helpful data in many of our inquiries. Their value, as a separate document from the annual Performance Report (which might otherwise be expected to subsume such information), is in capturing longer term trends which transcend the confines of individual spending reviews, defence reviews and even governments.[148]

77  Cm 5000 Back

78  ibid, pp 9-12 Back

79  Q 203 Back

80  Cm 5000, p 9 Back

81  Second Report, Session 2000-01, op cit Back

82  Cm 5000, p 9 Back

83  Cm 5000, p20, para 28 Back

84  Q 200 Back

85  Second Report, Session 1999-2000, op cit, paras 67-73 Back

86  Cm 5000, p 10 Back

87  Q 195 Back

88  Q 196 Back

89  Ev p 73 Back

90  PSA target 2 Back

91  Target 5 Back

92  Target 6 Back

93  Target 9 Back

94  New PSA target 4 (Ev p 73) Back

95  New PSA target 6 Back

96  New PSA target 8 Back

97  The Balanced Scorecard system was developed by Kaplan and Norton at the Harvard Business School. The MoD's version is described in a report by the C&AG, Measuring the Performance of Government Departments, HC 301, Session 2000-01, p 40  Back

98  Cm 5000, para 120 Back

99  Cm 5000, para 121 Back

100  Ev p 80 Back

101  Q 167 Back

102  Cm 5000, para 122 Back

103  Sixth Report, Session 1997-98, The Defence Evaluation and Research Agency, HC 621; Ninth Report, Session 1998-99, Defence Research, HC 616; Ninth Report, Session 1999-2000, The Future of DERA, HC 462; and Fifth Report, Session 2000-01, The Draft Defence Science and Technology Laboratory Trading Fund Order, HC 289 Back

104  Mainly as part of our annual monitoring of major procurement projects-Eighth Report, Session 1998-99, Major Procurement Projects Survey: The Common New Generation Frigate Programme, HC 544; and Tenth Report, Session 1999-2000, Major Procurement Projects, HC 528 Back

105  Fifth Report, Session 1999-2000, The Defence Geographic and Imagery Intelligence Agency, HC 100 Back

106  Second Report, Session 2000-01, op cit Back

107  Fourth Report, Session 2000-01, The Draft Defence Aviation Repair Agency Trading Order 2001, HC 261  Back

108  Ev p 77 Back

109  HC Deb, 29 March 2001, c730w Back

110  Cm 5000, pp 95-105 Back

111  Q 105 Back

112  QQ 105, 106 Back

113  The Army Technical Support Agency, the Defence Clothing and Textiles Agency and RAF Logistics Support Services which disbanded; and the Naval Bases Supply Agency and the Ships Support Agency which merged Back

114  Q 190 Back

115  QQ 187, 188 Back

116  Cm 5000, p 54 Back

117  Cm 5000, para 136 Back

118  Q 34 Back

119  Cm 5000, para 136, second bullet-point Back

120  Ev p 81 Back

121  Second Report, 1999-2000, op cit, paras 22-37 Back

122  The others being the Cabinet Office, Department of Health and OFGAS Back

123  Twenty-ninth Report from the Committee of Public Accounts, Session 1999-2000, HC 556, pp 118-119 Back

124  See NAO memorandum of 31 May 2000 (reproduced in the PAC's Twenty-Ninth Report, op cit, p110) Back

125  Annex A at Ev pp 60-62 Back

126  Ministry of Defence: Consolidated Departmental Resource Accounts 1999-2000, HC 50, p12, para 6 Back

127  ibid, p 14, para 18 Back

128  ibid, p 14, paras 21, 23  Back

129  ibid, p 15, paras 26-30 Back

130  ibid, p 16, paras 35-46 Back

131  ibid, p 18, para 52 Back

132  ibid, p 13, para 9 Back

133  ibid, p 13, para 11 Back

134  Q 118 Back

135  Q 124 Back

136  Second Report, Session 1999-2000, op cit, para 27 Back

137  QQ 119, 120 Back

138  HC 50, op cit, p 25 Back

139  Second Report, Session 1999-2000, op cit, paras 34, 36 Back

140  ibid, para 34 Back

141  HC 50, op cit, p 19, para 55 Back

142  Q 9 Back

143  ibid Back

144  ibid Back

145  QQ 9, 10 Back

146  Q 125 Back

147  The 2000 UK Defence Statistics is the most recently published by the MoD's Defence Analytical Services Agency Back

148  In the most recently published defence statistics, DASA produced some intriguiing historical comparisons, eg that the UK had forces twice as large a century ago (p66) and a defence budget then of only £3.2 billion (in today's prices) (p14); that the financial cost of WWII was £647 billion, in today's prices, for the UK forces alone, and that 402,000 UK personnel were killed in that war (pp 27, 67) Back

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