APPENDIX 3
Further Memorandum from the Ministry of
Defence
MAIN ESTIMATES 2006-07
(i) The Committee's report on the Spring
Supplementary Estimate for 2005-06 expressed concern at the level
of contingency included in the request for resources. We are unable
to identify from the Memorandum covering the Main Estimate whether
or not there are any contingencies included within the Main Estimate.
Please could you provide details of any contingencies in the Main
Estimate, both by amount and by sub-head, and explain how they
were arrived at? How do any contingencies relate to the Departmental
Unallocated Provision of £470 million and are there any plans
yet as to how the unallocated provision will be spent?
There are no contingencies included within the
Main Estimate. Should we need to access the Departmental Unallocated
Provision, we will seek Parliamentary authority to do so in Supplementary
Estimates.
(ii) The Memorandum covering the MoD's Main
Estimate does not include any information on the levels of End
Year Flexibility that the MoD is carrying. Although we recognise
that the use of EYF is reserved for Supplementary Estimates, the
Committee would like an update on the latest estimate for EYF
which we anticipate will have changed slightly from those presented
alongside the Winter Supplementary Estimate as a result of 2005-06
actual outturn figures. Are there any plans for utilising the
stock of EYF during 2006-07?
End of Year Flexibility will be assessed following
the publication of HM Treasury's Public Expenditure Outturn White
Paper later this year, informed by the actual 2005-06 outturn
in the audited accounts.
(iii) The Memorandum covering the MoD's Main
Estimate shows (paragraph 4) some restructuring taking place,
combining the Top Level Budget holders for Commander-in-Chief
Fleet and 2nd Sea Lord/Commander-in-Chief Naval Home Command.
The Committee was briefed on this during the visit to Fleet Command
but would appreciate a short note on the operational impact of
this merger of roles and the efficiency savings which the merger
will generate.
The reason for the merger of the Commander-in-Chief
Fleet's and the Second Sea Lord's headquarters was to ensure that
the Navy manages itself in the most cost-effective and efficient
way possible, thereby maximising the resources available for the
delivery of operational capability. The new unified headquarters
and single top level budget came into being on 1 April 2006 and
will generate over £10 million of efficiencies by April 2008.
(iv) The Memorandum covering the Main Estimate
also indicates (paragraph 5) that further restructuring is currently
underway to consolidate the MoD's assets under single balance
sheet owners. Again, what will be the operational impact of this
restructuring and what efficiency savings will it generate?
As part of the review of the MOD Finance Function
conducted in 2004, known as "Simplify and Improve",
we considered whether current budgetary accountabilities matched
decision-making responsibilities. We concluded that because key
decisions about the procurement of new equipment and out of service
dates were taken by the Centre of the Department rather than by
the Top Level Budget Holders there was no management benefit in
these assets appearing on the balance sheets of these budget holders.
It was therefore decided that all fixed assets would be transferred
to Single Balance Sheet Owners (SBSOs), who would manage the financial
consequences of asset ownership. This has no operational impact
and will not, in itself, generate efficiency savings, but it does
significantly simplify our financial processes.
(v) How much of the £100 million additional
resources announced for the MoD in the Budget 2006 will be spent
effecting this restructuring?
The purpose of the £100 million additional
resources made available to the Department from the Reserve in
2006-07 is to help manage the up-front costs of the programme
of Civilian and Military manpower draw-down and restructuring
that was first announced in the "Delivering Security in a
Changing World: Future Capabilities" Command Paper of 2004.
The aim of this programme is to assist the delivery of efficiency
improvements across Defence and to modernise the way the Armed
Forces and Defence are organised, equipped and supported. The
additional resources are not intended to meet any costs associated
with the consolidation of MoD assets under single balance sheet
owners or the creation of the single Fleet Top Level Budget from
the merger of the Commander-in-Chief Fleet and 2nd Sea Lord budget
areas.
(vi) There has been a 24% increase (£647
million) in sub-head I (Central) within RfR1 compared with the
2005-06 provision. Please could you provide an explanation for
the increase?
The increase in the Central TLB is within Indirect
Resource Departmental Expenditure Limit (DEL). As noted above
we are planning to transfer Fixed Assets to Single Balance Sheet
Owners later in the year. Until the SBSOs have assumed responsibility
for the assets we shall not have a definitive view of the final
allocation between TLBs. We plan to adjust the inter-TLB allocations
and seek Parliamentary approval through Supplementary Estimates.
(vii) Paragraph 3 in the Introduction to
the Main Estimate mentions a change in the classification of On-Balance
Sheet PFI contracts. Could you explain why the change has occurred
and what impact this change will have on the future funding requirements
of the MoD?
This is the result of changes in the budgeting
guidance issued by HM Treasury (which is available on the Treasury's
website). Departments were previously required to split the recording
of payments on PFI deals so that the interest payable below 3.5%
was charged to non-budget (not within the Departmental Expenditure
Limits (DEL)) and that over 3.5% was scored to Direct Resource
DEL. The new arrangements require that the full amount of interest
is charged to Direct Resource DEL. The cost of capital credit
was in Non Budget, and it will now be within Indirect Resource
DEL. This technical accounting change simplifies the recording
of transactions: Treasury has adjusted Departmental DELs accordingly
and there is thus no impact on future funding requirements.
(viii) Non-Budget costs within RfR1 in the
2006-07 Main Estimate are around £12 million and are significantly
lower than those in 2005-06 which exceeded £2.5 billion.
Please can you explain why this difference has arisen?
This change arises because the discount rate
for provisions reduced from 3.5% real to 2.2% real with effect
from 1 April 2005, and as a result the Non Budget Estimate in
2005-06 was significantly larger than usual. When provisions for
future liabilities are recorded on the balance sheet, they are
discounted (reduced) using HM Treasury rates to reflect the present
value of future payments. If the discount factor decreases, the
present value on the balance sheet will increase, and this corresponding
entry is charged to the operating cost statement in Non Budget.
The Non Budget Estimate in 2005-06 comprised £2,328 million
for the discount rate change, which is not required in 2006-07,
£18 million for the PFI interest and cost of capital which
now lies within Departmental Expenditure Limits and Annually Managed
Expenditure and £13 million for Grants in Aid. The only item
in Non Budget in 2006-07 is the Grants in Aid.
(ix) Capital non-operating appropriations-in-aid
are included within the 2006-07 Main Estimate at £21.5 million.
This compares to the 2005-06 provision of £607 million. Within
the £21.5 million total only £7.2 million relates to
the sale of assets. The Committee would like a breakdown of the
assets to be sold in the year and an explanation of why the MoD's
asset disposal strategy for the year is so limited.
We made an oversight in not reflecting the totality
of the planned estate disposal programme in Main Estimates. For
reasons of commercial sensitivity we do not wish to provide a
detailed breakdown of individual anticipated receipts. Major disposals
this year will include Queensgate, Farnborough, Holton Hospital,
Dean Hill, West Rainham, and Drummond Barracks. Overall, however,
we expect the Estate disposals figure to be in excess of £150
million. We shall update the figures at Winter Supplementaries.
(x) There are two new contingent liabilities
in the 2006-07 Main Estimate relating to the "Provision of
MoD support services to the Iraqi Ministry of Transport in opening
Basra Airport" and the "Non-Insurance of the Rolls Royce
Core Factory and associated Neptune Test reactor facility for
third party risks". Please could you provide more information
about the nature of these contingent liabilities and explain why
they are unquantifiable?
The contingent liability relating to the provision
of MOD support services to the Iraqi Ministry of Transport in
opening Basra Airport was reported to Parliament by Departmental
Minute on 2 December 2004. MOD will support the commercialisation
of Basra Airport in the provision of the following services: Air
Traffic Control—Communications Support—Fire and Crash
Rescue. These services will continue to be provided to the Multi
National Division (South East) in addition to supporting commercial
operations. The potential contingent liability would arise in
the event of an aviation accident. Because of the broad and potentially
unbounded nature of aviation accidents the potential costs are
unquantifiable.
The contingent liability relating to the non-insurance
of the Rolls Royce Core Factory and associated Neptune Test reactor
for third party risks was reported to Parliament by Departmental
Minute on 11 March 2004. MOD proposes to extend the existing contingent
liability in respect of the submarine reactor fuel Core factory
and associated Neptune test reactor that are operated exclusively
for Defence by Rolls Royce. The existing scope of the Crown indemnity
within procurement contracts would be extended from risks to Rolls
Royce facilities and workforce only, to cover all third party
liabilities (damage to property and injury to persons outside
the nuclear site). The existing scope of Crown indemnity for the
facility and workforce and the £140 million cap to insurers'
liability for third party claims means that a significant proportion
of the financial risk is already held by the MOD. Careful appraisal
of the risks has been undertaken to support the investment appraisal.
The chance of a significant nuclear accident is so remote that
expenditure to purchase commercial insurance does not represent
value for money.
Further information on both of these liabilities
is provided in the Departmental Minute.
In both cases the cost to the Department would
depend on the severity of the incident. There are so many different
scenarios that could lead to the liability being realised that
the potential costs are unquantifiable.
(xi) We notice there has been a small change
in the format of the notes to the Main Estimate which reduces
the information available to the Committee on appropriations-in-aid.
Could you provide a breakdown of the £1,365,830,000 on page
308 relating to the sale of goods and services in order to enable
a comparison to the prior year's provision?
The following table shows a breakdown of the
appropriations-in-aid, in the same level of detail as previous
Estimates.
| 2006-07
£000s
|
| Income from supplies and services | 1,026,477
|
| Loan and rental income | 265,369
|
| Interest Received | 94 |
| Other Income | 73,890 |
| Sale of goods and services | 1,365,830
|
| Trading Funds dividends (includes interest previously reported under interest received)
| 25,546 |
| Total | 1,391,376
|
(xii) There remains in the MoD's Main Estimate a contingent liability to top up the QinetiQ pension fund, the need for which was to be assessed when the Government's remaining stake in QinetiQ was sold. QinetiQ was floated on the London Stock Exchange in February 2006 at which point the Committee would expect to see the liability either settled or extinguished. Newspaper reports suggest QinetiQ is indeed intending to call on the entire £45 million commitment and retain a further £45 million raised from share sales to boost the pension fund further. If QinetiQ has publicly expressed its intention to call on the MoD's £45 million commitment why does the liability still remain contingent? Has it not crystallised? Does the £45 million QinetiQ is planning to retain from share sales reduce the amount available for repayment to the MoD? Given that the pension fund is likely to still be in deficit following the £90 million cash injection, has the MoD made any further commitments with regard to the pension fund in future?
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The contingent liability of £45 million in respect of
the QinetiQ pension fund was paid at the end of March 2006, just
after the completion of the Initial Public Offering (IPO) of shares.
Although Main Estimates were not published until May this year,
much of the supporting data was prepared before this payment was
made and did not therefore reflect the fact that the liability
would be discharged by the time of publication. The position will
be corrected in Winter Supplementaries. Following the IPO, MOD
retained a 19.3% stake in QinetiQ, but has no further commitment
or liability in relation to the pension fund.
(xiii) The Memorandum covering the MoD's Main Estimate
makes reference (paragraph 11) to the Armed Forces Memorial—"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". On 22
May the MoD laid a copy of a Departmental Minute (attached) concerning
"the reporting of a contingent liability for the underwriting
for the Armed Forces Memorial". The costs of the Armed Forces
Memorial project is expected to be in the region of £6 million.
The MoD wishes to provide an indemnity of £3.3 million to
the Armed Forces Memorial Fund Trust to underwrite the costs of
the projects that are not yet covered by donations. The Minute
notes that it is the Trustees' intention to meet all costs from
funds from public subscription and that officials from the MoD
will work with the Trustees to ensure that the risk of the guarantee
being called on is minimised. In what ways will the MoD ensure
that the risk is minimised?
The Minute states that "The Chancellor of the Exchequer
announced on 13 February 2006 that the Treasury would contribute
£1.5 million towards the appeal from the proceeds of the
sale of Trafalgar Coins. These are non-public funds". Why
is this contribution from the Treasury considered non-public funds?
The Committee staff were informed that the usual 14 day's
notice was not being given. Please explain why, and why this is
not explained in the Minute.
The Armed Forces Memorial Trustees have submitted their fundraising
business plan to the Department. This is being scrutinised for
realism and officials will liaise regularly with the Trust to
monitor progress against the plan. When the Treasury approved
the £1.5 million donation they asked us to make clear that
it is not funded via the defence budget but from the proceeds
of the sale of a coin. They have since advised that cash from
coin sales is paid to the Consolidated Fund and is available to
finance public spending. The £1.5 million to fund the Armed
Forces Memorial has been provided from the Consolidated Fund and
can therefore be regarded as public money. Prior to the formal
submission of the Departmental Minute the Parliamentary Clerk
had discussed informally with the Committee Clerk the possibility
that the full 14 days notice might need to be reduced. In the
event it was concluded that the full notice period would be acceptable
and no reduction was therefore required in the Minute.
(xiv) The Committee understands that negotiations for
the next Comprehensive Spending Review are currently underway
and that as well as agreeing budgets for the next three years
with Departments, this will involve setting new PSA targets for
the three year period. Please could you forward details of the
MoD's draft PSA targets and an explanation of where changes to
targets or new targets are proposed.
Discussions on our approach to a PSA covering the CSR07 period
are still at a very early stage. We have not yet begun to discuss
in detail with the Treasury the coverage or level of individual
targets and there are no drafts at this stage.
9 March 2006
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