Select Committee on Defence Second Special Report

ANNEX

THE MoD'S ANNUAL REPORTING CYCLE 2000-01

1. The Government welcomes the opportunity to respond to the Committee's report on the Ministry of Defence Annual Reporting Cycle. Reporting documents considered by the Committee included the Performance Report 1999/2000, the Expenditure Plans for 2000/01 and 2001/02, the 2000 Investment Strategy and the policy papers "Defence Policy 2001" and "The Future Strategic Context for Defence".

2. The Government particularly welcomes the Committee's acknowledgement in the conclusion to its report that "overall there has been a perceptible increase in both the quantity and quality of information provided" [HC 144 para 116]. This memorandum sets out the Government's Response to the main points raised in the Committee's report.

THE FORMAT AND CONTENT OF THE REPORTING CYCLE

The Format

"... MoD's annual report is divided up between a number of publications ... the overall effect is to make it difficult to get a clear view of the state of defence affairs at any particular moment." [HC 144 para 8]

3. The Government notes the Committees observations on the overall effect of the Ministry of Defence's reporting arrangements. The MoD considers the current arrangements to be coherent, although we look continuously for improvement. The Ministry of Defence is now placing more, and more relevant, information in the public domain than ever before, and for a wider range of audiences. We believe that this is the right approach.

The Expenditure Plans, Investment Strategy and Performance Report

"... we recommend that the Expenditure Plans report is completely recast as a forward-looking document, disclosing as much as is practical about the aims and objectives of the MoD over the succeeding 12 to 36 months." [HC 144 para 13]

4. The Ministry of Defence is currently engaged in a Government-wide review of the annual Expenditure Plans report with the Treasury. This is taking a hard look at the report's purpose, content and audience and reviewing its format and structure.

"[The] long term balance between equipment and personnel is a key issue which will require constant re-examination over the coming years." [HC 144 para 20]

5. The long term balance of investment between equipment and personnel is regularly re-examined as part of the MoD's strategic planning process.

"We welcome the assurance that PFIs will not compromise front line military capability but we detect a shift in the policy on the boundaries of PFIs since the SDR less than three years ago. ....... We repeat our earlier warning about the dangers of allowing PFI to take control of its war fighting capabilities out of the MoD's hands." [HC 144 para 23]

6. Each requirement is examined rigorously on its own merits, and the Department seeks to make the best use of private sector skills and finance wherever appropriate. PFI is likely to offer the greatest benefits when a project involves assets which can be used commercially as well as for defence purposes, thereby allowing the contractor to generate third party revenue and achieve economies of scale. In these circumstances, PFI may deliver greater value for money than conventional procurement. By definition dedicated warfighting equipment does not support such commercial opportunities. Moreover, PFI projects involving the use of assets close to the front line might require a contractor to assume types of risk not suitable for commercial financing. PFI and PPP may nevertheless be feasible close to the front line, and the MoD has always been prepared to countenance such options provided they offer value for money without detriment to operational effectiveness. Indeed, some current PFI programmes support front line capability. Important examples are the Future Strategic Tanker Aircraft for air-to-air refuelling, now at the invitation to negotiate stage, and the Heavy Equipment (tank) Transporter, now at preferred bidder stage.

"We ... questioned the Secretary of State as to whether there had been another nuanced shift in policy on the disposal of the defence estate. We suspect there is now greater pressure to maximise receipts and less emphasis on returning such areas to uses which benefit the public. ....... We would encourage our successors to examine the performance of the Defence Estates agency in some detail." [HC 144 para 24]

7. The Government notes the Committee's suggestion that its successor might undertake an examination of the performance of the Defence Estates agency.

8. Over recent years, considerable progress has been made, and continues to be made, towards improving the Department's arrangements for the management of its estate. 'In Trust and On Trust - the Strategy for the Defence Estate', was published in July 2000 and followed a detailed review of all of the factors which impinge on the estate. These include the requirements of the armed forces, other departmental considerations, Government policies, legislative requirements, and wider public expectations which bear on the way the MoD uses the land it occupies.

9. The Strategy includes a clear commitment to openness in the form of an annual Stewardship Report which will describe how successful the Department has been in achieving the objectives it has set itself. The intention is to publish the first such report, covering the financial year 2000/2001, around the end of this year.

10. One of the most significant improvements to the way in which the Department manages its estate is the adoption of a new procurement strategy based upon Prime Contracting. This involves the application of the principles of Smart Acquisition to construction procurement and applies both to stand-alone capital projects (such as the Government's significant new investment in single living accommodation), and to smaller-scale projects and property maintenance which will in future be managed through large regional prime contracts.

11. The new Committee may wish to consider whether an examination of the first published Stewardship Report would provide a suitable vehicle to address the full range of estates issues, including the performance of Defence Estates.

12. In paragraph 24 of the report, reference is made to the statement in the MoD Investment Strategy that it is its policy to ensure that best value is obtained by offering sites to the commercial market and that only "in exceptional circumstances" may they be offered to local authorities or public bodies. This is intended to refer only to non-competitive disposals. There is no restriction on sales to such bodies as a result of a competitive process.

"... 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." [HC 144 para 29]

13. The settlement arising from the Spending Review 2000 provided the resources necessary to implement the Strategic Defence Review and implement the lessons learnt from recent operations as well as to improve the Services' living accommodation. The Strategic Defence Review was policy driven and gave the MoD (and the Armed Forces) the opportunity to modernise defence capabilities, policies and programmes as well as make the best use of the resources available to them.

"We trust our successors will be vigilant to detect any future slippage in the target date for the JRRF." [HC 144 para 33]

14. The Government welcomes the Committee's acknowledgement that the balance between operational commitments and training and exercising has improved, and that foreign and security policy goals are now addressed in a more joined-up way. It agrees that achieving the full operational capability of the JRRF is a key requirement for maximising our operational effectiveness. Initial JRRF capability has been achieved and the MoD continues to remain on course to meet the late FY2002-03 target for Phase 2 operational capability.

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

The Permanent Secretary admitted - 'It is by no means enough but [we] have turned the corner ...' We judge that to be an optimistic assessment of the facts." [HC 144 para 34]

15. The Government notes the Committee's judgement. The MoD's statement that it was "on course" was made in the context of a specific Public Service Agreement target and the performance indicators underpinning that target. In the case of medical support, the PSA has two specific elements - the formation of a regular ambulance regiment and the use of medical reserves to support field hospitals in a medium scale deployment. MoD is indeed "on course" to meet the target. However, as was indicated in paragraph 73 of the Performance Report 1999/2000 itself and the statements by the Secretary of State and the Permanent Secretary to the Committee, this does not mean that acute shortfalls against key medical specialties have ceased to exist, although developments such as the establishment of a Centre for Defence Medicine are a crucial part of the long-term solution to these difficulties. The manning position of the Defence Medical Services has, however, broadly stabilised, and it was this which lay behind the statements made to the Committee.

"Future MoD Performance Reports will be structured to reflect the Balanced Scorecard. 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." [HC 144 para 37]

16. It is intended that the Performance Report for FY2000-2001 should reflect the MoD's trial of the Balanced Scorecard which was completed earlier this year. The MoD remains committed to greater alignment of internal and external performance reporting, including on Public Service Agreement targets.

"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." [HC 144 para 39]

17. The Defence Logistics Organisation has developed a methodology and reporting structure specifically designed to measure improvements in its effectiveness and efficiency, and in addition has undertaken considerable work in performance management which has been favourably reviewed by the Public Service Productivity Panel. The dual aims of benefit tracking and performance management are exactly to ensure that performance can be constantly improved.

"... there is little sense of how [Defence agencies'] targets were arrived at, how demanding they are, or what level of achievement they really represent." [HC 144 para 41]

18. Key Targets for agencies are drafted following discussion between each agency and its MoD owner and customers and other stakeholders. The main forum for such discussion is the relevant agency's Owners Advisory Board, which is best placed to make sure the targets are demanding and meaningful. The draft targets are then submitted to Ministers for approval. This process includes setting out the rationale behind each target, the current level of performance, the level proposed for the target, the balance between targets, needs and requirements of customers, broader strategic requirements and any extenuating circumstances. This process is unique in Whitehall and provides transparency within the Department of the degree of stretch in targets against previous performance.

"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, 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." [HC 144 para 42]

19. The Performance Report attempts to draw together the key headlines of agency performance and MoD will examine ways in which a clearer view of performance can be portrayed in the report.

20. The MoD shares the Committee's concern that a number of targets are not based on enduring measures of performance and is striving to improve that situation. However this is a matter of evolution as agencies, owners and customers attempt to establish what measures are most appropriate and enduring. The process of Quinquennial reviews is helping to bring more rigour to this.

21. Between 1998/1999 and 1999/2000, 50% of targets were directly comparable (an average of nearly 4 per agency). Another 40% comprised the development of new measures (often linked to launch of new agencies) or alteration of existing measures which were considered inadequate (which makes direct comparison with previous years difficult). The remaining 10% were management milestones.

22. Alteration of existing measures usually goes hand in hand with changes in collection and analysis of data to report on performance. Reporting against old, inadequate measures of performance in parallel with the newer, improved targets would create an additional administrative burden on agencies that would be difficult to justify.

23. The targets where comparison can be made are a mix of output delivery, quality and efficiency (reducing the cost of achieving output). It is difficult to make a comprehensive statement about change in performance although in perhaps the most inclusive measure, efficiency, the majority of agencies met their targets leading to performance improvement.

24. Performance targets are benchmarked against outside organisations only where it makes sense to do so. There are some clear examples in defence, for instance in education and health care, where benchmarking does take place. In such cases agency annual reports provide the necessary details.

25. In general terms the approach in the department is to encourage the use of tools such as the European Foundation for Quality Management Business Excellence Model, which provide a means for organisations to benchmark processes to help deliver improvements in performance. This process is based on personal contact and trust between organisations, and is not published unless the organisation chooses to do so.

The Resource Accounts

"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'." [HC 144 para 47]

26. The Government assures the Committee that MoD continues to devote the highest priority to the resolution of all outstanding accounting difficulties, against the overriding goal of producing accounts for FY2000-01 which are sufficiently complete to allow the Comptroller & Auditor General to form an opinion.

"The behaviour of budget holders in response to the new information they have will be key to the success of RAB. ....... Without that linkage, RAB is just an accounting exercise." [HC 144 para 48]

27. The Government accepts that the full value of RAB will be delivered when the link between outputs and costs has been established. But real benefits from RAB - Project CAPITAL for the MoD - will arise not only from output costing but also from the availability to managers at all levels in MoD of information on the full resource costs of their activities and holdings, so that RAB is more than just an accounting exercise.

28. MoD has therefore been actively encouraging budget holders to take full advantage of the additional information now available to them. The benefits are beginning to be felt. For example, the availability of more complete information is improving decision making on capital investment, and the visibility of true resource costs is leading to better management of the defence estate. MoD would expect other management benefits to accrue as RAB develops, including when costs are attributed to outputs.

"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." [HC 144 para 50]

29. The Government understands the Committee's concern and assures the Committee that MoD remains committed, as a high management priority, to the progressive delivery of a robust output management regime. But new output management tools will be of limited utility if the underlying financial data is not robust enough to support decision-taking. MoD must therefore first be able to produce resource information in which there is a high degree of confidence. This will take time to achieve, particularly in the light of current accounting shortcomings, identified by the Comptroller & Auditor General and noted by the Committee (paragraph 47), which must be the highest priority for resolution.

30. In the shorter term, MoD is seeking to develop Schedule 5 (Resources by Departmental

Aims & Objectives) of the 2000-01 Departmental Resource Account to provide more information than has hitherto been available, as a first step towards a fuller output management regime.

THE STRATEGIC CONTEXT

The Process

"We would welcome, in response to this Report, an explanation of the long-term strategy of the MoD for conducting such reviews, their likely timing and the extent to which they will be open to external inputs." [HC 144 para 56]

31. "The Future Strategic Context for Defence", which the Government published in February this year, updated the analysis that underpinned the "Policy Framework" produced in the first stage of the Strategic Defence Review in 1997 (published as supporting essay 2 to the Strategic Defence Review). The Ministry of Defence expects to carry out a thorough review of the Strategic Context at similar intervals in future, i.e. every three or four years. These reviews will be underpinned by a programme of strategic analysis of the future security environment, carried out by the Joint Doctrine and Concepts Centre. Recognising the breadth of this subject, the programme will include a series of external reference groups consisting of experts from the public, private and academic sectors as well as drawing on available material from a range of sources and commissioned research.

The Defence Missions and Policies

"The lack of sufficiently capable headquarters on the part of our European allies is a serious matter for concern, given the increasing importance of the regional conflict prevention and crisis management defence mission. This, of course, is an issue which will have to be addressed in the context of the EU's European Security and Defence Policy." [HC 144 para 66]

32. The MoD agrees that whilst PJHQ has been shown to work well, and the ARRC under UK command has proved itself as an operational HQ, the UK cannot be expected always to take the lead.

33. Within the context of the ESDP, whilst looking at ways in which multi-nationality can be further improved at PJHQ, MoD is also actively offering opportunities to work with other European Allies to exchange practical ideas and mechanisms for improving the ability of their own headquarters in this capacity.

34. Subsequently, developments should have a positive impact on nations' ability to use these headquarters for national, NATO or EU auspices.

Weapons of Mass Destruction and National Missile Defence System

"There is no doubt that the threats from WMD and the development of NMD, will be a matter of critical debate over the next few years. We hope our successors will tackle them and we recommend to them an early inquiry into weapons of mass destruction." [HC 144 para 71]

35. The Government agrees with the Committee that the proliferation of weapons of mass destruction and their means of delivery will be a critical issue in the years ahead. MoD will continue to tackle this problem with a comprehensive strategy. Clearly, the issues surrounding missile defence will also continue to be a subject of serious debate.

Asymmetric Threats

"While the UK may be regarded as well geared up to deal with traditional terrorist threats in general, new forms of terrorism and other aspects of asymmetrical warfare such as the use of hostages, environmental degradation, cyberwar, black propaganda etc, may find us rather less well prepared." [HC 144 para 74]

36. As the Committee's report recognises, the handling of the threat posed by asymmetric tactics is the responsibility of a number of Government departments. The Government is alert to the dangers of asymmetric attacks and our preparedness to deal with them relates directly to our threat assessment. The Government's planning covers the range of asymmetric threats, from preventing the threat emerging, through to preparing for the worst case. The potential for future threats and new forms of asymmetry is also being addressed.

The Documents as Part of the Reporting Cycle

"... one of the distinct disadvantages of the way the MoD now approaches the reporting cycle is the missed opportunity to place a far-sighted (though discomforting) essay such as The Future Strategic Context for Defence into a more general statement of policy and resources. Producing separate documents to be read in conjunction is not as useful a policy exercise, either for the MoD or Parliament, as producing a single document which integrates different issues and timescales." [HC 144 para 77]

"We consider there would be value in combining something like the policy essay of Defence Policy 2001, and indeed elements of the broader picture painted in The Future Strategic Context for Defence, with the Expenditure Plans, and recasting the format of that document to link resources allocated to key policy areas more clearly. That would bring the challenge of linking policy and resources applied more into focus, and would increase both the usefulness and the readability of the Expenditure Plans report, which in its present form makes only a modest contribution to accountability and transparency." [HC 144 para 78]

37. The Government considers that "Defence Policy 2001" offered a concise, clear and specific statement of Britain's defence policy and MoD proposes to update this on an annual basis, although there may not be significant changes every year. "The Future Strategic Context for Defence" which, as noted earlier, we propose to publish every four years or so, seeks to identify the key implications for defence from an analysis of current trends and potential future developments and is designed to provide a strategic context that will influence the MoD's planning.

38. Through publications such as the Defence Policy pamphlet, the paper on the Future Strategic Context and our new series of MoD Policy Papers, MoD seeks to provide both an overview and an in depth analysis of the key policy issues facing Defence both now and in the future. The Expenditure Plans report serves a separate purpose in fulfilling the statutory requirement to inform Parliament and the public of the Department's financial plans for a specific three-year period. (The work on improving the Expenditure Plans document is covered in the response to paragraph 13 of the Committee's report). Taken together with the wide variety of publications aimed specifically at the general public, these documents constitute a family of material designed and written with the specific needs of particular audiences - Parliament, the public, academia and the media - in mind. This new approach enables us to transmit more information far more effectively than was ever the case with the old-style Statements on the Defence Estimates and makes more explicit that which concerns reporting on our performance, and that which relates to future plans and policy. As such, our new approach is a significant contribution to openness in Government.

39. In this new system, the link between policy and resources is addressed through the publication of the Defence Policy Pamphlet (the annual restatement of the fundamentals of our policy and aims), The Government's Expenditure Plans, and the Performance Report. Additionally, the MoD has already indicated an intent to publish a full Defence White Paper perhaps every five years or every Parliament (or sooner if circumstances justify this).

"We would see merit in a White Paper, once a Parliament at least, which carries the signature of at least the Secretaries of State for Defence, Foreign Affairs and International Development, and that of the Prime Minister, showing how the 'joined up' policies of conflict prevention, crisis management and the maintenance of peace and security are operating, and are co-ordinated, across the whole of government activity." [HC 144 para 79]

40. Mechanisms for joint Ministerial reporting on conflict prevention, including the promotion of peace and stability in the world, are already in place. This reporting is undertaken annually and it covers the work of the Departments through the two sub-committees of the Cabinet Committee on Defence and Overseas Policy that have been established to conduct joint conflict prevention (one for sub-Saharan Africa, the other for conflict prevention elsewhere). The first, and latest, jointly agreed report was issued in November 2000 as part of Departmental Annual Reports and it covered the work of both sub-committees. Future reports may either be issued jointly, or in the form of jointly agreed text to be included in the separate Departmental Reports to Parliament. MoD believes that these arrangements already meet the need for reporting to Parliament on 'joined-up' conflict prevention policies.

SMART PROCUREMENT/SMART ACQUISITION

Faster and Cheaper?

"... future Performance Reports should provide sufficient detail to demonstrate conclusively and fully the timescale, cost and performance benefits obtained from smart procurement." [HC 144 para 83]

"We welcome the fact that smart procurement savings on individual projects will not be translated directly into cuts in the overall equipment procurement budget - there are many areas of deficient military capability that will take years to rectify, even in the most benign of budgetary circumstances." [HC 144 para 84]

41. The £2 Billion reduction in acquisition costs over the period 1998 to 2008 was identified as a target in the SDR. Over the three successive annual planning rounds since the inception of the Smart Procurement Initiative, costing reductions attributable to Smart Procurement have been identified which total £2 Billion over the 10-year period from 1998 to 2008 and this is expected to improve in current and future planning rounds.

42. Project procurement costings are dynamic. Action to change forward financial planning assumptions about cashflow is not in itself sufficient to measure whether the radical thinking demanded by Smart Acquisition continues to be effective.

43. The Defence Procurement Agency (DPA) is putting in place performance measures, akin to those used in the Major Projects Report but covering all projects over £20M, by which it can better capture and demonstrate over time improvements in acquisition processes. These measure whether new equipment will meet key user requirements as well as improvements in planned procurement timescales and cost.

44. Most of the DPA Targets for this and the next three Financial Years are already in place

and data are being collected. Performance Reports from the end of the current Financial Year onwards will include the results.

"... the basis for including projects in the [Major Projects] Report changed during 1999-2000 ....... Performance on the 'new' and 'existing' projects of the Public Service Agreement, it would appear, is not the same as performance with 'pre-' and 'post-smart procurement' projects of the Major Projects Report." [HC 144 para 86]

"The situation is made more confusing still because the corporate plan and the annual report of the Defence Procurement Agency use a third set of data." [HC 144 para 87]

45. The introduction of Smart Procurement has resulted in considerable changes in project accounting and approvals. In seeking to reflect these changes, the Defence Procurement Agency is aiming to improve the clarity of its performance information. This is the reason for the change in format of the Major Projects Report (MPR) 2000.

46. Some 'new' projects under Smart Approvals will predict an earlier 'expected' In Service Date (ISD) at the outset of the projects. The MPR tracks movement of this expected ISD. The Public Service Agreement targets measure ISD slippage beyond the approved ISD only, and this slippage is noted separately in the MPR.

47. The DPA's Key Targets comprise two elements: the average past cost growth or slippage of projects, and an allowance for in-year change derived from the Public Service Agreement targets. In order to make clearer the connection between the two sets of targets, the DPA Corporate Plan for 2001 shows the in-year allowance component of the Key Targets. This will be covered in the DPA Annual Report this year, in line with National Audit Office recommendations.

 "Despite the difficulty in reconciling the MoD's performance data, the results do indicate satisfactory performance against targets for cost overruns, if not on delays. ....... Nevertheless, the increasingly demanding targets for reducing both cost overruns and delays (in both the Public Service Agreement, and within the DPA's Corporate Plan) are a welcome indicator of the MoD's confidence in being able to secure improvements in the way its projects are managed. Improvements in these areas would be an important step towards meeting the smart procurement objectives of reducing projects' timescales and costs that underpinned such targets." [HC 144 para 88]

48. The Government notes the Committee's comment.

"We welcome the wider data capture in the MoD's monitoring of its project management performance, the results of which, we were told, will be made available to the House." [HC 144 para 89]

49. The DPA recognises the need to track performance against a wider range of projects than the Major Projects Report. As explained in section 2.2 of the 2001 DPA Corporate Plan, the DPA has adopted a measure of the performance against approval of all projects with expenditure over £20m, and has set itself a long term Strategic Goal of having 95% of these projects within all approvals.

Better?

"... there may be a fine line between acquiring better equipment through incremental acquisition and settling for 'worse' equipment by reducing its prospective potency, range or other capabilities. This is an issue that will remain at the heart of our annual examination of major procurement projects." [HC 144 para 91]

50. Smart Acquisition offers many ways to achieve better equipment capability, of which incremental acquisition is one. Incremental acquisition allows the timely introduction of a baseline capability followed by planned upgrades to increase capability incrementally through manageable steps, allowing for continuous cost versus benefit evaluation, risk reduction and responsiveness to technology maturation and operational feedback. In deciding to take an incremental approach the customer will balance military need against the benefits of reducing the time for key technologies to be introduced into the front line, thereby reducing the risk inherent in introducing large improvements in capability through a single major technological step. This is not about settling for 'worse', but managing more effectively the delivery of 'better'. The various stages of incremental acquisition are pre-planned. The level of performance required for each increment is defined, and successful achievement is a pre-condition for the equipment's Acceptance into Service.

51. In the case of Bowman, the application of a smarter approach to defining the requirement and the use of Incremental Acquisition has ensured that a considerable improvement on current capability will be delivered earlier than previously offered. The awarding of the contract for Personal Role Radios ahead of the main Bowman project is a good example of how Incremental Acquisition can deliver an initial capability faster without prejudicing the delivery of the full capability.

THE DEFENCE BUDGET

The Conflict Prevention Budget

"We intend to monitor closely the financial, as well as the security, implications of the Conflict Prevention budget." [HC 144 para 97]

52. The Government notes the Committee's comment.

Spending Review 2000

"We welcome the change in direction (though modest) in the MoD's budget settlements." [HC 144 para 101]

53. The results of SR2000 were very welcome allowing the MoD to press ahead with the implementation of the Strategic Defence Review, and to modernise our Armed Forces to provide balanced, better defence capabilities able to react quickly.

"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." [HC 144 para 102]

54. As the report says, the concept of role specialisation has obvious attractions as MoD seeks, in particular, to concentrate defence effort on those areas where the Alliance needs to make good capability shortfalls. No single nation could hope to support the full range of defence capabilities, so a degree of role specialisation is inevitable and already widespread across the Alliance: carrier-borne air power, for example, is the preserve of only a minority of Allies.

55. Role specialisation is however an area where considerable caution needs to be exercised in taking forward initiatives, not least because of the danger of role shedding. The UK believes that a pragmatic first step is improved multinational defence co-operation, which has the potential to provide more capability for the same level of resources, or the same capability for less. Ministry of Defence Policy Paper No. 2, published in February 2001, examined the benefits and risks of co­operation, and set out our plans for the future. A good example is the recent European Amphibious Initiative, where closer co-operation between France, Italy, Spain, The Netherlands and the UK will mean that those nations which have specialised in the amphibious role will become more effective when operating together. The Government would expect to see programmes of this kind assuming greater prominence in future in the UK defence programme, and hence in the Department's performance reporting.

The Efficiency Programme

"We welcome the Department's fresh assessment of the Efficiency Programme.

 ....... 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." [HC 144 para 107]

56. As reported in the MoD's memorandum of 3 April, work continues on the review of our Efficiency policy and procedures and the Committee will be informed in due course of the findings of the review and decision on the way ahead. The Government accepts the Committee's point that the MoD needs to demonstrate more convincingly the fact that efficiency is about improving military capability (by delivering the same outputs for less money or greater outputs for the same money) and this point will be taken into account in the ongoing review.

CONCLUSION

"Critical areas of uncertainty remain. Full manning of the Armed Forces, as we discussed in our recent Report on personnel issues, may not be realisable in the timescales hoped for in 1998, or even against the revisions subsequently made. There has been some overall reduction in overstretch, but in some key areas it remains and its recurrence more widely needs to be constantly guarded against." [HC 144 para 111]

57. The Government notes the Committee's observations on achieving full manning of the Services. As was made clear in the response to the Committee's earlier Report on "The Strategic Defence Review: Policy For People", the Department acknowledges that achieving full manning will be challenging, particularly in those areas where the civilian employment market is buoyant. But the MoD is working hard to address these problems.

58. Armed Forces retention is being tackled as a matter of the highest priority. A wide range of measures aimed at improving levels of retention through policies that genuinely reflect the priorities of our people and their families, both at home and on deployment, have been introduced.

59. With regard to overstretch, the burden on personnel is being reduced. Levels of commitment have reduced significantly since the height of the Kosovo operations.

"There must be limits to the amount of extra efficiency that can be demanded from the MoD and the Armed Forces." [HC 144 para 114]

60. The Government accepts the Committee's point that there are limits to the amount of efficiency that can be delivered by the MoD at any one time. As with any improvement target, efficiency targets should be set at a level that is challenging but realistic.

"We hope our successors will continue to monitor the implementation of the SDR, and in particular the major pinch points which we have identified. We also hope that they will continue to engage in a constructive dialogue with the MoD to ensure that the quality and coherence of the defence-related information which is provided to Parliament continues to improve. That is critical to ensuring democratic accountability for the maintenance of the UK's defence and security." [HC 144 para 115]

61. The Strategic Defence Review (SDR) and associated re-structuring and re-equipping of the UK Armed Forces remains central to the MoD's plans and the Government therefore welcomes the continuing endorsement of this programme by the Committee. Defence Policy 2001 states "The Strategic Defence Review remains the foundation of the government's defence policy, plans and programme, reshaping and modernising our Armed Forces to meet new realities" and this has been validated by recent operational experience in Sierra Leone and Kosovo. A key implementation milestone was passed earlier this year with the completion of just over half of the key SDR measures and the Department continues to monitor SDR implementation on a regular basis.

Ministry of Defence
25 June 2001

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Prepared 24 July 2001