Examination of Witnesses (Questions 1-19)
12 MAY 2004
SIR KEVIN
TEBBIT KCB CMG AND
MR TREVOR
WOOLLEY
Q1 Chairman: Sir Kevin and Mr Woolley,
thank you very much for coming along. This is the first year,
as you well know, in which the MoD has combined the Annual Performance
Report and the Departmental Resource Accounts into a single document.
I think it is a document which even journalists would be prepared
to read through to the bitter end. What plans do you have for
further improving the format and content of the accounts, or are
you perfectly satisfied with the way in which you have configured
it at the moment? If you do think different things could be added
or a different approach taken, what process will you be undertaking
to evaluate your handiwork so far?
Sir Kevin Tebbit: The first thing
I would say is that we should like to speed up. We are progressively
getting better at laying our accounts and reports earlier in the
year. In 2000-01 we were back in December and we have come forward
by a month each year. So by 2005-06 I hope we shall be in a position
to lay our accounts with the report linked to them before the
recess. The first thing is that I should like to get earlier in
the year so that we can have these sorts of discussions a bit
closer to the actual events which are described in the material.
The second thing is on content. There are always judgments to
be made about what you put in, what you leave out, whether the
presentation is as geared to the outcomes and the outputs as may
be desired. We are open to suggestions for improvement and this
Committee has already made one or two in our written correspondence
between us over the past few months, which we are certainly looking
into. One or two things spring to mind. When we describe our Public
Service Agreements (PSA) targets, you have said to us that we
have sometimes, when we have failed to achieve targets, not had
a column for the remedial action. I think that is a very good
point. There always is remedial action: why do we not say what
it is? That is one illustration. If I were the Committee—I
am taking a chance here, but why not, I have been around for a
long time now—
Q2 Chairman: You have enough troubles
without a slight one being added.
Sir Kevin Tebbit: I have enough
troubles as it is, but I am a generous man so let me share this
one with you. I should like to be able to link the money spent
more clearly to the outcomes achieved in relation to our Public
Service Agreements, our key objectives. We try to do that the
best we can in defence. The trouble is that since our whole force
structure is a capability for flexible employment, that capability
is employed flexibly across a whole number of different targets
and objectives. I am not quite in the same neat position as in
the Home Office where you can ask what it costs to deliver the
prison objectives, or the policing objectives. It is much easier
to show how those various sums are attributed. It is rather more
difficult in defence. We have three broad attributions: cost of
current operations; cost of the capacity in being; cost of the
long-term plan, the future capability we are developing through
the equipment and the logistics plans. Costing to those three
broad headings are about where we are now and we can give you
sub-details of that. I should like to have done more and I am
always conscious of trying to demonstrate more clearly how the
money is linked to the outcomes.
Q3 Chairman: Overall, when this Committee
complained a few years ago about the Defence White Paper not being
annualised, I thought we were in for a bad time, but frankly the
publications are quite professionally done and it is very good
for people who are observing the MoD scene to get a much more
open approach and more information made publicly available. The
format of this document does look very professional and we shall
discuss the context of the document in a moment.
Sir Kevin Tebbit: I have this
false sense of security.
Q4 Chairman: You sent us a memorandum
at the end of January which said that the MoD was looking at ways
in which financial and performance reporting could be more easily
aligned in the annual report and accounts. Can you just give us
a little more detail on the progress you have made on this issue
and whether you can bring forward the date in future when you
introduce the annual reports and accounts? Just elaborate slightly
on what you said a little earlier.
Sir Kevin Tebbit: On the format,
I hope we shall be able to produce those for 2003-04, the year
which has just passed, by 30 September. We shall want to discuss
2004-05 with the Committee because the progress we are making
will put them slap in the middle of the recess, so maybe we shall
hold it as soon as the recess is over.
Q5 Chairman: Good timing for the MoD.
That is carrying on a well established trend.
Sir Kevin Tebbit: I hope we will
get 2005-06 in before the recess. In other words, the way the
accounts are working, the way the staff are performing, I am reckoning
we are getting better by one month each year. More than that I
could not do, but certainly I would hope to be able to promise
that much. As far as the format is concerned, I have mentioned
one or two things. We have taken on board the point from the Committee
that perhaps we do not put enough information about your own reports
on us over the year. We list the actual reports, but give no detail
about them. There is a balance to be struck about how much we
put in, but we will be looking at whether we can put some brief
summaries in of key areas covered, so it is a little more informative.
It is still going to be our report rather than Parliament's, but
nevertheless, we are looking at doing something there if we can.
I am open to suggestions on improving and if there are difficulties
we will be open about what they are.
Q6 Chairman: In terms of parliamentary
scrutiny, that will be immensely helpful. We spend a lot of time
producing the report. You then respond within the allotted period
and then things can disappear. Unless we produce reports saying
what happened to recommendations made five years earlier, then
frankly we are not aware of the consequences of the report, where
you might agree. Ironically they did that in the nineteenth century
and produced vast private volumes available to the War Office
and the Admiralty where the various parliamentary committees made
reports and then in a very detailed way they chronicled what had
happened to those recommendations. What you say might appear to
be innovative and I very much hope it will be done, but if you
do it, that is re-establishing a principle which has long since
been abandoned. We look forward to any further thinking on this
one.
Sir Kevin Tebbit: We probably
would not be able to do it in quite that detail because of the
size of the report which would emerge. I think we could do the
twenty-first technology equivalent by putting clearer cross-referencing
to where the websites are available so people can simply use their
own internet from home, or wherever, and link up more readily
to the information which is out there. We do not have to put it
all in paper form these days, but we do need a paper which gives
everybody the route to finding it if they need it in this same
document.
Q7 Chairman: You mentioned bringing the
date of the reports forward a bit which appears to be helpful.
Do you have any information on where the MoD stands in relation
to other government departments? Are they going through the same
process of trying to shorten the time-span somewhat?
Sir Kevin Tebbit: I think they
are. I must say that I am not in detailed touch with my colleagues.
On this particular issue we have simply tried to provide more
information by this combination of reports and essays into particular
areas which I am quite proud about really. We have tried to give
more information there. We have had a bigger challenge than most
departments in coming to terms with resource accounting and budgeting
(RAB) because of the size of our asset base. It means that we
probably have more obstacles to overcome in speedy production
of accounts than some. I do not know whether there are technical
issues which are easier or harder for us than other departments.
Mr Woolley: On pure accounting,
the technical difficulties the Ministry of Defence faces are immensely
greater than almost any other government department. In terms
of the timing of reports, I am sure all government departments
will be looking to produce them and the accounts in the timescale
we are seeking. We are actually rather ahead in terms of the timing
of the report itself; many government departments do not publish
a report until nearly a year after the end of the previous year.
All government departments are looking to improve on that.
Q8 Rachel Squire: May I ask a couple
of questions about resource accounting and budgeting? You do tend
to get mixed reviews from the National Audit Office. I know the
Comptroller and Auditor General congratulated the MoD on encouraging
resource accounting and budgeting progress to date. However, the
departmental resource accounts for 2002-03 were qualified by the
National Audit Office. Can you say what progress you have made
to improve the accuracy and reliability of your stock management
information and how confident you are of achieving a clear audit
certificate for the 2003-04 departmental resource accounts?
Sir Kevin Tebbit: You are quite
right: it is about recording stock movements. That is the problem
we have had. If I might just put it in context, the government's
chief accountant, Sir Andrew Likierman, basically gave us the
biggest accolade of any department in terms of how we had faced
up to the challenge. The challenge for us was much greater than
for any other single department. We have an asset base of £86
billion which is by far and away the most complex, if not absolutely
the largest asset base in government. The accounting systems we
have in place were not designed for resource accounts. They tell
us a great deal about how much we have, where it is, what state
it is in, precisely what it can do. They were not designed to
put valuations on current stock in the original cost price. Therefore,
to convert all of this system into giving us accruals information
has been a major task. I used to describe us as falling forwards.
We knew we would make mistakes, we knew we would get accounts
qualified as we went along, but that was the direction we were
going to go in and we will get better and better. Last year there
was just one area of qualification to do with tracking stock.
The technical problem is that the system used in the RAF is a
thing called an auto-balance system. Any discrepancies of stock
between the beginning and end of the year, done monthly actually,
matched against the inventory are automatically corrected so the
balance is correct, but there is no audit trail to show precisely
how it was done. There have been various problems of misbookings
and the need to define more clearly how to book particular items.
It was in that very specific area that we had the qualification.
It was over £1 billion; it was not a loss or gain of £1
billion, and it was an accurate figure, but it was simply that
we could not provide the audit trail for it because of the nature
of the systems. For the year which has just gone past, I am reasonably
confident that we have reduced that to such a degree that it will
not be a material issue in the accounts and I hope to get a clean
bill of health. At the moment I cannot say that because the NAO
are currently going through our accounts. In broad terms, it has
been difficult; we have got better progressively each year. Last
year we had fewer difficulties than the year before. This year,
the one which is immediately past, I am hoping we will come out
cleanly.
Q9 Rachel Squire: Thank you. That very
much picks up on what I understand you have said, Mr Woolley,
about the more complicated way of managing finance and that there
has to be certain workarounds to make it work in relation to the
MoD. Are you confident that all your staff now have the required
skills to deal with this challenging and more complicated system?
What workarounds do you have to make to make resource accounting
and budgeting work?
Sir Kevin Tebbit: May I just say
that training up the finance staff to do this was one of the big
challenges for the MoD. We have introduced our own training packages
as well as national ones. We have brought into the department
large numbers of accountants from the private sector, but we also
have a thing called the Finance Director's licence, which accounts
staff get after they have passed a certain level of competence,
to give further strength to our overall financial management,
people who are not formally accountants but need to deal with
finance. So we have done a lot in that area. It was a huge achievement
from the previous Finance Director, Colin Balmer, who on the back
of that has now gone to the Cabinet Office and Number 10 as the
managing director of the Centre, and is being carried forward
now by Trevor Woolley. It is something we can feel pretty proud
about. We have had shortfalls in numbers of staff, it has been
a very difficult area and it has needed great leadership to lift
the morale and the skill and the recognition of our finance people
to where it is now, which is pretty high. I am personally very
much in favour of resource accounting and budgeting. I think it
provides much more accurate information about what we are doing,
how we are managing our assets as a whole. It enables us to be
fully aware of the full costs of what we are doing at the time
we are delivering the outputs because cash did not. You buy something
and three years later you might use it and there was no way of
measuring that against the actual output you were achieving. Now
there is a direct relationship because accruals oblige you to
cost everything when it is consumed, at the point of use. It gives
a much better handle on the real cost of doing things. There are
other benefits as well to do with debts. We used to put them off
accounts in some sort of suspense form; now they come onto the
balance sheet. We have greater incentive for making sure we collect
our debts. We have greater incentive to bear down on the assets
which are not fully useful, because we have to pay capital charges
on them and depreciation costs. All in all, it is a much better
way of managing a huge area of public expenditure. It just gives
us great challenges. Trevor will say one or two words about how
we have responded to that in staff terms.
Mr Woolley: There is an issue
of skills and there is an issue of experience. We employed a lot
of professionally qualified accountants from outside the department
when we embarked on the implementation of the new accounting regimes.
That brought us new skills, but what we have needed is experience
as well, because the way resource accounting works within the
Ministry of Defence and within the public sector is quite different
in its application in the private sector, plus the fact that we
did not have the financial accounting systems in place and we
had to get them up and running. There has been an enormous improvement
in the quality of the finance staff in the Ministry of Defence
as a result of the skills both brought in from outside and the
training we have made available to individuals, combined with
the experience people have now had of three or four years of operating
resource accounts. What I am looking for is now to build on that,
to get from a position where I think our financial control is
quite good in terms of identifying the numbers and making sure
they are properly recorded and ensuring that we manage to a budget,
to a system in which we use the information to make better decisions.
Clearly the real test, the real value we can get from commercial
accounting is better decisions. That for me is the next stage
we have to embark upon.
Q10 Rachel Squire: I am glad you raised
that point. Especially when talking to armed services personnel,
you will not be surprised that comments are made about how they
could get something quicker, better, cheaper than this apparently
complex maze of accounting and delivering. Just what focus do
you give to whether all the challenges and changes you have made
with resource accounting actually do deliver for the troops on
the ground?
Mr Woolley: It certainly has the
potential to ensure that we make better decisions, that we make
better decisions about resource allocation for example. For instance,
the fact that under resource accounting we capture the cost of
consuming consumable spares and ammunition at the point at which
they are consumed rather than the point at which they are purchased
means that we now have a much better feel for the cost, for example,
of an army exercise. Because we know what the cost of an army
exercise is, we can better make judgments about the relative priority
as between conducting that army exercise, doing the training in
a different way, expanding the exercise and having it overseas
or having it in this country or whatever. There is the information
there to make those sorts of judgments which previously was not
available and that ought to mean that we are making better decisions.
Sir Kevin Tebbit: There is a different
point here as well that you are getting at. There is always a
tension in every walk of life between a local unit which says
it can go down the road and buy it cheaper from the corner store
and the centre, which says, if we deliver centralised services
we can get much greater savings for the organisation as a whole
and a level of service which is better for everybody as a whole
if we go down those routes. There is always a tension between
individual local freedoms and collective efficiency and that is
true of whatever walk of life one is dealing with. Any big organisation
faces these sorts of problems. The trick is to work out what is
really best done with local freedoms, with very small petty cash
allocations, and what is best done collectively for efficient
procurement as a whole. If you look at the way the government
is going at the moment, with the Gershon review, one of the key
efficiencies that Gershon is looking for is efficiency in procurement
by chunking things up into even bigger blocks to use the power
of the government as a whole in the market to get better deals
all round. That probably will still never stop the individual
at a local unit saying actually he could go round the corner and
get the paint cheaper and just paint the barrack block himself.
It will be better for the organisation in total. Getting people
to understand that, sign up to it and see the benefits for them
as a whole is quite a challenge. So, for example, we are going
in for prime contracting for the maintenance of the defence estate,
regional prime contracts. Instead of hundreds of individual contracts
which we have had so far with local companies, we are now going
in for very, very big ones, five for the country as a whole, the
whole of Britain. We have already let the one in Scotland. The
South West is about to go now. These will deliver overall savings
to us in our maintenance budgets of perhaps 20 or 30% for the
same level of upkeep. It may not look like that to some individual
people who want the barracks block round the corner done today.
We have to look at those bigger pictures as well as the small
ones.
Q11 Rachel Squire: Thank you. That leads
me on to my next question and this key thing of whether those
savings actually deliver a better overall defence capability and
what our armed service personnel need. Are there conflicts of
interest? During the evidence session on 31 March for our White
Paper inquiry you told us that resource accounting offers you
scope ". . . to make the defence budget stretch further"
by bearing down on your asset base of £86 billion to release
resources caught up in capital charging or depreciation costs.
However, you also said that the Treasury was unwilling to let
you have the "full flexibility" you had sought. That
seems to be a possible area of conflict of interests between making
the defence budget stretch further and not being allowed to have
the full flexibility then to focus what you have achieved in the
areas you have established should be a priority.
Sir Kevin Tebbit: There are two
separate issues here. The first one is: are we actually getting
these efficiencies and savings to put into the rest of the budget?
I was making a rather separate point. There the important thing
is to make sure we do track benefits so that when we introduce
a particular reform, modernisation, rationalisation, efficiency
measure, we actually track that the forecast savings are being
achieved and as it were made available to strengthen the frontline
for example. That is a very important element of what we are doing,
also in our overall change delivery plan: ensuring that we identify
the benefits and then track that they happen is of critical importance.
Too often in the public sector we have said we are going to do
this and save 15% and proving it has not been quite so straightforward.
The organisation reorganises itself and moves on and nobody knows.
We have to be able to track those benefits better. We are determined
to do so in the MoD. That is the first point. The second point
about the question of what happened in our budget last year is
quite different, but if you like I shall explain what really happened
then more clearly because it has been misrepresented and mis-recorded
rather a lot in the press.
Q12 Rachel Squire: I certainly wanted
to ask you what the financial implications were to you of the
Treasury not allowing full flexibility and how you will manage
your budget as a result?
Sir Kevin Tebbit: The last spending
round SR02 was the first one which was conducted on a full resource
accounting basis. Then, similarly, we in the department conducted
our own internal planning round on a full resource basis. We were
not subject to a cash limit and therefore our cash requirement
for last year—it is not this year, it is 2003-04—was
derived from those resource plans and were consistent with the
resource budget that we had. For wider fiscal reasons, the way
in which the economy as a whole had moved, the Treasury asked
us during the course of last year to reduce our planned level
of cash spend. They did it by asking us to re-allocate resources
from the lines of our resource budget which generate cash into
ones which do not and we did that and we changed out plans internally
as a result. It did not reduce the overall defence budget. That
total budget remained exactly the same as set out in spending
round 2002; £3.5 billion increase, the biggest in 20 years,
5% real growth over three years, all this remains true and we
expect still to spend close to that total resource budget when
the accounts are finally closed this year. But it did require
us to constrain those activities which generated cash spend.
Q13 Rachel Squire: Coming to a more specific
example, can I ask you about the Treasury's stance on the impact
on the number of equipments procured as urgent operational requirements
for Op Telic which can be retained in service?
Sir Kevin Tebbit: Op Telic is
a completely different issue again because the resources for Op
Telic were provided in addition to our normal budget. So the Chancellor
has allocated £3.8 billion for Iraq: Ministry of Defence
mainly, to some extent DFID and the Foreign Office. Within that
we had some urgent operational requirements which were raised
and most of them are accounted for in these accounts. The rule
about this is that urgent operational requirements are only allowed
for very specific operations where you needed them to do a particular
task as opposed to the general activities of the armed forces.
Some things were very Iraq specific for that operation, some things
were the result of bringing forward plans which were already in
our plan, but which would have been met two or three years later
and we had to accelerate them. What that means is that we have
to decide at the end of the period how much we keep. For those
we keep which were otherwise planned we will find our future allocations
adjusted accordingly. The Treasury will not let us buy them twice,
if you see what I mean. Those which we choose to keep, which were
not otherwise in the plan, we will have to find the resources
for. Those we will choose to keep will be the ones which will
have most general relevance to our activity across the board.
I cannot give you a specific answer to say whether there are some
we will not be able to keep because of specific issues such as
this non-cash to cash transfer question. I cannot give you an
answer to that. I can say that in an ideal world I would do everything
and have everything; but everybody is constrained by overall resources
so choices will have to be made. We will keep some, the most important
ones, others we will not. Of course some of them are time limited
anyway and their life expiry is pretty quick.
Q14 Rachel Squire: May I finally ask
you the reasons for two PSA targets being missed and three PSA
targets only being partially met and to what extent inadequate
funding was the reason for that?
Sir Kevin Tebbit: Of course I
would say always inadequate funding. Could you be more specific
about which ones you mean?
Q15 Rachel Squire: Paragraph 4 in the
annual report and accounts.
Sir Kevin Tebbit: Forgive me if
I do not cover them comprehensively, but the main ones which were
missed were in procurement and are to do with the time and cost
of the procurement programmes. I think that is probably correct.
That is not to do with total resource allocation, that is to do
with slippage in the programme due to industrial factors and general
things. I think that would be correct. I am not absolutely certain
to which PSA targets we are referring here. Would you just give
me a moment, because it is a big document? Yes, the main slippage
in the programmes which were not met were in the areas I was talking
about, bringing on our equipment programme. As you will see from
there, the issues were not to do with resources, they were to
do with the rising cost of major projects, particularly what we
call legacy projects, the ones which were begun before we got
our smart procurement processes in place and four are causing
particular difficulty and continued to cause difficulty in the
past year. I have had some unpleasant appearances before the Committee
of Public Accounts to explain why the costs have gone up so much.
That is not so much a question of not getting the budget, but
of overruns in the actual procurement programme.
Q16 Mr Blunt: You have just told us that
in the course of the last year the Treasury invited you to reduce
the cash expenditure. By how much did they ask you to reduce it?
Sir Kevin Tebbit: How much did
we actually change our plans by?
Q17 Mr Blunt: That was not quite the
question.
Sir Kevin Tebbit: That was the
issue.
Q18 Mr Blunt: Perhaps you could answer
the question and give the supplementary information. The request
was what the actuality is turning out to be.
Sir Kevin Tebbit: I do have a
difficulty here. In the current discussions which the Defence
Secretary is having with the Chancellor, the discussions are covering
not just our bid for the spending round itself, but also this
particular issue of the extent to which we should be free to move
resources, properly accounted for into cash. I have seen comments
in the press saying we were engaging in creative this and creative
that; not true. Everything is absolutely in accordance with accounting
standards throughout the accounting profession endorsed by the
National Audit Office and by independent accountants. How much
could we move, how free should we be to move from the non-cash
element of our budget, that is to say depreciation and capital
charges, into cash? That discussion is still going on and the
extent to which we shall be able to do that is still part of that
overall negotiation. I am afraid that it would be wrong for me
to give details at this stage because it will become evident when
we have our final settlement in July, but before then I am afraid
my lips are sealed.
Q19 Mr Blunt: I do not think that is
acceptable. Parliament votes the money for the Ministry of Defence.
This Committee represents the House of Commons in looking after
defence. It is one of our primary responsibilities to understand
the expenditure by the executive. You are going through the consequences
of this change in accounting and you then gave a reference to
the fact that for wider reasons the Chancellor had asked you to
reduce cash expenditure in the course of this year. You then are
not prepared to tell us how much that is. I should have thought
that on 1 January 2005, if I made a request to the Information
Commissioner for that information to be made public . . . I cannot
possibly see what the public interest is in that not being disclosed.
Why can it not be disclosed now?
Sir Kevin Tebbit: Because it is
one of the issues which is rolled into our bid and if I were to
start discussing it here I would effectively be revealing positions
which are under discussion confidentially between the Defence
Secretary and the Chancellor. That would either weaken the Defence
Secretary's positions or the Chancellor's and would not be in
the interests of the government as a whole. These are active discussions
and the outcome will be known in the next couple of months.
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