Examination of Witnesses (Questions 1880
- 1897)
WEDNESDAY 7 JANUARY 2004
MR TREVOR
WOOLLEY, MR
PAUL FLAHERTY
CBE AND MR
DAVID WILLIAMS
Q1880 Mr Cran: Of the equipment
that was lost, I think that it was two Sea King helicopters, a
Challenger 2 tank, Tornado aircraft and various other things.
Which of these equipments will be replaced? At what cost and in
what timescale? This may not be something that you, as finance
director, are responsible for, and I doubt if you are, but could
you talk us through that process?
Mr Woolley: In answer to your
question, the Sea King helicopters will be replaced, in the sense
that Sea King airframes that we already have will be equipped
with the Searchwater radar to perform the role that the lost Sea
Kings undertook. So we have plans to purchase new Searchwater
radars to integrate into two Sea King airframes. That is a decision
which has been made. We are not planning to replace the Challenger
2 tank that was lost. We are not planning an extra Challenger
2 tank, or an additional Tornado to replace the Tornado that was
lost. We will be planning at some stage to have additional UAVs
to replace the Phoenix that were lost, but they will not be Phoenix.
We have not yet made a decision on the precise equipment.
Mr Williams: In due course the
Phoenix capability will be replaced by the Watchkeeper programme.
As I understand it, the production line for Phoenix has closed
anyway, so the option of getting more of the same is not there.
If we need to purchase an interim capability to meet operational
requirements in advance of Watchkeeper coming in, to make good
that shortfall, then we will consider acquiring that.
Q1881 Mr Cran: You have been
able to answer the questions of course, which we would have expected
you to do, but I take it that these are corporate decisions taken
within the MOD—by whom? The director-general of purchasing
or whatever? And you are merely presented with the bill?
Mr Woolley: They are decisions
taken—
Q1882 Mr Cran: It is interesting
that finance directors always giggle when you mention the bill!
Mr Woolley: The decision as to
the type of equipment and the requirement for a commitment will
be taken by the equipment capability organisation. You will be
talking to General Fulton and his team later. It is his organisation
which would take that decision. Because this is a consequent cost
of the operation, it will be the Treasury rather than, as it were,
me who is paying the bill, and therefore the Treasury will need
to approve those procurements.
Q1883 Mr Cran: I now understand
that. To tie down what you said, Mr Williams—in the case
of equipment which is no longer in production, such as the Tornado,
you would automatically go for the nearest option, would you?
Or is it just a bit more complicated than that?
Mr Williams: It would be a bit
more complicated than that.
Q1884 Mr Cran: Talk us through
why that is.
Mr Williams: In the case of Tornado,
I think the view is that the number of aircraft we currently have
in service—which in any case will have been sized to reflect
assumptions about attrition through life—are sufficient
to meet our future requirements, and therefore there is not a
capability gap as such that we need to fill. For the Phoenix UAVs,
it may well be that we would want to do something to fill that
capability gap earlier than the replacement programme, Watchkeeper,
that we already have in train—at which point we would want
to consider precisely what capability it is that we need to fill
and how best to meet that, either by purchasing a different model
UAV or by looking at other potential equipment or other solutions,
as appropriate. It becomes a standard investment decision, based
on an identified capability gap and consideration of arrangements
for possible solutions.
Q1885 Mr Cran: This opens
up a whole range of questions which we do not have time to ask,
and so I will not—but maybe on a future occasion. My last
question is this. If we think about Operation Telic that we have
just gone through—it has not finished, of course—what
major equipment will be written off and at what value? Are you
in a position to tell the Committee anything about this?
Mr Woolley: They are the ones
that we have already mentioned—the Sea King helicopters,
the Challenger 2 tank, the Tornado, and the Phoenix. Those are
the major equipments that will have been written off.
Q1886 Mr Cran: I had that
in my notes under the 2002-03 accounts, but that is not the case,
is it? It will be 2003-04?
Mr Woolley: In 2003-04, I am not
aware that there are any additional major fighting equipments
to be written off in addition to those which, as you rightly say,
were in the 2002-03 accounts.
Q1887 Mr Cran: Will you get
to that point? Is that a definitive answer?
Mr Woolley: That is not a definitive
answer. In the sense that I am sure I would have been made aware
if there had been any others, I think that it is reasonably definitive.
What is not a definitive answer is what the total value of equipment
written off as a consequence of the operation will be in 2003-04,
because obviously there may well be minor equipments; there may
be individual vehicles, and so forth. There is also, as we touched
on previously, the cost of the guided missiles that were used,
for which we do not yet have a figure.
Chairman: From personal experience, should
the MoD want any advice on frugality and how not to spend money,
then Mr Cran is your man! He redefines frugality!
Q1888 Mr Roy: We know from
an answer given to a parliamentary question in October that other
nations drew from our food and fuel supplies, and obviously we
would expect that those other nations would pay the appropriate
moneys back to us. How are such costs now being recovered? For
example, we know that 40% of the fuel dispensed by the UK's air
tanker fleet was given to US Navy and Marine Corps aircraft. Has
that money been recovered? Have there been any problems with the
United States or indeed any other nation?
Mr Woolley: I will ask Mr Flaherty
to comment in a moment on the more general points about cost-sharing
in theatre. As far as the particular case you raise is concerned,
I am not aware that there has been a problem here. There are longstanding
arrangements by which, where we buy or sell fuel between countries
that are on operations, this is reimbursed. Mr Flaherty may wish
to comment on the in-theatre cost-sharing arrangements more generally.
Mr Flaherty: We have arrangements
in place in our AO in southern Iraq which were agreed at various
contributors' meetings, which are basically in proportion to the
number of people in HQs and, if they are taking meals, they are
noted. We are in the process of finalising MOUs with each of the
countries, but actually the arrangements are already happening
and money is feeding through. So there is a system and a process
up and running in theatre now. For example, in Cyprus we certainly
identified the fuel costs and are in the process of getting that
money back from the US.
Q1889 Mr Roy: How long is
that process? How do you define the timescale?
Mr Flaherty: I am sorry?
Q1890 Mr Roy: You are in the
process of getting the money back from the United States. We already
know that 40% of the fuel was given over from the air tanker fleet.
What is that process? It is a huge proportion.
Mr Flaherty: There are two slightly
different issues. In Cyprus we had a fixed amount of fuel that
was there and we know exactly how much the US used. We have spoken
to them and have an agreement with them that they now need to
give us that money back. We are in the process of getting that
back, and I hope that will be finalised in a few months. Some
of the fuel that we dispensed through our aircraft was not necessarily
our fuel. It was not UK-bought fuel that we were dispensing. We
picked up fuel from Kuwait, for example. So it is not necessarily
a cost to the UK. We may well have dispensed fuel that was American
fuel that we picked up. Doing that was not necessarily at a cost
to us.
Q1891 Mr Crausby: The MoD
report, Lessons for the Future, told us that Operation
Telic was "the first major operation to be costed under full
resource accounting and budgeting principles". It went on
to tell us that it "created some additional challenges for
finance staff". You have already said that the National Audit
Office identified some shortcomings. From your point of view,
however, what problems were encountered for finance staff and
in what areas is there need for further work in order to address
those problems?
Mr Woolley: The first thing to
say—as indeed may have been apparent—is that resource
accounting and budgeting is a very much more complex way of managing
finance than the old cash system that we used to use. It has many
advantages, but it is more complicated. For example, we have to
account for consumable stock at the point at which it is consumed.
Under the previous cash regime, we accounted for consumable stock
at the point at which it was purchased. Similarly, we have to
identify the value of all our assets, and the write-off value
of those assets when we lose them, and record those in our accounts
and in our budget. We have to reconsider the life of our fixed
assets and therefore the rate at which they depreciate, if they
have been damaged, or if they have increased—in the case
of an aircraft, for example—their fatigue life during the
course of an operation as compared with what had previously been
assumed. So there are all these additional complications, these
additional considerations, which we have to take into account
in resource accounting and budgeting. We have both to estimate
as best we can what these costs will amount to and we also have
to account for those costs. These are all additional challenges
for finance staff. Finance staff are now reasonably familiar with
resource accounting and budgeting and therefore none of this,
conceptually at least, is necessarily terribly difficult. However,
in terms of actually assembling the figures and assembling the
right numbers it is both complex and time-consuming. It is why
we have tended to seek definitive numbers—particularly in
these more difficult areas which are concerned with the non-cash
costs of the operation as opposed to the cash costs of the operation,
which are reasonably straightforward to capture—to address
these principally in the course of assembling our resource account
at the end of the year. Essentially, those are the challenges.
In terms of where improvements and lessons may be apparent, I
think it is principally a case of ensuring that our finance staff
are properly trained and that, as part of that training, the operational
dimension and the need to ensure that all operational costs are
properly identified are well recognised. I think that it is well
recognised, but this is something we have constantly to re-emphasise
to people.
Q1892 Mr Crausby: In the light
of the Operation Telic experience and given that war-fighting
is something unique, do you still believe that it is an appropriate
system to be used in these circumstances?
Mr Woolley: Parliament requires
us to provide our accounts on a resource accounting basis. So
in a sense it is not a decision that the Ministry of Defence could
take, even if it wanted to, to account on a different basis.
Mr Crausby: You can express an opinion
though. I asked for your view.
Q1893 Mr Cran: From someone
who was once Private Secretary to the Secretary of the Cabinet!
Mr Woolley: Resource accounting
and budgeting has many advantages and many disadvantages. It has
disadvantages in the sense that it is more demanding on resources
for financial processes. We would not need so many people doing
finance if we did not have resource accounting and budgeting.
On the other hand, it does provide us and Parliament with information
that is relevant and useful. I think that the unique nature of
the Ministry of Defence and defence business makes the application
of resource accounting to it, in some cases, slightly strange.
We have to have certain work-arounds to make sure that resource
accounting and budgeting works in relation to the Ministry of
Defence.
Q1894 Mr Crausby: Was that
a yes or a no?
Mr Woolley: That was an opinion,
which is what you asked for.
Mr Crausby: I think that I will give
up!
Q1895 Chairman: On behalf
of Parliament, may I say that it was not our responsibility. It
was Treasury-driven, MOD-endorsed. We voted for it (a) without
understanding it and (b) without any responsibility. So to pass
us the blame is disingenuous, and maybe you could drop us a note
or talk to us privately on what you really feel.
Mr Woolley: I would prefer the
latter, I think.
Q1896 Mr Viggers: The Comptroller
and Auditor General noted that "the Department's chart of
accounts is not designed to record automatically the cost of individual
operations". Given the fact that it is likely that the number
of operations will increase, how do you propose to address that
issue in future?
Mr Woolley: The chart of accounts
as such does not, but we have processes which have the effect
of providing us with that information. As we have indicated, we
are reasonably confident that those processes are robust. I do
not think that we therefore have any plans at the moment to alter
our chart of accounts.
Q1897 Mr Viggers: The system
of financing which takes the capital cost and puts a charge to
it does give an incentive to run down capital stocks. How would
you respond to suggestions that have been made that the Ministry
of Defence may have run down stocks in order to reduce the cost
of capital?
Mr Woolley: I fully accept your
point that the cost of capital charge that is applied to all assets,
including stocks, is intended to give visibility to the notional
cost of holding assets in the form of stock rather than in the
form of cash, and therefore the notional interest that you might
be able to earn on that cash if it was in the form of cash rather
than the form of stock. So, yes, it is indeed there to identify
the cost of holding stock. Having said that, I am not aware that
that in itself has significantly affected decisions about levels
of stock-holding. It is only 3.5%. It is a relatively small element
of the total cost of procuring new stock, for example. Until 1
April this year, when we move on to stage 2 resource accounting
and budgeting, it fell outside the control regime, outside the
departmental expenditure limit.
Chairman: Rather than to keep you hanging
around for 20 minutes, gentlemen, we will have to draw stumps.
We have a number of questions to ask you, which we will write
to you about.[7]
Rachel Squire: I wanted quickly to follow
that up and maybe to take it on advice. I was going to ask you
this. What would your response be to what we have heard, both
during our visit to Iraq and in the subsequent visits we have
made in this country, that resource accounting is the prime reason
why supplies were delivered just too late rather than just in
time? However, I accept that the Chairman wants to ask you to
write in response to that and other issues.
Chairman: Please do. Thank you very much.
7 Ev 431 Back
| 
