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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 589-i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE DEFENCE COMMITTEE
MINISTRY OF DEFENCE ANNUAL REPORT AND ACCOUNTS
Wednesday 12 May 2004 SIR KEVIN TEBBIT KCB CMG and MR TREVOR WOOLLEY Evidence heard in Public Questions 1-109
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Defence Committee on Wednesday 12 May 2004 Members present Mr Bruce George, in the Chair Mr Crispin Blunt Mr James Cran Mr David Crausby Mr Kevan Jones Mr Frank Roy Rachel Squire ________________ Memorandum submitted by Ministry of Defence Examination of Witnesses Witnesses: Sir Kevin Tebbit KCB CMG, Permanent Under Secretary and Mr Trevor Woolley, Finance Director, Ministry of Defence, examined. 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 Tebbitt: 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 Tebbitt: 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. 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 Tebbitt: 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 Tebbitt: 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 Tebbitt: 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 Tebbitt: 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 Tebbitt: 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 Tebbitt: 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 clearly. 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 from 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 per cent 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, so in our overall changed 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 per cent and prove it and 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 miss-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 per cent 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. That 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 in full 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 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. Q20 Mr Blunt: If we want to make a comparison between defence expenditure historically before RAB came in and now, are we right to look at the cash flow statement to try to identify a satisfactory comparison? Sir Kevin Tebbit: I am not sure that would be too helpful because of all the other elements which come in and out of cash flow. Q21 Mr Blunt: In the old days it was actual cash and this is the place to look for actual cash within the budget, is that right? Mr Woolley: Yes. The actual cash is indeed a comparator. We went through a phase of so-called stage one resource accounting and budgeting and the control regime we had in 2001-02 and 2002-03 was an evolution from the cash regime, but it was not the full evolution into the full RAB regime. Although the size of the defence budget in 2001-02 and 2002-03 is very similar to the size of the budget under the cash regime in terms of what is encompassed by the budget, it is different because the principle of accruals accounting applied in 2001-02 and 2002-03, that is to say you accounted for expenditure at the point of consumption rather than the point at which the bills were paid and therefore the defence budget as it stands for 2001-02 and 2002-03, although it is comparable to that for previous years, is done on a rather different basis and therefore is not directly comparable. When we move on to 2003-04 we go to full RAB and all sorts of new items come into the budget and the headline figure of the budget becomes very much larger and therefore you cannot make that sort of comparison. In terms of the cash flow, the cash flow in these years is comparable. What we do not do is identify a separate cash flow for the cost of operations. If you are looking at trying to prepare the defence budget on a cash basis with the extra cost of operations sliced out, that we cannot do because we do not identify a separate cash flow relating to the extra costs of operations. There is indeed a cash flow for 2002-03 and that would compare with the overall cash flow in the pre-RAB regime. What you would not be able to do is net off the cost of operations. Q22 Mr Blunt: So the cash figure would be inflated for the cost of operations to some extent but not the precise extent of the operations because of the way they are taken onto the budget line. Except of course in the old days if it was actual cash expenditure then I do not quite see why you cannot make the comparison. It may not be precisely year by year, but over the piece, if one were looking for the comparator, one would be able to see that the actual expenditure would actually reflect a reasonable comparison with previous cash expenditure, accepting the caveat about when operational expenditure is paid and how much. Mr Woolley: Yes, it would be a reasonable comparator of gross cash expenditure on all elements in the defence budget. What you would not be able to do, which is what we normally do in making these year on year comparisons, is take off the extra cost of operations because they distort from one year to the next. When we were managing in cash, we measured the cost of operations in cash and therefore we would take that out of the overall cash. Under the new resource accounting regime, while we have an overall cash figure, encompassing all elements of the budget, we do not separately identify the cash relating to operations. That is identified in terms of the resource cost. Therefore it would be difficult to compare the cash net of operations under the old regime with the cash under the new regime. Q23 Mr Blunt: What we do know is that you have a cash crisis. Sir Kevin Tebbit: You can see why I asked the finance officer to explain this. Q24 Mr Blunt: Yes, but I think it is still perfectly possible. Sir Kevin Tebbit: No, we do not have a cash crisis; that is not true. Q25 Mr Blunt: You do not. So what Sir Alan West was reported as saying in The Times today or the remarks attributed to Sir Jock Stirrup about the cuts that were going to be required in the Royal Navy and the Royal Air Force have absolutely nothing to do with cash at all. Sir Kevin Tebbit: I always regard crisis as defined by a combination of challenge and opportunity. Q26 Mr Blunt: Crisis is the word at issue here. Sir Kevin Tebbit: Crisis is when one --- Q27 Mr Blunt: We have a cash opportunity. Is that right? Sir Kevin Tebbit: If you ask me as the accounting officer, crisis is when I am unable to control the budget. That has not happened. We control the budget; we controlled it in this year we are looking at and we came in well within any target that anybody would set: 0.3 variation in outturn over this volume of cash is quite an achievement. In the year which has just passed you will find again that we shall be coming in within our budget; not very much in, but still inside the budget. In terms of controls: no crisis. In terms of my role as the permanent secretary, in terms of financing defence as a whole, of course we always want more and we would always like more and it is always wrong for me to say that what we have is enough. We will continue to deliver defence outputs, capabilities, force structures in line with the policy, including the Defence White Paper of December 2003, as far as I am aware, subject to the outcome of this current spending round. So I do not regard that as a crisis. Ask me in July and I might answer the question again. Q28 Mr Blunt: So the cash opportunity facing the Ministry of Defence at the moment is sufficient for the Secretary of State to have to write to the Chancellor as reported saying that the demands for a £1.2 billion cut in defence spending is putting the MoD operations and the rest at risk, that that would appear to have led to the work strands which are going on at the minute which are looking for savings of that sort of order and that part of that work is being generated by this cash opportunity that you face. Sir Kevin Tebbit: Firstly, the £1.2 billion figure you mentioned is not one I recognise and I cannot confirm it. Secondly, the work strands which are under way at present are derived from a combination of reasons. The first is that we should want to do the evolution of the force structure anyway in relation to policy. Q29 Mr Blunt: Does the need for any of those work strands come from the cash request from the Treasury? Sir Kevin Tebbit: There is a combination of reasons, not the cash request from the Treasury. There are rising costs in the budget. The first is that we should want to do this anyway. The idea that we should sit with a force structure which never changes is wrong, particularly in relation to how our technology has moved on. As we said in the White Paper and as the Secretary of State has said in speeches, we need to move to a sense of defence effects, the effects we can create by our force structure rather than simply platform numbers and people numbers. It does not mean to say numbers are not important, but they are no longer the driving measure of defence capability that they were. Precision guidance, speed of response, quality of intelligence, all linking up, intelligence to decision makers to delivery systems, all that is important. I know you understand that, but it is important to say that. That is one part of the work. The second part of the work is to do with the rising costs in defence caused by factors such as the speed of growth in the equipment programme, where costs are rising much more rapidly than normal inflation, which is an industry problem as much as it is a defence problem; the success in some areas of recruitment, where we are now in a happy position, we are virtually at manning balance. Shortfalls tend to be in specialist areas rather than in total numbers. That has put more pressure on the budget, because it has happened faster than we expected. In the year of this budget we are looking at, there are £20 million extra costs coming through. This past year it has been even more than that. Other factors too affect this. So we have rising costs and the issue you are mentioning, the reduced flexibility to move from non-cash to cash is a further element. However, it would be wrong to regard is, as has been presented, as the driving element. Q30 Mr Blunt: The trouble is that if you decline to tell us the numbers, it is impossible for this Committee or even informed defence opinion to come to a judgment about how much of the drivers for the very significant changes which are now happening in defence, possibly dozens of ships it would appear, if this report in The Times this morning is correct, being taken out of commission, thousands of sailors and airmen. Sir Kevin Tebbit: I hope not dozens of ships, otherwise the Chief of Naval Staff will have a bad time of it today; not dozens of ships. Q31 Mr Blunt: It depends on the definition of the size of the ship. I think it was in the region of 100. Sir Kevin Tebbit: I do understand your frustration, but there is not a permanent secretary in Whitehall who would be able to sit before a Committee and describe the details of their Secretary of State's bid at this stage, except for the ones who have already got their settlement. Q32 Mr Blunt: What we are trying to identify is the proportionality, what is being driven by this non-flexibility within the budget and therefore the Treasury requirement for a cash reduction. Can you give us some indication of the proportionality which is due to defence inflation in the procurement field which is related to the in-year cost rises identified by the NAO in the management of major projects? How significant is that? Are you able to give us a 25 per cent? Are you able to put a percentage figure on it? Sir Kevin Tebbit: I cannot be drawn further. You are fishing in an area where I have already said we shall just have to wait for the next couple of months while the negotiations go on. Q33 Mr Blunt: How will you achieve the required reduction in procurement expenditure which falls out of the Chancellor's requirement for reducing government expenditure across the board in administration and procurement by 2.5 per cent annually if you are faced with defence inflation? Sir Kevin Tebbit: That again is a separate issue. The 2.5 per cent target is one pretty familiar to defence; 2.5 per cent efficiency is what we have been generating broadly speaking for a long period. We have not had the same increases in our budgets as other departments have. I said our one two years ago was the best for 20 years, but that is more a reflection on how small increases have been in other years and reductions in other years rather than huge growth. We have had to live with efficiency for a very long time in the MoD, so a new challenge for 2.5 per cent is not that different. It is different in the sense that our efficiencies, as expressed in this report are against a basket of measures. The efficiencies which are coming through now from the Gershon report are total against budgetary base lines. To that extent they are more demanding. I expect us to be able to meet those targets. We have hard forecasts to meet those targets. They derive firstly from the work we are doing already. The changed delivery programme which we put in place is referred to in these accounts, which was set up at the beginning of 2002, where we felt we were not giving enough emphasis to the key driving changes in the department which would generate efficiencies and I recommended to the Secretary of State that we should create this sharper focus on the key projects - we have about 11 or 12 of them now. That pre-dates this latest issue. Secondly, the key thing of course is that we keep the efficiencies which are generated; they are not cut from the budget, but they are used to generate more output. We are actually getting more defence output. You are talking again about platform numbers; I am talking about extra capability in precision guidance. The effects we can create now are much greater, much better than used to be the case with the new systems we are bringing on stream. Firstly, the efficiencies are not intended, certainly not from our point of view and as far as I am aware not intended by the government, to be reductions on budgets, but are giving greater flexibility internally for departments to get more frontline delivery from their budget. Q34 Mr Blunt: I just want to conclude by inviting you to confirm that you are not being able to achieve the flexibilities which are supposed to be driven from RAB in the MoD because the Treasury are limiting those flexibilities to an extent you are not prepared to share with us - whether those reasons are satisfactory or not we shall differ on -and that is a very serious problem, that you are not getting the full flexibility in the RAB, and that is having a serious effect on the MoD now. Sir Kevin Tebbit: The general proposition about flexibility is correct. "Serious" is a value judgment I would not use, but you are correct that it is having an effect. Q35 Chairman: It may not be a crisis from your perspective, but on this side of the table it looks like a crisis to us. The Royal Navy down to the low twenties of frigates and destroyers looks quite critical to me. Sir Kevin Tebbit: Wait and see, Chairman. Do not believe everything you read in the press. These are not decisions which have been taken. Q36 Chairman: When your senior sailor virtually tells you, indirectly through the media based on a speech to a very reputable institution, it is more than pure conjecture. When the decision which will be made following secret negotiations, which I understand is not a recent phenomenon, it has always been like that, when all of this is fixed, it would be really helpful if either you or the Secretary of State for Defence were to come to explain to us very soon afterwards how the armed forces have emerged as a result of these further cuts. If they cannot explain, then maybe the people responsible for the force changes will come to explain because they do not; they do not come to explain, the Treasury does not come to explain. They hammer you and then they expect you to explain. We shall look with enormous care at what is going to happen and we shall listen very carefully to see whether the Royal Navy, or the other armed forces, are being cut, because there are perfectly rational grounds for that cut and governments of all persuasions give very rational grounds for a decrease in fighting performance, etcetera. When the Navy gets down to the low twenties, then you wonder what the future of the Royal Navy is. We cannot press you any further, Crispin tried to no effect, but when the time comes we shall really ... Sir Kevin Tebbit: Your effects based questioning is very effective. Q37 Chairman: Crispin was an adviser to a minister who gave us exactly the same answers; maybe Crispin even advised the minister to give exactly the same answers. Sir Kevin Tebbit: I can only describe the process at this stage, I cannot describe the details. We have already said, which I think is pretty open, that we have 16 separate work streams working. The reference which has just been made to a report in The Times today is about one of those work streams. These have to be brought together, ministers have to make a judgment about the totality of the plan, about what is increased as well as what is reduced against the overall resource envelope which will come from this spending round. That process is under way, but it will be completed in June and July. That is all I can say. I am being as open as I can about that process. Q38 Chairman: I hope not just before the recess. Three is a quorum in this Committee and we shall hold a public session in the recess if necessary, with three people, to have explained to us how the Royal Navy --- Sir Kevin Tebbit: The department shares your impatience to get an early resolution of this. Chairman: We shall be publishing a report in a month or so in which we shall express our views. Q39 Mr Jones: I realise that you are not going to go into detail, but you referred to process. What is the process? You talked about changing capability and we all recognise that there are some systems there which need changing and some of those will be hard pills to swallow for certain sections of the MoD and also the armed forces. In terms of these work streams you say are going on, what is the process in terms of looking at capability as against actually trying to balance the budget you have before you? How do you separate those two things out or are they one and the same? Sir Kevin Tebbit: The key criterion is the policy base line set out most recently in the Defence White Paper in December last year. The work is judged against that policy base line. In other words the measures which are being considered are in order to conform to and to deliver those policies. Q40 Mr Jones: I am not saying I have ever dealt with a budget the size of yours but in local government each year I had to balance the budget and it was always about priorities between policies and also being able to come within an overall budget. To what extent is the focus from the Treasury or someone else on the overall budget? How do you quantify that in terms of making some of the tough decisions you have to make as well? Clearly, if you say, for example, that you want to move away from one system to another, it might be a very expensive option. Is the process, that you put that up and then in these negotiations with Treasury you argue for more money? Or are you saying you cannot do it and putting it to one side and cutting somewhere else in the budget and moving monies around? Sir Kevin Tebbit: The defence budget is complicated in the sense that we have an awful lot of different elements to it. We have to maintain current operations, current capacity to do things like training, logistics as well as people and develop a long-term future equipment programme so that we have the defence the country needs in ten years' time. A lot of these are long lead items. Broadly speaking we have a wide degree of flexibility within the total envelope, notwithstanding this discussion about cash, to apportion resources according to our priorities. We have to have that flexibility; we cannot have an American style individual programme line because it becomes unmanageable. Broadly speaking we have an equipment programme of about £6 billion which reaches out into the future, about which there is a degree of flexibility obviously about what we bring on when, how long we take things in development phase, when we move to production, those sorts of issues. The manpower element of the budget is pretty fixed; broadly speaking we are not, I can reveal, intending to slash away the armed forces in huge measure and therefore the manpower costs are not going to change very much. I hope they will change to some extent, because it is a rising cost in the budget. We know more or less what we have in those sorts of elements and therefore what moves tends to be in the logistics area, how much sustainability we can afford at any one time, and in the equipment programme, just how rich a forward programme we can afford to have. Q41 Mr Jones: In terms of the procurement process you are committed to the overall spend, but how you move that down the line in terms of slippage is how it is managed, is it? Sir Kevin Tebbit: It depends what is committed and what is not committed. If it is on contract then it is committed. Clearly the proportion which is uncommitted is relatively small; greater the further you go to the right, the further the out years are. Most of the budget is obviously committed. The flexibility one has is relatively limited. There are choices, as ever and the important thing is to try to build some flexibility into the system so you do have choice. That is another element of what we are doing at present. We are trying to gain some headroom so we do have the opportunity to make choices as well as simply making ends meet, which is why it is not simply a question of cuts. Q42 Mr Cran: Could I bring you on to consider the question of readiness as set out in pages 18 and 19 of your report? The Committee are specifically interested first of all in paragraph 43. Just for the record, it is that the Army "... improved its performance of rapidly available units at the required states of readiness to 84% (against the PSA target of 90%) from 81% in 2001-02, despite under-manning and continuing specific sustainability challenges". Can we take the manning first? Could you just explain to the Committee what we are talking about? What are the major manning problems? What are you doing to rectify them and with what success? Sir Kevin Tebbit: Performance on manning has been very, very good indeed. Recruitment is up in this year covered by the report; it is also up over the past 12 months, though we have been very successful in recruitment in all three services. The difficulties which remain tend to be in specialist areas, in the Navy in submarine officers, artificers, in all three services in medical staff, in the Air Force a reduction now in problems. We had a problem with junior pilot officers and that has now gone. Recruitment has been very strong in all areas. The strongest probably was in the Army. Over the past 12 months, during the year 2003, we increased the size of the Army by about 1.9 per cent, nearly two per cent, which was a remarkable achievement, the best for about 15 years. So in recruitment and retention in all of those areas the statistics are improving. It does not mean to say we can be complacent, but it is the result of incentives put into the system, most obviously in the pilot area and in the medical area, a result of overall pay, general quality of life. I actually think some of the training investment has been pretty good and pretty attractive. We now have something like 43,000 people on courses which are recognised nationally, so when they leave they will go into the civilian economy with full qualifications and skills. I am not just talking about officers, I am talking about general servicemen and that is becoming an attractive element of overall military life. With all of these things we have improved on manning levels. We are not complacent, but it is much better than it was three years ago. Q43 Mr Cran: You did mention the whole question of retention, which is key to the whole question of you being able to be properly manned. Just say a word or two about retention. As we walk around the MoD estate, as it were, we keep on hearing about the inability to retain, usually niche capabilities. Sir Kevin Tebbit: That is true and I did not mention signallers; people with communications/IT skills are obviously very much in demand in the private sector. All I can say about that is that retention is improving slightly, although we still have serious difficulties in very specific and specialist areas. What we are doing is trying to target financial retention incentives to make a difference in the critical areas and keep people in longer. That has been successful and we have particular success in the RAF in getting pilots to stay longer. In the medical area it has been a question of getting them in and we have had this "golden hello" scheme which has been very successful. For example, we had a fourfold increase in our success in recruiting doctors and consultants last year, probably as a result of the "golden hello" scheme. Still too small, still numbers are much smaller than we would wish, but nevertheless it is making a big difference. Those are the techniques we are using. We are competing in a very difficult market; retention is also in a difficult market. Q44 Mr Cran: In broad terms, if you and I are sitting here next year discussing the successor report to this one, the manning variable would not be the variable which would impede the MoD reaching the 90 per cent PSA target or whatever it is going to be next year. Sir Kevin Tebbit: That is right. The actual numbers for manning will be even better. That is separate from readiness of course. That area will be better. Q45 Mr Cran: Can we attack the specific sustainability challenges, again in paragraph 43? What do you mean by that and what are you actually doing to address these challenges, whatever they are? Sir Kevin Tebbit: This is more about the pace of activity, the operational tempo that our forces are having to sustain at present; that is the biggest challenge rather than numbers of forces, or indeed readiness states, because they can be quite misleading. The RAF and the Navy can maintain high readiness and meet those criteria even when they are on operations, because essentially it is not difficult for an air wing to go and do something else at quite short notice, even if it is on operations. Its operational routine is not that different from its peacetime routine. Pilots have to fly regularly. Similarly with ships, if they are deployed, they are active and if they are in a military operational theatre one day at quite short notice they can switch to another theatre. With the Army it is different and the Army is where the greatest challenges exist because, as you saw from the stream of figures in the report, their readiness levels were rising through 2000-01 to 2002-03, recovering from Kosovo in 1999 and Afghanistan and building up, but building up for Iraq. Now we are in the part-recovery period from Iraq, but still sustaining a leading-scale mission, it means the Army is not at a readiness state equivalent to 83 per cent here. The Chief of Defence Staff and Chief of General Staff have already testified to the Committee that it will take a while now before they are back to doing major operations. They can do small-scale operations now, but medium scale is 2006, large scale 2008. That is the sort of effect that this huge effort of 26,000 ground forces has had. Q46 Mr Cran: Again, if we were sitting here in a year's time discussing the successor report, are you saying this particular set of variables, specific sustainability challenges, would not be the impediment which would prevent the Army reaching the 90 per cent PSA? Sir Kevin Tebbit: The key issue will be operational tempo and the time taken to recover from operations. Q47 Mr Cran: Just so that I understand, is that a yes or a no? Sir Kevin Tebbit: There is a separate issue about sustainability to do with logistics. That will be less significant that the question of recovery from operations and getting the Army in shape for large-scale operations as quickly as we would like. That is the point. I should perhaps say that the Army is looking to change the way it measures its readiness and we are for all our armed forces. We have tended to look at high readiness only, but of course it is much more important to look at the overall readiness of the totality of the force structure. Our future readiness measures will look at the readiness of everything rather than just the high readiness element. Q48 Mr Cran: The rest of the Committee may well know when we are going to hear about this: I do not. When are we going to know about this new measurement for readiness? Sir Kevin Tebbit: The new readiness measurements are coming in now as part of the future Army plans. Q49 Mr Cran: I cannot think of any occasion myself, but then I may not know everything. On this whole question of readiness were there any occasions when the Army's inability to reach the 90 per cent PSA target prevented them undertaking any operations? Sir Kevin Tebbit: No. Q50 Mr Cran: I cannot imagine that. Sir Kevin Tebbit: No, it does not. It does not mean to say we could not generate something bigger before the timescales I have mentioned, but these also are linked to harmony guidelines as to how often it is reasonable to expect people to be deployed on operations. It does not mean necessarily you cannot do it, but it means if you are doing it you are basically breaking your internal compact with people as to how often they should expect to have to deploy. Q51 Mr Cran: The PSA targets having been set at 90 per cent for all three services, when are we going to reach 90 per cent, or is this an illusory target which one never really gets to? Sir Kevin Tebbit: It is not illusory for the Air Force and the Navy and that is going to be fine. For the Army, it is not possible at present to get the overall force structure into that readiness level fast enough. In any case and for different reasons we shall be measuring readiness as a broader measure for the totality of force structure rather than asking how many are high or high/medium. These are interested in how many days it would take people to deploy on operations: 30 or 60. We shall be giving better measures to the force structure as a whole. That is not supposed to obfuscate, it is just going to be a reality of being better at measuring all forces rather than just high readiness elements. Q52 Mr Cran: Just tightening that up a little for my purpose, does that mean to say that by this time next year or whenever, the Royal Air Force and the Navy will have reached the 90 per cent readiness? Sir Kevin Tebbit: I think they are already there and I think they will be sustaining that. Q53 Mr Cran: I of course have not been involved in the setting of these PSA targets. I should just be interested to know what effect Iraq has on the readiness of troops, not in Iraq but back at home here ready to undertake whatever it is the government may decide in the future they should undertake. Bearing in mind that I do remember what the Chief of the Defence Staff said about not being able to undertake anything major for eight to ten years, but thinking perhaps of something more modest, what effect does Iraq have on that? Sir Kevin Tebbit: Iraq is the most important factor because to sustain an operation, to keep one brigade in a place, you have to have people ready to come in behind it, to rotate it and refresh it every six months or so. That is why it is more of an effect that it might seem. When you say if you have 8,000 people or whatever in Iraq at present it does not sound huge in relation to the total Army, of course that takes out rather more than 8,000. In formal terms you should multiply that by five on the 24-month overall cycle; in fact it is not quite as much as that, but that is the ideal. Iraq has that sort of impact. In addition to that, at the moment we have the Bowman conversion. I was talking about measuring by effects and the positive things we are doing to our armed forces. Digitisation of the land forces, enabling them to communicate better, not just by voice, but also by data links and in a secure way, makes it easier to respond more quickly and to control bigger areas of ground that used to be the case in the past. That is therefore a critical modernisation, new capability for the Army, and that takes out the equivalent of a brigade as well because we are doing the conversion to Bowman. It is not just the people, it is all the vehicles; they all have to be converted to take this new communications capability. That adds another commitment to this. In short, that is why we shall not be back in harmony terms to being able to do a medium-scale additional operation of 8,000 or 9,000 until about 2006 and for large-scale I suspect 2008 would be the earliest. It does not mean to say you could not do it. It means you could not do it without breaking some of our rules about what we expect in terms of preparation. Q54 Chairman: One of the rules for the military is to go and fight a war every now and again. Sir Kevin Tebbit: That is right. Q55 Chairman: The idea that we cannot fight a proper war, if ever wars are proper, until 2008 gives me an indication of the size and shape of the military. Sir Kevin Tebbit: I did not say we could not. Q56 Chairman: No, but it would be exhausting and would cause even further problems. Maybe when you are negotiating with the Treasury you should point out to them the size and shape and funding of the military is more than an accountancy exercise. If an adversary reads or listens to our debates or to what the Treasury says or what the Secretary of State says, it will be very comforting to know that an operation which was not the Second World War - very important and our forces did incredibly well, but it was not a massive operation -a less than massive operation had such an adverse effect upon the military that they are unable properly to deliver. They could as they always do, but it should not have to be that way. And we are going to have to wait now five years before the military will be absolutely effective. If that does not tell the Treasury that something is rotten - not in the sense of corrupt - in the state of British defence, then I do not know what one would need to do to explain to them that diminishing these forces even further is going to have an even more adverse effect upon our armed forces than perhaps you or we had realised. Perhaps you would pass that on and we certainly shall in our report. Sir Kevin Tebbit: I take your point, but you are painting an overly bleak picture of it. Remember that I am talking about additional capability at the margin. Today we have 23 per cent of the Army deployed on operations. At the height of Operation Telic it was up to about 55 per cent. We are recovering from a huge effort. We have troops, 11,500, 12,500, still earmarked or deployed to Northern Ireland. We sustain commitments in the Falklands. We sustain commitments in Cyprus. We have forces slightly increased in Afghanistan as well as in the Balkans, as well as in Iraq. We are still sustaining a high level of commitment, perfectly competently and without strain. We shall be able to respond to any short-term emergency and we do not have a policy which says we should in the short term be able to generate large-scale forces regularly. We never did have. We would contribute to any international collaborative effort very directly. Even during this period, when it was necessary to send reinforcements to the Balkans, if you recall, the spearhead battalion went from the UK and was deployed within 24 hours when the actual requirement from NATO was to deploy in three days. I would not want the Committee to get a false impression of the effects of Operation Telic. That said, 46,000 people from the UK in one operation, deployed very, very rapidly, when, until the middle of January we thought we were going somewhere else, is a huge achievement. Rather than talk about the weaknesses subsequently, it is worth dwelling a little on the achievement at the time. I still feel that the armed forces and my department received rather grudging credit for what was actually achieved then. Imagine it: we were expecting to go in through southern Turkey and we went in through the Gulf. Q57 Chairman: We wrote a three-volume report on this, so we are convinced how great the British forces are. Sir Kevin Tebbit: I wait with anticipation to see the final report; maybe it will be like that, but that was an unusually stressful operation in terms of the speed with which we had to mount it and the flexibility we had to show. Q58 Chairman: Sure. You mentioned Kosovo. We were in Kosovo and we had a hard job to find a soldier because most of them were gone. Sir Kevin Tebbit: They come back again very quickly. Q59 Chairman: They come back again but there was a crisis in Kosovo which caught everyone by surprise, especially the intelligence services and we had a very small contribution to make. Yes, the spearhead battalion came, but the small number of troops there - and I shall not go into detail as to what those troops were doing - are doing a very effective job. I am merely making the point that this is not simply a Treasury exercise. No-one can predict what the future shape of conflict is going to be and I am simply making the point, as any rational person would do, that we are going yet again to a Treasury exercise in which there will be cuts and you will come and the Secretary of State will come and put a very brave face on it and tell us how we are actually stronger as a result of losing tanks or ships or aircraft. We have been through this before. I am merely making the point, perhaps for a wider audience, that the time comes when the armed forces cannot reach a critical mass and the Royal Navy will be moving to that position if they are going to have to take the transferring to somebody else of three, four or five ships. Sir Kevin Tebbit: The only point I am making is that speed and agility of response are the critical issues today. Q60 Chairman: Repeat that for The Guardian. I shall speak to Mr White afterwards, as I would not want my words to fall on every deaf ear. Sir Kevin Tebbit: We do not and do not aspire to provide large-scale force packages regularly, but even in the Strategic Defence Review in 1998 we said two medium-scale operations concurrently was what we should gear our forces to, able to generate up to large scale if required, but not as a rule. That sort of trend has been deepened, not just as a policy thing but by the reality of what we have actually been doing since 1998: regular need for quite small elements of forces, but up to medium scale, needed to deploy rapidly, particularly for war fighting and the UK has been able to be at the forefront of that. Really the point I am making is that it is not just about large numbers, it is about speed, agility of response, with effective forces, possibly at smaller sizes than we have aspired to in the past, but the key thing is to get there quickly. We do not expect to be in these operations alone. We expect to be operating as part of the coalition. Chairman: They are in even worse shape than we are. Q61 Mr Crausby: Back to questions concerning manning levels. Paragraph 79 of the annual report tells us that we are on course to meet our PSA manning targets by March 2004. Those targets were: Royal Navy and Royal Air Force to achieve full manning and the Army to meet 97 per cent of its manning requirement. Did you completely achieve this target? You have already told us that there were some shortfalls, but overall did you meet the target? Sir Kevin Tebbit: Yes, I think we did meet the target for manning. Within the tolerances shown in the PSA target, plus or minus one or two per cent, we did basically achieve our targets. Q62 Mr Crausby: You have already explained that there were some specialist areas which remain. Can you expand on that? What shortages in what specialist areas? You mentioned pilots. Sir Kevin Tebbit: Let me just give you the precise details. We expect that the deficit in the Navy will have improved from 2.4 per cent in this report to 2.1 per cent by the end of this just past year. We expect it to stabilise at around 1.5 per cent, so that is within our two per cent tolerance. In 2002-03 we started at 4.3 per cent down and we ended with 2.4 per cent; we got in 910 people net, so that was a good achievement in the Navy. The specialised areas where we are still short are artificers and submarine warfare officers. I did not mention the other point which is that Royal Marine other ranks are short. The armed forces have campaigns to deal with those both in terms of recruitment and trying to reduce wastage to keep retention up. I expect when we see the final figures from 1 April this year that the Navy will have fractionally missed their target, but only by a small fraction. I expect them to hit the target during the course of the current year. The Army has had a very good year, putting on just under two per cent in the year on strength, which was very good indeed. The whole trained strength is now 1,904 people higher than it was 12 months ago. Recruiting is still very good. The outflow is around its lowest level for five years, which is also encouraging. Army is on track rather well. We define balance as being within two per cent of the requirement and we are on track to achieve that in about the next 12 months or so. It does not mean that there are no shortfalls; there are specific areas of concern: medical services, communications specialists, logisticians, those sorts of areas. We are working at those. The RAF are already within their target, which is within 1.5 per cent of their manning figure. Their problems are with medical staff, where they have taken action to improve it. Their early retirement rates are down a bit, so that is useful too. By and large again the same broad picture. Q63 Mr Crausby: How affordable is full manning in the medium and long term in the light of the active discussions which you mentioned to Crispin Blunt and the proposed cuts of £1 billion. Is full manning affordable in the light of all that? Sir Kevin Tebbit: I think the £1 billion was £1.2 billion which was Crispin Blunt's figure not mine. They are higher than the figures, if I were to give any, which I would give. No, these things are manageable within the totality of the budget. It does mean we have to move things around in year if we are doing unexpectedly well. The recruiting performance in the Army was faster than we had anticipated, but we did that by the normal in-year adjustments which we make all the time. Q64 Mr Crausby: There is not much flexibility in the budget, is there? According to the report, you had an underspend of £63 million which is 0.3 per cent of the total budget. In the light of those discussions with the Treasury on expenditure reductions have plans been made and will the PSA targets change in relation to the size of the budget and the negotiations you conduct? Sir Kevin Tebbit: We will always have manning targets, because it is very important to man the armed forces to the level required. I do not see this as being a critical issue in the budget. If I compare these sorts of pressures to ones in the equipment programme for example, it is the equipment programme which is putting on greater pressures than the manpower targets. Q65 Mr Crausby: In any active discussions you have with the Treasury the equipment programme will bear the brunt of that. Sir Kevin Tebbit: It is already doing so. It is equipment and logistics where we have the greatest flexibility and therefore the greatest issues surrounding affordability, not in the manpower field. The manpower requirements are what we need and we are determined to fund those in any case. Q66 Mr Roy: You spoke earlier in answer to Mr Cran about the "golden hello". As I understand it a payment of £50,000 was made available to specialist medical services. You said it was a fourfold increase, which sounds really, really good and quite frankly I would expect a huge increase if someone were offering someone else £50,000. How does that fourfold increase compare with your expectations? Sir Kevin Tebbit: It was as good as the expectations, but we are talking about very small numbers still and we still have a way to go. We are going in the right direction and we have the policies in place and we are taking the right sort of action, but it takes time to get it coming through. We still have our plans, for example, for our centre of medical excellence at Birmingham, we still require reservists to fill out our medical complement when we go on operations and we still have shortfalls in specialist areas, particularly consultants and doctors. I do not want to imply that everything is fine, but the patient is responding to treatment, if I may put it that way. We created a Deputy Chief of Defence Staff (Health) about two years ago for this very purpose of putting a much more powerful focus on this and driving it forward. We put quite a lot of money into the overall medical area which was underfunded. After Spending Round 2000 we put something like £120 million into this area and we are getting results. It takes a long time. Q67 Mr Roy: According to the annual report, there was a 24 per cent shortfall in Defence Medical Services (DMS). How has that changed recently? Is that going down substantially? Sir Kevin Tebbit: It is definitely improving, but I would not want to give you any totally false promises. I am just looking at the figures. We are expecting to bring on stream 40 consultants and 400 nurses over the next four years. They are already in the pipeline, people with whom we have already made contact and are now training. That is quite good news. How will that affect the percentages? Obviously it will take them down. Q68 Mr Roy: There was a shortfall in the recruitment of nurses. Is there a "golden hello" for them? Sir Kevin Tebbit: There is very good starting pay but not the same level. We are talking about specialists who are already specialists and the biggest area of problem is in the specialist/consultant area, anaesthetists, that sort of area. Q69 Mr Roy: We heard after Operation Telic from people in the medical services who had resigned following the deployment. Have the manning levels overall worsened since Telic? Sir Kevin Tebbit: I know what you mean, but we have not found any unexpected or unusual outflow from the medical services or anywhere else from Telic. There has been no unexpectedly high or expectedly high outflow. It is pretty static, pretty normal. We are not suffering a big outflow. A figure was quoted of 47 reserve personnel leaving and I did look into that and asked. I was told that there had been no unusual outflow of medical reservists following Operation Telic. Q70 Mr Jones: May I turn to the defence estate? By December 2002 the MoD had identified sites made up of core sites and non-core sites. What progress has been made in releasing high-value sites or sites which have high maintenance costs? Sir Kevin Tebbit: We have been making huge progress since 1998 when I arrived, so that is when I tend to get these figures from. I think that was after our Strategic Defence Review when we emphasised this area. We have disposed of £1,052,000,000 of defence estate, the benefits ploughed back into our activity. That is a huge asset realisation, over £1 billion over five years. That is the good news. The bad news is that most of the low-hanging fruit has now been taken. Individual sites which were simply sitting there for disposal have been disposed of and for the future it is more a question of having to invest up front in order to dispose. Increasingly we are now in an area where we want to say: close three separate little sites and concentrate on one big one, but we cannot get the upfront funding for the big one easily and therefore we cannot close the small one, so there is a bit of a bind there. We now need to be able to invest in order to release estate elsewhere. In other words, we are seeking to concentrate on big sites more and release smaller sites around the country. Q71 Mr Jones: You say you have to invest in those sites, but surely there are other options, for example partnership arrangements with developers and others. Are you exploring those types of options? Sir Kevin Tebbit: Yes, we are indeed. That is one of our big efforts. It is more in the context of defence training plans, where we intend to concentrate training more on a tri-service basis and group together in one establishments which are currently run by the individual separate services; this is for specialist training, not for basic military training. There it will depend essentially on the ability to get a good private/public partnership going with the private sector. We have quite an advanced state of discussions going on with them and have been looking to let a contract for this. The key thing will be affordability. If this were off balance sheet it would be easy, but if it is not going to be off balance sheet, then it is obviously much more of a challenge for us. Q72 Mr Jones: Does that review include everything in the estate? Does it include, for example, TA sites and reservist sites? Sir Kevin Tebbit: Not in that context. I was talking more about the training review element and our core site policy. The core site policy is about regular forces. It does not mean to say they do not take account of the TA, but it is not about TA, no. Q73 Mr Jones: The reason why I asked that in terms of sites is that I know one on the banks of the Tyne. Because of the very foresighted council and councils which have pushed the regeneration of the quayside in Newcastle there is HMS Calliope which must be worth an absolute fortune now in terms of its siting next to redevelopments going ahead. What would be the process there for realising the site, which I accept 20 years ago was perhaps worthless but which now I would imagine is a small goldmine because of its location? How would that process be initiated? Are you looking for example at areas like that where 20 years ago they were in an area of dereliction, but now are absolutely slap bang in the middle of a thriving development area. Sir Kevin Tebbit: I wish we had more of them. Most of those sorts of sites have gone generally. If I think of the sorts of sites we would be aiming to raise in the future, too often we find that there is not great value in them; they tend to be in the countryside and some of them have been defence lands for a long time and therefore there are clear-up issues and risks associated with them. The book value to us at the moment is probably exaggerated and the market value is often much lower. All I am really saying is that we have taken the easy stuff. That £1 billion over five years will not carry on at that level. We still have good targets in our plan. Last year, not the year in here but this last financial year, we realised over £203 million of land sales which was our stretched target. For the future, these figures will come down and it will be much more a question of getting these creative arrangements with the private sector to get the upfront funding needed to pump prime, to be able to move ourselves around to core sites where we would expect to see fewer but larger concentrations of armed forces in the country. I am not talking about the TA. Above all, the key element in all this, is the rationalisation of the training estate. Q74 Mr Jones: You might like to look at that one, because I am sure the site on the banks of the Tyne is worth a fortune. Sir Kevin Tebbit: Thank you for the suggestion. I shall certainly look into it and let you have a note about what we think. Q75 Mr Jones: May I turn to the Lyons review and how if actually affects the MoD in moving government functions and offices from the South East and London and how redevelopment of the Main Building, which is ongoing at the moment, or near to completion, is affected by that review. It does always strike me, certainly in the North East, that previous governments' attempts to relocate from the South East and London have been quite successful, but my region seems to be quite a barren area as far as MoD establishments are concerned. Can we look forward to the day when you and others are based in Durham or Gateshead or Glasgow. Sir Kevin Tebbit: Those would be lovely thoughts. We have moved quite a lot of defence to Glasgow. Q76 Chairman: If house prices continue to rise in the North East, maybe there will be a relocation from the North East down to the West Midlands or Wales. Sir Kevin Tebbit: This is beginning to sound like a congressional hearing as senators come in with their congressional interests. Q77 Mr Jones: Never miss an opportunity I always say. Sir Kevin Tebbit: Clearly we have certain constraints. It does not help us that Portsmouth happens to be in the Lyons area and I do not think we shall be moving the Navy from Portsmouth whatever the size of the fleet. Q78 Chairman: There will not be so many to move, so it will be much more practical. Sir Kevin Tebbit: There are limitations for us, because we are not just talking about buildings, we are often talking about training areas, big defence establishments which have huge investments sunk into them and ones which we cannot easily relocate. On Lyons, we are contributing 4,200 posts to move out of London and the South East, provided of course we can get the upfront funding and they are affordable. Q79 Mr Jones: What type of jobs are those? Sir Kevin Tebbit: There is a combination of civil servants and military jobs. Part of that will be about Woolwich and a number of other sites which escape my mind at the moment, but I could easily give you a note about them. That is not a bad start. In London in 1991 we had 20 different offices; today we have just three. We have been reducing very heavily in London over the past few years. When we go back to our Main Building, which is on schedule, the first people will start going back this month, by the end of May we shall begin repopulating that building, it is successful in terms of the contract, we will take 300 fewer back into it than we had previously in the head office. I expect that to go down further as we look at processes and how we operate in an open plan environment rather than cellular offices. It is something which will give us savings in running costs between £5 and £20 million a year depending on how the actual service contracts work. It has given us reduced numbers and it will give us a more efficient environment in which to work and we shall be able to deliver our outputs better and reduce numbers further once we are in there. By and large it is a positive story. There are no frills, it is not gold-plated, but it is a fit-for-purpose building. Q80 Mr Jones: That is fine and I accept the point you are making about rationalisation of buildings in London. That does not actually help the North East and other places where it always strikes me that the MoD is a barren area in terms of jobs. Is there any reason why that is the case? Is there a cultural need to be in London or a resistance to moving anywhere outside London except the South East? Sir Kevin Tebbit: We have moved, that is the point. We have moved a very, very large amount of our department, but it has tended to go to the Bath and Bristol area. Q81 Mr Jones: Why? Sir Kevin Tebbit: The whole of the Procurement Agency moved there, the centre of the logistics organisation has gone there. We have moved people a hundred miles out of London, but they have gone West rather than North. We have just moved the Met Office, but it has gone to Exeter from Bracknell and the Hydrographic Office is at Taunton already. We did quite a lot of relocation to Glasgow. We have relocated some staff to York. I am sorry it has not gone exactly where you are, but the idea that we stayed in Central London is not correct. Q82 Mr Jones: No, but you have stayed in the South of England basically. Sir Kevin Tebbit: Not entirely. Q83 Mr Jones: No, but looking at other departments such as DWP and Passport Office, who under previous governments of all colours seem to have readily accepted a move out of London and the South East, is it a fact that in the MoD there is a cultural affinity or need to be in the South of England? Sir Kevin Tebbit: No, I do not think it is anything like that at all. I have to say that Bath and Bristol do not regard themselves as being in the South East. Q84 Mr Jones: I did say in the South. Sir Kevin Tebbit: It is a very large concentration. In the Lyons context, they are not there. Salisbury Plain is cut in half by the Lyons definition, but we have a lot of infrastructure there. Portsmouth is Portsmouth, we are not going to be able to move that. There is no cultural thing about the South East. The problem is that when you have infrastructure, not just office buildings, you cannot simply up sticks and move. To the extent that we were in office buildings in London, 20 in 1991, 3 in 2004, we have been coming down very substantially from about 12,000 then to 4,000 and a bit now. Q85 Mr Jones: I look forward one day to seeing one of your successors based in the North East. Sir Kevin Tebbit: If you are then a member of the North Eastern Parliament, then maybe, but obviously Parliament means that most departmental headquarters still tend to be in London. We are responding positively to Lyons and the MoD contribution towards the total target of 20,000 is pretty good. Q86 Mr Crausby: Ninety-one of the 200 recommendations made in the Defence Training Review had been implemented by the end of 2002-03. Could you tell us what further progress has been made in implementing the other recommendations? Sir Kevin Tebbit: I checked the latest figure before I came here and around 140 of those recommendations have now been implemented. We are cracking on. Q87 Mr Crausby: Do you have a target for the full 200? Sir Kevin Tebbit: The difficult stuff is managing to get this relocation of the specialist training estate done and that is the main element which remains where we will need to relocate onto central sites and possibly release existing ones. That will need upfront investment. At the moment I cannot say I have all the money we need and we will need creative, imaginative ways with the private sector of trying to do it. We are in discussion at the moment. That is the real issue which remains. We have set up our central training establishment, a directorate general. We are into e-learning in a very big way with network systems all over the defence estate to help people with modern ways of learning. We created the Defence Academy in 2002, that is up and running, looking to become not just a Defence Academy, but in particular a centre of excellence for leadership training, management training, as well as the technical work which Shrivenham always did. We have made good progress with most of these areas. I shall be happier when we get our specialist training co-located. Q88 Mr Crausby: You say in the report that the rationalisation programme remained the highest priority in delivering joint defence schools. What progress has effectively been made on the programme? You just alluded to that to some extent, but that was to be delivered through a public/private partnership. Is there any progress on that? Could you tell us what savings are expected from that and over what timescale? Sir Kevin Tebbit: The savings we expect from it are £1.25 billion over 25 years. So the investment appraisals are good. There are six streams which we want to put into that specialist training rationalisation: engineering areas; communications; electro-mechanical training; logistics; police; security, languages and intelligence as a final group. We hope to start discussing this with industry in a more specific way by July and we hope to have a very specific set of proposals out there. The key thing will be affordability on off-balance-sheet issues. I cannot guarantee anything in that area myself. What I can say is that we worked at this hard. It is a core thing for us, a central issue for defence. One of the best areas of the department is that we do put a lot of investment into training and education with the armed forces. One of the reasons people describe them as among the best in the world is because of the quality of the training we deliver. That is also true of the civil servants delivering defence outputs, so this is a central issue for us in terms of our long-term health. The plans are there. Now we need to get the resources. Q89 Chairman: One additional question on training. I know we have a central directorate responsible for network enabled capabilities. Do you have any comments on whether we have devoted additional funding and training for those engaged in this future approach to defence procurement and defence operations? Sir Kevin Tebbit: The short answer is yes. That is one of the main areas of the training which is going on, enabling people to work with computers and advanced IT systems, whether they happen to be in a tank or in an office. One of the main areas of training in skills is in IT competencies. Q90 Chairman: We visited Upavon yesterday and talked to people about training and we heard some very impressive things, so clearly things are on the move. When one realises the MoD is one of the largest trainers of personnel other than for the purely military functions, to do their military functions they obviously have to be trained for so many other professions, then an even greater obligation falls upon the Ministry of Defence. Although the budget is allocated to the Ministry of Defence, in fact it provides a great deal of training for those who, after their short service in the military, will then benefit other aspects of our economy, although the budget comes off defence. Maybe you should tell the Treasury that. Sir Kevin Tebbit: We are; we are. Q91 Chairman: Please do. Take it off some other budget. Sir Kevin Tebbit: I do regularly talk to my colleagues about the benefit that defence brings to the wider community. We turn out 25,000 or 30,000 people who leave each year and go into the economy, usually well trained and well disciplined. They are a huge benefit to UK PLC. One of my minor objectives, minor because clearly it is not easy, is to try to feed into some of these resources which are available, particularly at the regional and local levels these days, through various regional development councils and things where we can tap into that for mutual benefit. Q92 Chairman: Additionally, the MoD has to pick up the pieces from what failures there may be in the educational system. If young men and women come into the military who lack many of the basic skills because for one reason or another they have not performed very well in school, before they are usable in the Ministry of Defence, there obviously have to be crash courses to raise their levels. Maybe you should tell the Treasury that too and get some more money out of education. Sir Kevin Tebbit: I mentioned the IT thing, which we call, inevitably in defence, SFIA, skills framework for the information age, and that is a big area. At the basic level we reckon that as many as 7,500 of our recruits lack basic literacy and numeracy skills and one of the first things that happens is to provide people with that very basic education. We do do that as well. Q93 Chairman: Maybe I am part of that process. I hope you do not charge the Defence Committee for me to attend a two-day course in July or August - training the trainers. I really look forward to going there. Sir Kevin Tebbit: It is part of our duty of care, provided from the defence budget. Q94 Chairman: Duty of care to members of parliament as well. Sir Kevin Tebbit: And the wider community. Mr Cran: We must insist you tell us whether you passed or not. Q95 Chairman: We heard Lord Bach went on a course. It would be interesting to see whether his attendance was charged. I hope mine is not. Sir Kevin Tebbit: I am encouraged, Chairman, since you have given me the opportunity, to say for the record that the actual number of people who are doing lifelong learning accreditation skills useful for defence but relevant to their future life is 44,755 people who are registered on nationally recognised qualification courses. At that level too we are making a difference. Chairman: So when people complain about what they would regard as an inordinate amount of money spent on defence, we should try a bit harder to explain to them the benefit for society as a whole in addition to fire-fighting and protection. Q96 Mr Cran: The Defence Procurement Agency's annual report and accounts for 2002-03 make, to say the very least, interesting reading. Because I guess you will not have it in front of you, the Chief of Defence Procurement said "The Agency ... failed to achieve its targets on programme slippage and cost growth ... overall performance was seriously damaged by major cost and time delays on a number of legacy projects. This is clearly a very disappointing result ... Overall 2002/2003 has not been a good year for the Agency as measured by its corporate performance". Now there is an understatement, is there not? Sir Kevin Tebbit: It is honest. It is a classic defence statement which is that we are an honest department and we do tell it the way it is. Q97 Mr Cran: I would never have doubted that you were going to say that. However, the important thing is that the Committee would be interested to know whether you have a role as the MoD's accounting officer in getting this situation rectified. If you do, what is it? If you do not, is there anybody who does? Sir Kevin Tebbit: I certainly have a role as the accounting officer, because we now have a single Vote. In the past there used to be a separate procurement Vote for which the Chief of Defence Procurement was responsible. Now we have one Vote and I am responsible for the whole Vote. In that sense, as the accounting officer, I do have a responsibility. The Chief of Defence Procurement runs an agency and is an agency accounting officer, but that is a subordinate accounting officer. I take my responsibilities for procurement very seriously indeed. It is not so much the accounting officer role. The accounting officer role is about regularity, propriety, and I am not aware of any irregular or improper actions going on in that area, and about value for money. The difficulties in DPA are not really undermining value for money, but obviously they affect it. You will have heard a figure from last year, from the hearings I went to at the Committee of Public Accounts, that there was a £3.1 billion problem in our procurement budget and there were headlines in the newspapers saying we had lost £3.1 billion or something. That was a wrong impression. It may relate to your question, because we did not lose £3.1 billion, but that is the forecast of the future programme compared with the previous year, as a result of forecast new cost pressures mainly from these four legacy programmes, Brimstone, Nimrod, Astute submarines and Eurofighter. My main concern is as permanent secretary rather than as accounting officer, responsible as it were for the management of finance of the department as a whole and delivering our programmes. It is in that context that I am particularly concerned about this. What do we do about it? When we selected Sir Peter Spencer a year ago, it was with this very specific mandate to start to turn round this performance. It had been quite good before then, but it went very badly wrong that year. He initiated a stock-take of the whole smart procurement process and that has now been implemented. The results of the stock-take, working with McKinsey's, have now been implemented, which I trust will start making a difference. Improved skills development for the staff in these integrated project teams: there always were centres of excellence, but we need to spread it more generally across the population of our people who manage these projects. Better risk management techniques: we still need to have an appetite for risk because we are often dealing with leading technology problems. We have to manage it well and have mitigating strategies in place rather than just wait for things to get out of control. Looking at through-life costs, seriously rather than just as a token: working jointly with industry, understanding better what their capacities are as well as them understanding what our real requirements and needs are, requires quite a lot of work on, for example, technology readiness levels, that is what we call them, so we understand what the risks are in industry in keeping their promises as to saying they can deliver this or not. Then business processes, organisational changes. He has put in place what is called a stock-take, but it is a pretty thoroughgoing upgrading of the management in the Defence Procurement Agency and it is an important piece of work on which I keep a very close eye too. We cannot do it all ourselves of course. I should add before I cover myself completely in a hair shirt and lacerations that it does require industry also to up its game. You may have noticed from time to time the odd little public comment about our relationship with industry. We do expect industry also to work harder to deliver the projects to time and cost which they have taken freely on contractual terms. Q98 Mr Cran: I am not suggesting you should not have given a long answer, I am perfectly happy with that, but the quick answer to my question is that yes, you do have a role as permanent secretary and the actions you outlined really came out of the discussions you have had within MoD. Sir Kevin Tebbit: Yes. As accounting officer, but particularly as permanent secretary, it is really the area I worry about most and where I feel we need to do better. Q99 Mr Cran: Is it your view that the ones I mentioned, not meeting targets and programme slippage and cost growth, will be rectified by the time of the writing of the next annual report? Sir Kevin Tebbit: It will get better. The 2003-04 report will be better, but I am not under any illusions here. We keep saying these are because of legacy programmes and that happens to be true, but we must make sure that our new programmes do not start going in the same way. It is all right at present, because we have not got to the hard stage of those programmes. We have to keep working at this. Q100 Chairman: Last week we had Sir Dick Evans in conciliatory mood. There has been a lot of megaphone diplomacy on the MoD side as well as BAE Systems side. The BAE position has been dismissed as "Oh well, we shall just have to put pressure on the Ministry of Defence to get better terms". It is part of your responsibility to maintain the British defence industrial base. Do you have any concerns about the future of BAE Systems and what you might call the threats by them largely to pull out of the United Kingdom because they cannot make any money in this country and they are making it elsewhere? They have made mistakes and I do not think the MoD is blameless. Are you treating this seriously? It would be quite appalling if, because of their shareholders' pressure or because of any attitudes within the Ministry of Defence or DPA, if we were to see our one remaining large manufacturer of weapons systems, employer of 45,000 people, seeing it has a better future centred in the United States than being centred here? Are you taking it seriously, Sir Kevin? Sir Kevin Tebbit: This is a serious point. May I take it in bits? My first duty is to ensure the armed forces are equipped with the equipment they need, when they need it and at a price we can afford. That is my first responsibility as permanent secretary. We also have a defence industrial policy, which is geared to ensuring that where there is a strategic requirement the UK needs to have in the UK that that is maintained. There is a wider interest in having a healthy British defence industry, but we do define that slightly more broadly than you have, as being companies which create wealth in the UK, create technology in the UK as well as employment. They do not necessarily have to be British owned. I am not making a big point here, but it is an important qualification. For example, a little while ago we released BAE Systems from the obligations to ensure that the majority of their shareholders were British. They are an international company and we have probably gone further than any other country in promoting international competition and competitive forces, which is one of the reasons why we have very good armed forces, because we have been more ready to look at competition than others. That said, clearly where we possibly can we want to see a vigorous British defence industry. The important thing is that they should be operating actively in the UK. Part of me says I wish I could do both, but if I have to choose, the emphasis must be on equipping British armed forces to the very best that we can. Private sector companies have to make their own judgments about where they wish to be. Equally, they need to do that with an understanding of what their market is going to be like. We have a duty to try to show British industry generally what our requirements are going to be over a 10- or 15-year period so that they can plan accordingly. That is the bit of the obligation that we will be meeting. We cannot obviously be held hostage or be obliged to continue to pay if we feel that it is not the most effective way of securing our objectives. In terms of the issues you have seen in the press, as you know, we are now looking for our carrier contract and I am very much hoping that will have BAE Systems as well as Thales as part of it. We shall see what occurs. Q101 Chairman: It is my irritation, I have said a thousand times, that this openness of the British market is largely unreciprocated, which is a matter of grave concern to me. Why should we be so nice to other countries when they make it virtually impossible for us to bid for contracts in theirs? It is a generosity of spirit which I find quite baffling and they must find so funny. You used the word "hostage" and that is part of the language I read too much about; BAE holding us hostage or whatever. Evans last week was trying to be nice and to say all appears to be hunky-dory with the Ministry of Defence, which frankly I do not believe. When you have an obligation to provide equipment for our armed forces, one of the concerns is that if so much of it is coming from abroad for urgent operational requirements, are other countries going to be so keen, because we do things usually at a rush. The last war was a classic example of doing things in a typical British way, rushing and getting through things very, very quickly, whereas in a more rational process it would take time. My only concern is if we rely too much on foreign countries, and I am not denying the importance of it, then when it comes to urgent operational requirements, let us say vis-à-vis the United States, are they going to say we are nineteenth in the queue? What if some country we are reliant on says they do not like us fighting the war in Iraq and if those companies are largely French controlled or German controlled or whatever. I do not want to disparage them. May I respectfully suggest that screwing a minimum price out of British companies is not as simple as you say. Your obligation is to provide equipment for the armed forces. I should have thought an important corollary of that is having a British defence manufacturer with whom you are working very closely and are assisting in every way, rather than trying to screw down the price so other countries, who may not have the same procedures that we have in the relationship between ourselves and defence manufacturers, no brown enveloping, would find it much easier to win contracts than a British company. I am merely saying: is it not within your responsibility to get both seriously good equipment for our armed forces and maintain and sustain the British defence industrial base rather than having policies which go a long way to sustaining somebody else's defence industrial base? Sir Kevin Tebbit: We do have a defence industrial policy which is about developing the defence industrial base in the UK, not necessarily insisting on British ownership. As long as the companies are in the UK with the technology being created in the UK and the jobs in the UK, that is one caveat I would make. On the idea that we had simply been screwing down the price and damaging companies, I would simply ask you to remember that you are referring to contracts which were competed for freely and openly. We simply invite bidders. When a competitive process is under way it behoves the government to select, not necessarily the lowest bidder but the person with the best bid. You cannot expect us to say "We quite like your bid but we really think you ought to have £200 million more because you are good chaps". That would be absurd. We are talking about contracts which are freely entered into on the basis of competitive forces. We have absolutely no wish whatsoever to weaken or see any lessening of the vigour of British defence industries. Our policies are designed to strengthen those. All I am saying is that private sector companies have to make their own choices as well. We cannot override those choices. Q102 Chairman: It is clearly not a free choice for companies in a bidding process. If you are driving down price and companies are in a very competitive environment, they might put in a bid which might be seen at that time as incredibly low in order to sustain employment in this country. I am not remotely going down the argument, the line that any old bid at any price which is ridiculously high should be awarded to that company because they are British. I would not do that. When you are looking at the totality of the bid and the consequences of jobs, a largely British company - I know you say it is international; it is very convenient to say that but it is identified as a company which is the largest British company in the defence field ... I am just putting to you that there are consequences of an open market defence policy. It might seem smart to you, but it does not seem smart to everybody else. I do not want to see, as a result maybe of BAE's fault or even the fault of the Ministry of Defence, their shareholders saying they are better off clearing off elsewhere. Then to put that down simply as posturing or holding to hostage may not be seen in retrospect to have been the right analysis. I am merely floating those ideas. I am no shareholder of BAE Systems. I am not a consultant to BAE Systems. I merely want to see the best for the MoD and the best for British industry. At this time what might be good for one does not appear to be completely beneficial to the other. Sir Kevin Tebbit: My comments were very general; I was not speaking about any particular company and I would not want my remarks to be taken in that context. The real issues for the future are that the international defence market is going to be smaller. The days when we built large numbers of platforms are obviously limited. Post Cold War the defence industries all over are facing challenge and restructuring issues. Manned aircraft: where is the next generation beyond JSF coming from? Ask the question and very few people will have clear answers about that. There are big restructuring issues which face the industry as a whole and they are the ones which are the real challenge. There is also a serious asymmetry between defence expenditure in Europe and in the United States when you look at the size of the US defence market. It is not surprising that British companies want to get footholds in the United States and be successful there. This is surely a natural response to market forces. With the US defence budget larger than the total defence spending of the rest of the world it is inevitably going to be a powerful market. These are factors we have to take into account as well, in addition to the British defence industrial policy. We have to shape that in the context of these global trends. Those are the real issues and challenges we are going to face rather than looking at a purely national market or industry. Q103 Rachel Squire: May I ask fairly briefly about the defence change programme, the modernisation in a number of areas such as logistics, estates and manning and so on? May I ask you to explain what the overarching objective of the defence change programme is and what progress has been made in delivering the expected improvements? Sir Kevin Tebbit: In simple terms it is all about better delivery of public sector objectives, getting better value for money, using the best techniques to become more efficient in what we do and to integrate new technology into the MoD effectively, which has been a bit of a challenge for the public sector generally with things like IT programmes. It is a single coherent programme which joins up the most important of the various initiatives, which would otherwise anyway be under way in defence, to achieve those objectives. When we looked at it, at the end of 2001, we had an awful lot of change programmes coming out of the defence review from 1998, but they were not perhaps as focused on the key areas as they should have been; we had too much activity across too wide an area. This was an attempt to focus on the really important programmes, particularly in logistics and in the information infrastructure, although we probably have 11 or 12 now in that overall change programme, to link ministers more directly with programme delivery as well, they take a more active interest and sponsor some of these major projects, to make sure that we pin down responsibility for delivery to individuals, to make sure that they have better benefits established before we fund them, they can track the progress of projects better, be more accountable for them, those sorts of things. It is the changes which would happen anyway, delivered by better project management essentially, with closer supervision from the top. In terms of what the main benefits are, or the main issues are, the biggest one is in the defence logistics area where we are committed to 20 per cent savings in output costs for our logistics, better contracting and better procurement. Last year the gains were something in the region of £300 million, but that is an area we are looking to quite seriously for a lot of the overall efficiencies we are talking about through Gershon, the 2.5 per cent. A lot of that is coming from the DLA. The other one, the defence information infrastructure, is bringing together into one sort of ring main, I expect you could call it, about 300 different IT systems which we have throughout defence, grown up over the years, 2,000 locations around the world. The DII is trying to provide this overall coherent infrastructure for IT which will also interface with military applications in the field as well as office applications. That is absolutely critical because nearly all of the other initiatives will hang off the information infrastructure one way or another. They are the two main ones. Q104 Rachel Squire: Moving on to my second question, I perhaps ought to declare a constituency interest because I happen to have the munitions depot at Crombie in my constituency. It has been subject to at least one review every year for the 12 years I have been a member of parliament and is currently awaiting the outcome of one of the latest. That has led me to question, when I have then moved on from my local concerns, the broader issue and I have found that I understand that McKinsey's have been responsible behind something like at least 900 different reviews in defence logistics. That is a statistic I saw somewhere. Just from a local perspective, I have then looked at how many reviews, studies, are being carried out. This then led me to question just how much the Ministry of Defence does spend each year on review and frankly whether they actually save more from the outcomes of those reviews than they actually spend on procuring the external consultants to undertake such reviews. Sir Kevin Tebbit: It is something on which I keep a careful eye because nobody wants to spend more than they have to on external consultancy. It has been a problem across government and something the people have looked at quite carefully. Equally, I could not hope to keep in house all of the skills and techniques necessary to help us to deliver our change rationalisation programmes. It makes sense to buy in skills from consultants when we need them; I am not talking about one particular consultant. The important thing is only to use them when we need them and to grow our own internal capacity based on experience in past reviews, which is what we do. We have an internal directorate general of management organisation which provides an in-house capacity as well as using external consultants. It is inevitable that we use external consultants if we want good quality challenge in what we are doing. I do not recognise the figure of 900 reviews involving McKinsey; that seems to be rather high. We certainly use them for what is currently a thing called the end-to-end review of logistics, which is that previously we have tended to look at logistics as a sort of separate world, not linked up enough to industry on the one end which produces the equipment which goes into the logistics supply chain, or enough to the frontline and what the frontline really wants and really needs. The end to a logistics study is looking at the whole piece to decide what we should do in house, what we should look to industry to do, where it should be done, how close to the front line, the role of in-house logistics capacity, Defence Aviation Repair Agency (DARA) for example, or the Army equivalent Army Base Repair Organisation (ABRO), whether we should be using more of them, or whether we should be using British industry more, whether we should in fact be putting it closer to the front line or in base repair organisations, whether we should go for modifications of equipment rather than repairing the existing stuff. That is what the end to end work is doing and it is throwing up serious areas of overlap, duplication and areas for efficiency well in excess of anything even McKinsey's charge government departments. Q105 Rachel Squire: May I ask you to be a little more specific about how the output from the reviews undertaken is evaluated and whether the expected improvements/savings from such reviews are achieved? Sir Kevin Tebbit: We track them very carefully and have very clear progress from the logistics organisation. Mr Woolley has got away with not saying very much lately, but he has taken a close interest in making sure that the gains claimed, particularly for the logistics organisation, are actually there and built into the figures they give in their budget. Could you possibly say a word as proof of what I am saying? Q106 Rachel Squire: I am happy to hear about logistics but could you also comment on the other areas? Sir Kevin Tebbit: It is a good illustration; that is my point. Mr Woolley: The key thing from my perspective is that where we undertake a study which shows that by doing things differently we will save cost, that cost is incorporated into the budget of the organisation concerned so that it is actually scored as a budgetary saving, at any rate a budgetary saving to offset against any other costs which might otherwise have to be incurred by that organisation. It is absolutely essential that we have a benefits tracking system and certainly, as a result of the so-called end to end review of defence logistics and indeed in terms of the other change programmes which come under the defence change programme umbrella, we will have in place a clear articulation of where it is we expect the savings to be realised and a system in place to ensure that we check that those savings really have been realised in order that the budgets we place on these organisations are coherent with the reorganisation or the different method of doing things which have emerged out of doing these reviews. The question of identifying specific savings, of having a plan to achieve them and of ensuring that those savings have been achieved against the plan, is an integral part of our planning and monitoring process. Q107 Rachel Squire: When you are assessing value for money, cost savings, do you take into account the commitment that MoD civilian staff have given to providing the crucial area of logistics to the forces when they need it? Sir Kevin Tebbit: Absolutely right. I might say again that some of the unsung heroes of Operation Telic were the civil servants who worked day and night around the clock to get those urgent operational requirements met. After the operation people like me went round to places like RAF Witton to do so and to see the teams who got Storm Shadow fielded. It was not just Storm Shadow, although that was the most remarkable story actually, a system which was really not yet fielded operationally and they worked on it almost physically and got it out. Some of the contractors did similar work as well, but there is no doubt whatsoever that the civil servants who work in defence, firstly tend to be under-appreciated and secondly it is one of my key objectives to make sure their work is recognised. I have to say that Geoff Hoon, the Secretary of State for Defence is good now at always remembering that there are four elements which deliver defence outputs: the three services and the civil service. He does mention that properly. This is not about not recognising the work of civil servants, it is just a question of making sure that we have the best optimised system for delivering logistics and we will always expect there to be a very strong civilian element. What I am not sure of is the precise balance as between whether they will be working in companies, or whether they will be working inside the Ministry of Defence. Q108 Chairman: Thank you very much. Perhaps you could send us a list of consultants, the titles of the work they are doing and the cost. We are not opposing it, we are quite interested. Sir Kevin Tebbit: We do publish a list each year. It is part of our public transparent policy and I shall be happy to send it to you. Q109 Chairman: Obviously transparency has not reached my office. Sir Kevin Tebbit: I shall be happy to send you last year's list. Chairman: If you would not mind. Thank you both very much for coming in, it has been very helpful. Thank you. |