Select Committee on Defence Eighth Report



94. In each of the last three years, the MoD has not spent its full financial allocation. With its carry-over provision, however, the funds involved were generally made available for the following year[239] (Figure 4).

Figure 4: Cash Limit Adjustments and Underspends, 1997-98 to 2000-01

Original Cash Limit
Additional Funds provided in Spring Supplementaries
(Under)/Overspends against revised Cash Limits
+£181m- £168m
Bosnia"fine" from 1996-97 overspend
+ £13m
Carried over
+ £85m
Bosnia/Gulf (out of £200m)
+£74m +£509m
Carried over Kosovo/Bosnia
(£76m) Kosovo/Bosnia
(£241m) Remainder
Carried over
Kosovo/Bosnia/Sierra Leone
'Modernisation' programmes[241]
misc. transfers

Unprogrammed costs

95. As we noted above, a persistent feature of the defence budget over the last few years has been the addition of funds from the Treasury's Reserve during the year to cover the additional costs of 'unprogrammed' operations such as those in Kosovo and Bosnia, to the extent that the MoD cannot bear such costs 'without detriment to defence outputs'.[242] In 1998-99, it was given only £85 million of the £200 million extra cost of operations in Bosnia and the Gulf. In 2000-01, similarly, the MoD has again not been fully reimbursed for its extra 'unprogrammed' costs: its budget was topped up by the full additional costs of operations in Kosovo that year (£220 million), but not for £19 million of the £119 million additional burden of its Bosnian operations, nor for all the additional costs of Sierra Leone.[243]

96. Allocations from the Reserve to cover 'unprogrammed' costs have been made late in the relevant year, because of the difficulty often experienced in quantifying the expected costs involved. The NAO's report on Kosovo and the subsequent PAC Report drew particular attention to the MoD's difficulties in forecasting the extra costs of that operation (as well as its failure to report its estimates to Parliament in a timely way).[244] The PAC Report noted that an MoD estimate for 1999-2000 made three-quarters into the year still proved to be 18% different from estimates made closer to the year-end.[245] In the event, in 1999-2000, the MoD did not spend £76 million of the £509 million extra costs of Balkan operations,[246] as well as underspending by an additional £242 million on its mainstream 'programmed' budget. The £76 million underspend was largely due to some bills (including those for Temporary Field Accommodation) coming in after the end of the year.[247] This underspend was not formally carried over to the following year because it represented unused Reserve. But in practice there was no loss of funds, for the MoD's Kosovo operation at least, because the call on the Reserve in the following year (2000-01) subsumed the deferred extra expenditures.[248] The MoD forecasts the extra costs for Kosovo operations over the 3 years to 2003-04 as £110 million, £108 million and £83 million respectively, including £25 million for replenishing stocks.[249]

The Conflict Prevention Budget

97. The 2000 Spending Review includes an innovation, the establishment of a separate budget for 'conflict prevention'.[250] Under this arrangement, it was envisaged that the FCO, DfID and the MoD will manage a pooled budget for some 'programmed' operations of £515 million in 2001-02, rising to £568 million in 2003-04, divided between sub-Saharan Africa and the rest of the World. The MoD's contribution was expected to be about £33 million a year for programmed conflict prevention tasks.[251] Funds would be earmarked in advance from the three departments and the Treasury, and underspends would routinely be carried over to the following year.[252] It was not clear at the time of the Spending Review how major 'unprogrammed' commitments like Kosovo would be managed financially.[253] Subsequently, the latest Expenditure Plans report has set the MoD's contribution at £195 million for 2001-02 (as an addition to the Defence budget outlined in last year's Spending Review), most of which (£155 million) will be unprogrammed 'peacekeeping' in the 'rest of the World'.[254] No allocations have yet been made for 2002-03 or 2003-04.[255] Mr Tebbit told us that the conflict prevention budget—

    ... reduces uncertainty for relatively minor, smaller scale operations. It does bring a certain discipline to the process. In one sense the MoD would not be able to do certain things unless everyone agreed to give us more money. For the large enterprises it does not work like that. The Prime Minister, the Defence Secretary, the Foreign Secretary and the Chancellor collectively agree on something and money is found from the reserve for things like Kosovo.[256]

We intend to monitor closely the financial, as well as the security, implications of the Conflict Prevention budget.

Spending Review 2000

98. In our Report last year, we analysed the SDR settlement, by which the MoD's budget was to be reduced by nearly 4% in real terms over the three years to 2001-02.[257] The 2000 Spending Review set out new Departmental Expenditure Limit allocations for the three years to 2003-04. The earlier Comprehensive Spending Review provided year-on-year real-terms cuts of 0.8% and 2.4% in its first two years, and 1.8% in 2001-02, and continued a longer term decline in the defence budget (Figure 6). The Spending Review replaced that 1.8% drop in 2001-02 with a real-term rise of 0.1%, and provided further real-terms rises of 0.1% and 0.7% in the subsequent two years. By the third year of the Spending Review, the budget will be 0.95% higher in real terms than in 2000-01, driven mainly by an increase in the budget for equipment procurement and other capital expenditure (paragraph 18). Figure 5 shows the 2000 Spending Review budgets for the MoD's Departmental Expenditure Limits, as revised[258] by the recently published Expenditure Plans report[259] (these figures exclude £195 million allocated for 'conflict prevention' in 2001-02).

Figure 5: 2000 Spending Review Allocations

SR 2000
Year-on-year change
DEL (real terms)[260]
Year-on-year change
Change over 3 years

Figure 6: Defence Budgets[261]

99. Key components of last year's Spending Review were set out by the Secretary of State in July 2000.[262] It included the continuation of the 3% a year efficiency programme (paragraph 105), smart procurement savings of £750 million across the review period (paragraph 82), and at least £600 million in asset sales in the three years to 2003-04 (paragraph 24).[263] The Review also identified two one-off additions which would not affect the defence budget baseline. First, £200 million would be added to the budget for 2000-01 from the Reserve. The Secretary of State said this was intended "in particular to help address the main equipment lessons learned from the Kosovo Campaign",[264] including the purchase of Maverick missiles and GPS-based munitions "as soon as possible", and enhanced secure air-to-air communications.[265] As the year drew to a close, however, it appeared that £53 million would be specifically for Kosovo 'lessons', with £80 million of the £200 million to cover payments to BNFL and £67 million to meet 'other pressures on the defence programme'.[266] Second, DERA's public-private partnership would go ahead, with £250 million of the sale receipt to be added to the defence budget for 2001-02. This is a topic covered in four of our inquiries this parliament,[267] most recently on the revisions to the DERA trading fund. Subsequent to the Spending Review, the latest Expenditure Plans identified £195 million for 'conflict prevention' in 2001-02, in addition to the mainstream ('Request for Resources 1') defence budget[268] (paragraph 97).

100. The Comprehensive Spending Review and the 2000 Spending Review overlap for the year 2001-02—the last year of the former, and the first year of the latter (Figure 7).

Figure 7: Comprehensive Spending Review and Spending Review 2000 Financial Settlements

1998 Comprehensive Spending Review DEL (cash):[269]
Spending Review 2000 DEL (resources):[270]

Expenditure Plans 'conflict prevention':[271]


However, the figures for that year cannot be directly compared without further analysis. While the Comprehensive Spending Review figures were cash budgets, the figures of the Spending Review are resource budgets (this is the first year in which spending reviews will be on the new Resource Budgeting basis).[272] In broad terms, the nearly £600 million increase in the 2001-02 allocation comprises about £200 million for the difference between cash and resource accounting, but £400 million represents an increase in the defence budget.[273] Given the change of basis for the budget provision, we obtained from the MoD more readily comparable time series data, covering the five years subsumed by the CSR and the 2000 Spending Review.[274] The subsequently published Expenditure Plans report also provided such trend data.[275]

101. We welcome the change in direction (though modest) in the MoD's budget settlements. In the view of the Permanent Secretary—

    The virtue of having a budget increase in real terms, even if it is quite small, is that you do have a new psychological relationship with the organisation. You can say to people if they really can save resources and get more output for the same level of resources, it is all ploughed back into defence. You are not having to perform against the Treasury cut and that makes a huge difference.[276]

102. In contrast, however, the MoD's Future Strategic Context for Defence has since identified a continuing long-term underlying pressure on defence budgets—

    There is a broad consensus across the domestic public opinion about the importance of defence and the need to maintain high quality armed forces. Nevertheless, a number of factors are likely to combine to maintain budgetary pressures. These include defence cost pressures, demographic trends (in terms both of pressure on tax revenue and greater demands on health and social security spending), increased expectations of Government (again particularly in the area of health) and the absence of a strategic threat to the UK or its Overseas Territories ... Pressures on defence budgets will continue. Value for money and the maintenance of public and political support for defence will continue to be of great importance. These pressures are likely to encourage more serious consideration of role sharing and specialisation amongst allies.[277]

That final sentence points to role specialisation amongst the allies, particularly in Europe, as a key area of potential development in the struggle to get a greater 'bang per buck' ratio out of defence spending, and could have profound implications for future defence policy. But it is one of those big ideas which has not yet been clearly linked to the actual resources and priorities which are set out in the main documents of the reporting cycle.

103. More immediately, the Permanent Secretary took a positive view of the effects of the estate disposal and efficiency targets on the defence budget—

     ... we have targets for asset disposals of £600 million over the period of the settlement of three years, of both land and equipment. That money comes back to defence so that £600 million could be added to the Treasury settlement, as could our three per cent efficiency—and anything over three per cent would be for us. The smart procurement gains in our equipment plans will obviously mean that we can buy more equipment.[278]

Another interpretation is that without these savings targets, the MoD budget would be some £2 billion higher over the life of the Spending Review.[279] Particularly relevant in this regard is the efficiency programme, which we now examine.

The Efficiency Programme

104. We examined the MoD's performance against its 3% a year efficiency savings targets in our inquiry on the SDR[280] and subsequently in our examination last year of the annual reporting cycle.[281] In the latter we noted that there was a 'fundamental implausibility' in the total efficiency claimed by the MoD over the years.[282] The measures introduced since 1988 (the start of the programme) suggest an organisation now operating £6 billion more efficiently than a dozen years before. Taken at face value, we are being asked to accept that without these efficiency improvements the MoD would need a budget about a quarter higher than it is today in order to deliver the same level of output. When we examined the efficiency programme last year, it seemed to us that a major weakness in the current system was that as costs were cut in response to budget reductions, the Department did not have sufficient information to be able to demonstrate conclusively that defence outputs had not also diminished.[283]

105. Since then, the MoD's Performance Report has announced another £511 million of efficiency savings for 1999-2000[284] (Figure 8), and the target of 3% savings each year has now been extended by the Spending Review to 2003-04,[285] and retained in the latest Public Service Agreement.[286]

Figure 8: Efficiency Programme 1997-98 to 1999-2000


106. In our current inquiry, we raised with MoD officials our continued scepticism about the overall credibility of the Department's claims. Our witnesses sought to assure us of the validity of individual efficiency initiatives,[287] including those where intermediate outputs are reduced provided overall operational effectiveness is not.[288] They did acknowledge, however, what we take to be a belated recognition of the implausibility of claiming to be £500 million more efficient each and every year. The MoD's Permanent Secretary told us—

    Although I am quite satisfied with the result of [an MoD] study [in September 2000] that these [individual measures] are genuine efficiencies, they still do not give me confidence that we have that efficiency drive focused on the output priorities ... To put it another way, I am concerned that we are delivering these efficiencies but we are still finding offsetting rising costs elsewhere in the budget, so I want to make sure we are really targeting the right areas to push.[289]

    ... we are going to be in discussion with Ministers about ways of linking our efficiencies more clearly to our outputs rather than to this rather abstract counting of money, which is not necessarily telling us about how we are performing, because it is a gross figure rather than a net figure in the organisation. It tells us nothing about the overall thrust of our achievement.[290]

    [The programme] 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. ... I am concerned that we should put them closer to the point of delivery and have them built more clearly into management plans, so that the efficiency targets are part of delivering the output rather than separately.[291]

107. We welcome the Department's fresh assessment of the Efficiency Programme.[292] It is important that the long-standing uncertainty about the credibility of the achievements claimed for the Programme are finally laid to rest. We have asked the MoD for details of its review of the Programme and its plans for changing the system, along with further details of eight of the individual measures put forward by the Department.[293] We intend to examine the operation of the Efficiency Programme later in the year, and if an election intervenes we would hope that our successors would include this near the top of their programme of work. We consider it vital that the MoD is able to demonstrate more convincingly that the perpetual demand for increased efficiency is not being achieved by covert cuts in capability. True efficiency gains are achieved by producing the same outputs for less money or greater outputs for the same money, without placing unreasonable demands on personnel or neglecting investment in infrastructure.

239  Q 22 Back

240  A sub-head breakdown of under-spends and over-spends was set out in a letter from the Secretary of State to Mr Iain Duncan Smith MP, 7 April 2001, placed in the House of Commons Library (HC Deb 29 January 2001, c 69w) Back

241  Ev p 81, para A3 Back

242  Ev p 79 (Appendix 6) Back

243  Ev p 81, para A1 Back

244  Forty-Sixth Report from the Public Accounts Committee, Session 1999-2000, Ministry of Defence: Kosovo-Financial Management of Military Operations, HC 582 Back

245  ibid, para 12 Back

246  The final division of the extra costs between the MoD's main budget holders is in at Ev p 69, para A1 Back

247  Q 26 Back

248  QQ 25-27 Back

249  Ev p 72, para A6 (The NAO's Kosovo report noted the MoD's then latest estimates for the additional cost of Kosovo as £866m over five years (1998-99 to 2002-03), which included £234m (27%) for Urgent Operational Requirements (ie extra equipment and stocks). Back

250  Spending Review 2000, Cm 4807, Chapter 36  Back

251  ibid Back

252  Ev p 73 Back

253  ibid Back

254  Cm 5109, p 52 provides a breakdown of the MoD's 2001-02 Conflict Prevention budget Back

255  Cm 5109, p 35; and p 12, footnote 3 Back

256  Q 86 Back

257  Second Report, Session 1999-2000, op cit, paras 141-143 Back

258  For minor transfers between departments Back

259  Cm 5109, pp 12, 35 Back

260  At 2001-02 prices Back

261  Data from UK Defence Statistics 2000, table 1-1; and Ev p71 (table). Deflators from Treasury data of 7 March 2001 Back

262  HC Deb, c 777; Ev pp70-73 Back

263  The previous Comprehensive Spending Review assumed asset sales of £700 million in the four years to 2001-02 Back

264  HC Deb 24 July 2000 Back

265  Ev p 71, paragraph A2 Back

266  Ev p 81, para A2 Back

267  See 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; Fifth Report, Session 2000-01, The Draft Defence Science and Technology Laboratory Trading Fund Order 2001, HC 289 Back

268  Cm 5109, p 35 Back

269  See Expenditure Plans 2000-01 to 2001-02, Cm 4608 Back

270  Spending Review 2000, Cm 4807, but with figures updated by Cm 5109, p 35 Back

271  Cm 5109, p 35 Back

272  The 'resource Departmental Expenditure Limit' figures of Spending Review 2000 are not fully-fledged resource-budgeting figures. As an interim measure, some resource expenditures are being carried on Annually Managed Expenditure budgets rather than DEL because of the general inexperience of government departments in forecasting and controlling such notional expense items-depreciation, interest on capital, etc. This interim measure will continue until the 2002 Spending Review when all approved resources costs will be transferred to DEL (see The Treasury's May 2000 memorandum on RAB, published in the 29th Report from the Committee of Public Accounts, 1999-2000, page 90). Back

273  The Treasury's explanatory note on the Spending Review explains the difference between the (Comprehensive Spending Review) cash and (Spending Review 2000) resource figures for 2001-02. Back

274  Ev p 70, para A1 Back

275  Cm 5109, p 35 Back

276  Q 36 Back

277  The Future Strategic Context for Defence, para 39 Back

278  Q 36 Back

279  Three years of £500m efficiency savings plus £600m of estate disposals Back

280  Eighth Report, Session 1997-98, op cit, paras 392-400 Back

281  Second Report, Session 1999-2000, op cit, paras 158-160 Back

282  ibid, para 159 Back

283  ibid Back

284  Cm 5000, p 44 Back

285  Spending Review 2000, Cm 4808, p 22 Back

286  Ev p76, Target 8 Back

287  QQ 61-62 Back

288  Q 64 Back

289  Q 77 (see also Q 71) Back

290  Q 173 Back

291  QQ 59-62 Back

292  Q 77 Back

293  We raised some of these during our recent hearings (QQ 63-69). Further details of the eight measures, provided by the MoD, are on Ev pp 84-88 Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2001
Prepared 9 May 2001