Select Committee on Defence Written Evidence


Memorandum from the Ministry of Defence



  1.  This Memorandum covers the Main Estimate for the Ministry of Defence (MOD). The Department's spending plans for 2006-07 are based upon the outcome of the Government's Spending Review 2004, which was published in the Government's Expenditure Plans 2005-06 to 2007-08 (Cm 6532). As announced by the Secretary of State for Defence on 21 July 2004, the key features of the settlement for Defence were:

    —  An increase in the Defence budget of £3.7 billion, representing 1.4% average annual growth in real terms over the period to 2007-08.

    —  A commitment to achieving £2.8 billion of efficiencies by 2007-08, all of which will be reinvested in Defence. Details of these are recorded in Cm 6532.

  2.  The Ministry of Defence requests in Main Estimates totals of:
£ million
Net resources within Request for Resources 1 31,986
Net resources within Request for Resources 2 47
Net resources within Request for Resources 3 1,030
Net Cash Requirement31,496


  3.  The transfers and other changes outlined in the Introduction to the Estimate are analysed in this section of the memorandum.

  4.  The MoD has reorganised the two Navy Top Level Budget Holders (TLBs) Commander-in-Chief Fleet and Second Sea Lord/Commander-in-Chief Naval Home Command into a single TLB called Commander-in-Chief Fleet TLB, as part of its rationalisation process. This is referred to as "Commander in Chief Royal Navy Single TLB" in the Estimate. Prior years' balances (2005-06 provision and 2004-05 Outturn) are shown against the two previous TLBs lines.

  5.  There have been a number of transfers between TLBs, reflecting routine adjustments resulting from the Departmental planning process. Further changes in the organisation's structure will mean these will be updated in the Supplementary Estimates; one of these changes is the impact of the transfer of assets to the MOD's new single balance sheet owners. This is explained in more detail in Para 17.

  6.  The table below shows how the Estimate is compiled, taking the figures for 2006-07 published in Cm 6532, and identifying subsequent changes. The figures for AME, non budget and cash release of provisions are not published in Cm 6532. These are explained further in the following paragraphs.
All £ million1Direct R DEL Indirect R DELTotal R DEL AMENon budget Near cash Non budget Non cashTotal Net Resources Capital DELCapital AME Total Net Capital
12 345 678 910
GEP figures

Cm 6532

21,482.411,224.5 32,706.9225.6 50.3-21.2 32,961.76,970.0 -7.06,963.0
Accounting Treatment changes2-9.6 -37.9-47.5-47.5 -37.921.2 -28.3
Transfers in10.1 10.1
Transfers out-222.6 -222.6
Restructuring100.0 100.0
Urgent Operational Requirements -15.0
Flexibility50.0-50.0 0.0
Armed Forces Memorial1.5 1.5
Total21,411.8 11,136.632,548.4 178.112.4 032,738.96,926.7 -7.06,919.7
Less Non voted items in SR 04
Departmental Unallocated Provision -470.0-470.0
Nuclear cash release-258.4 -258.4
Royal Hospital Chelsea-12.6 -11.6-24.2 -0.7
Fleet Arm Museum-0.6 -0.6
RFR1 Total21,140.2 10,655.031,795.2 178.112.4 031,985.76,926.0 -7.06,919.0
RFR2 Provision47.3 47.3
RFR 3 Provision Previous 1,026.0
War widows benefit 4.0
RFR3 Provision 1,030.0
Estimate Total*21,187.5 10,665.031,842.5 1,208.112.4 033,063.0 6,926.0-7.0 6,919.0
* Minimal differences may occur due to roundings.

1 Definitions of the column headings are shown at Annex A.1

2 This line reflects the changes to the Treasury control regime, which affects provisions, accounting for Private Finance Initiative deals, and long term prepayments and debtors.


Transfers in and Out

  7.  The Estimate includes a number of transfers to and from other Government Departments. Some of these are follow-on transfers from last year's Supplementary Estimates, and where applicable it is expected that MOD's baseline will be adjusted to reflect a permanent transfer in the next Spending Review.

Exporting Department£'000 Purpose
Department for Environment & Rural Affairs 4,863Contribution to National Meteorological Programme and Severe Weather Warning System
Department of Transport3,903 Contribution to National Meteorological Programme and Severe Weather Warning System
Department for Work and Pensions1,345 Postal Contract costs for the Veterans Agency. MoD is now responsible for meeting the cost from its budget
Cabinet Office8Costs of the Treasury Solicitors European Division. Treasury Solicitors are introducing a levy based system. Treasury Solicitors have disaggregated their costs to Departments.


Importing Department£'000 Purpose
Department for Trade and Industry-215,000 Transfer of responsibility for setting up of the Nuclear Decommissioning Agency. This was agreed in Spending Review 04. The transfer was effective from 1 April 2005, and was reflected in the Spring Supplementary Estimate 2005-06
Cabinet Office-7,500 MoD's Contribution to the running of the BBC Monitoring Service
Department for Culture, Media and Sport -160The transfer of the Pattern Room Collection The Pattern Room is a collection of historic weapons and other items accumulated over the past centuries when the Army etc made its own weapons; these have now been transferred to the Royal Armouries. This was not treated as an MOG transfer: it was too small and only covers the cost of the staff transferring.


  8.  Budget 2006 announced £100 million from the Reserve in 2006-07 in order to help manage the cost of restructuring of both the Armed Forces and Civilian elements of MOD.

Urgent Operational Requirement Changes

  9.  Some Urgent Operational Requirement (UOR) changes bring forward items of capital equipment already in the programme. In these cases, MOD accounts for the purchase against RFR2 funding in the year of delivery, but takes a corresponding reduction in the capital resource set aside for that purchase in the year that it was originally planned to be delivered. There is a reduction of £15 million in Capital DEL in the Estimate for equipment delivered under UORs in previous years.


  10.  The Estimate includes a £50 million switch from non-cash to near-cash agreed with the Treasury as a result of MoD's progress against the SR04 reform agenda.

Armed Forces Memorial

  11.  This relates to a grant of £1.5 million for the Armed Forces Memorial in Staffordshire, which will be funded by the proceeds from the coin celebrating the 200th anniversary of the Battle of Trafalgar.

Non Voted Items

  12.  Non voted items are those not voted in the Part II table of the Estimates, but are included in the GEP figures. These are:

    —  The Departmental Unallocated Provision. This is a part of the DEL received as a result of the Spending Review which Departments hold back to deal with unforeseen pressures in accordance with the Consolidated Budgetary Guidance issued by HMT.

    —  The cash release of Nuclear provisions created in previous years which will be paid this year.

    —  The net consumption and cost of capital charge for Royal Hospital Chelsea together with MOD's contribution to Capital additions.

    —  The grant to the Fleet Air Arm Museum for its running costs is regarded as a subsidy as over half its income comes from private sources. Grants to the other Museums do not meet the ONS definition and are voted.

Near Cash

  13.  The MOD's "near cash" budget (which is a Treasury control) is the sum of the Direct RDEL and Capital DEL (including non-voted items) for RfR1. For 2006-07 it is £28,081 million.

RFR2 Conflict Prevention

  14.  The Estimate includes Programmed Element of Conflict Prevention of £47 million of which £31 million is for Sub Saharan Africa and £16 million is for the rest of the world. Costs arising from operations (which are borne by the Global Conflict Prevention Pool of the Treasury Reserve) will be included in the Supplementary Estimates process, as in previous years. The Department will respond in due course to the Committee's recommendations in its report "Costs of peace-keeping in Iraq and Afghanistan: Spring Supplementary Estimates 2005-06".

RFR3 War Pension Benefit

  15.  RFR3 has increased by £4 million because of an increase to the pension allowance payable to widows of servicemen who died or left the service before 1 April 1973 and did not benefit from the improvements made in the MOD's Armed Forces Pension Scheme which was introduced on 1 April 1973. This increase was announced in Parliament in March 2005 and laid before Parliament in June 2005.

Items that will change in Supplementary Estimates

  16.  The Treasury has agreed that MOD should retain a proportion of the receipts (£250M) from the sale of shares in QinetiQ, over financial years 2006-07 and 2007-08. These funds will be drawn down in the Supplementary Estimates.

  17.  MOD has a fixed asset management project which is part of the Defence Resource Management Programme to "simplify and improve" financial processes across the Department. The second stage of this is the centralisation of fixed asset management under four single balance sheet owners (SBSOs) Defence Estates (DE), Defence Logistics Organisation (DLO), Defence Procurement Agency (DPA) and the Defence Communications Services Agency (DCSA), which is part of the DLO. At this stage, the budgetary implications have not been finalised, and the effect of these intra-Departmental transfers on the Estimates will be shown in the Supplementary Estimates.

The Department's Public Service Agreement

  18.  The Department's Public Service Agreement (PSA) for 2005-06 to 2007-08 was published in the White Paper "Spending Review 2004: Public Service Agreements 2005-08" (Cm 6238, July 2004). These are also published in the Government's Expenditure Plans 2005-06 to 2007-08.


Departmental Expenditure Limit (DEL)

19.  The following table shows the DEL from 2003-04 to 2006-07 for all RFRs

Outturn £m
Outturn £m
SSE £m
Estimate £m
Resource DEL31,329.935 31,286.72433,727.34432,643.245
Capital DEL6,073.300 6,754.2936,798.2786,926.660
Depreciation1-6,304.863 -5,647.882-8,168.297-7,551.000
Total DEL31,098.372 32,393.13532.357.325 32,018.905

  1.  Depreciation, which forms part of resource DEL is excluded from total DEL, since capital DEL includes capital spending and to include depreciation of those assets would lead to double counting.

  2.  The figures are for voted and Non voted DEL. The Non voted figure for 2006-07 is £331.294 net of depreciation.

DEL End Year Flexibility

  20.  End of Year Flexibility (EYF) will be assessed following the publication of HM Treasury's Public Expenditure Outturn White Paper (PEOWP) later this year.

Administration Costs Limit

  21.  The Department is not subject to an Administration Costs Limit.

Provisions and Contingent Liabilities

  22.  Provisions for liabilities and charges have been established under the criteria of FRS12 and are based on realistic and prudent estimates of the expenditure required to settle future legal or constructive obligations that exist at the balance sheet date. Provisions are charged to the Operating Cost Statement (OCS) unless they have been capitalised as part of the cost of the underlying facility where the expenditure provides access to current and future economic benefits. In such cases the capitalised provision will be depreciated as a charge to the OCS over the remaining estimated useful economic life of the underlying asset. All long term provisions are discounted to current prices by use of HM Treasury's Test Discount Rate, which is 2.8% for the financial year 2006-07. The discount is unwound over the remaining life of the provision and shown as an interest charge in the OCS.

  23.  MoD's provisions cover legal claims, civilian departure costs, environmental costs restructuring and nuclear decommissioning and restoration costs. Details of the contingent liabilities are set out at Contingent Liabilities note in the Estimate.

Machinery of Government Changes

  24.  A Machinery of Government (MOG) change is made when the responsibility for a service transfers from one Government Department to another. The most recent one of these was in 2002-03 when the War Pensions Agency was transferred from Department of Work and Pensions. There are no MOG changes in this Estimate.

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Prepared 29 June 2006