Select Committee on Defence Written Evidence


Memorandum from the Ministry of Defence

RESPONSE TO DEFENCE COMMITTEE QUESTIONS ON THE MINISTRY OF DEFENCE ANNUAL REPORT AND ACCOUNTS 2004-05 AND AUTUMN PERFORMANCE REPORT 2005-06

VALIDATION OF PERFORMANCE DATA AND DATA SYSTEMS

(i)   Pages 12-15 of the Performance Report summarise performance against SR2002 Public Sector Agreement Objectives and Targets. Has work been undertaken to assess the quality of the data systems used to support the measurement of performance against the PSA targets? If so, what were the main findings from this work and how are they being taken forward?

(ii)   Is any independent assessment undertaken of the performance against PSA targets reported in the Performance Report? If not, are there any plans to do so ie a body such as the NAO validating the reported performance?

  As set out in Annex D of the Annual Report and Accounts, our performance management and measurement approach has been subject to thorough review, in 2002 by the Department's internal auditors, and in 2003-04 by the NAO, which conducted an external review of our SR2002 PSA reporting arrangements. Both reviews provided favourable assurance. The NAO is currently conducting an external review of the data systems that underpin our SR2004 PSA targets. At a more detailed level there has been considerable external work looking at the systems and performance of a number of specific PSA targets. In particular:

    —    our Conflict Prevention Assessments (PSA Target 2) draw on a wide range of international statistics and reporting. In October 2005 the NAO published a report on Joint Targets, including the Joint Target for Conflict Prevention shared by the MoD, FCO and DfID;

    —    during 2004-05 the NAO conducted a further review specifically into our arrangements for assessing and reporting military readiness (PSA Target 3), which concluded that we had a good, and continuously improving, system for reporting readiness levels which compares well with that of other countries, such as the United States and Australia, and has been proven over time. We have since made a number of further improvements that were recommended by the NAO in the way we report readiness against our SR2004 target;

    —    the personnel statistics used to measure performance against out manning balance targets (SR2002 PSA Target 4, SR2004 PSA Target 5) are produced quarterly by the Defence Analytical Services Agency to the standard required for National Statistics;

    —    the NAO's annual Major Projects Report sets out forecast performance, costs and timings for the MoD's 20 largest equipment programmes (PSA Target 6). The most recent report, MPR 2005, published in November 2005, shows forecast cost savings of £699 million for the MoD's top 20 major equipment programmes; and

    —    the financial data underpinning assessment of our value for money (SR2002 PSA Target 7) and efficiency (SR2004 Efficiency Target) targets ultimately derives from the Departmental Resource Accounts, on which the NAO has given an unqualified opinion for the last two years.

CONFLICT PREVENTION

(iii)   PSA Target 2 (page 12), covers conflict prevention and is a joint target with DFID and FCO. For the second year running, the Target is reported as "not yet assessed" as "data on performance against the target is not yet available". What data is required to measure performance against this PSA Target and when is it expected to be available?

  The way Conflict Prevention performance is measured is set out in the relevant SR2002 and SR2004 Technical Notes (see Ev . . ., and published on the MoD, FCO, DfID and Treasury Websites). The Annual Report and Accounts reported against the SR2002 target. Data produced by the Stockholm International Peace Research Institute (SIPRI), International Institute for Strategic Studies (IISS), United Nations High Commissioner for Refugees (UNHCR), US Committee for Refugees (USCR) and Norwegian Refugee Council (NRC) Global Internally Displaced People project is used to measure performance against the four sub-targets for both the two Conflict Prevention Pools. These are:

    —    Global Conflict Prevention Pool (comprising Afghanistan, Nepal, Macedonia, Georgia, Israel/Occupied Territories and Sri Lanka):

    —  10% reduction in fatalities from a SIPRI baseline of 7,800 in 2000 to 7,000 by 2006;

    —  10% reduction in fatalities from an IISS baseline of 19,000 in 2000 to 17,000 by 2006;

    —  10% reduction in refugees from a UNHCR baseline of 3,800,000 in 2000 to 3,400,000 by 2006;

    —  10% reduction in internally displaced persons (IDPs) from a USCR baseline of 1,500,000 in 2000 to 1,350,000 (as measured by the NRC) by 2006.

    —    Africa Conflict Prevention Pool (comprising Sierra Leone, DRC, Uganda, Rwanda, Burundi, Sudan, Angola and Nigeria):

    —  20% reduction in fatalities from a SIPRI baseline of 6,500 in 2000 to 5,200 by 2006;

    —  20% reduction in fatalities from an IISS baseline of 48,000 in 2000 to 38,000 by 2006;

    —  20% reduction in refugees from a UNHCR baseline of 2,400,000 in 2000 to 1,900,000 by 2006;

    —  20% reduction in internally displaced people from a USCR baseline of 10,300,000 in 2000 to 8,200,000 (as measured by the NRC) by 2006;

  A time lag of one year before statistical data is available meant that data for 2004 only became available in November 2005. The Annual Report and Accounts, which was published in October 2005, therefore only included narrative reporting. The data for 2004 is set out in the table below. This indicates that the Global Conflict Prevention Pool is on course to meet all four of its sub-targets, and that the Africa Conflict Prevention Pool has slight slippage on two targets and major slippage on the other two. Data for 2005 will be available in November 2006, and a final assessment of performance against the SR2002 PSA target will be produced in late 2007 once 2006 data becomes available. Interim data will be published on the FCO website when it becomes available.

 
Deaths
(SIPRI)
Deaths
(IISS)
Refugee Population
(UNHCR)
  IDPs (USCR/NRC)
GLOBAL POOL
Baseline Figure 20007,800 19,0003,800,0001,500,000
Target for 20067,000 17,2803,349,9731,350,000
Afghanistan1,7411,550 2,084,925200,000
Nepal2,6042,400 1,416200,000
Macedonia-- 5,1061,299
Georgia2750 6,633240,000
Israel and Occupied Territories485 870351,281350,000
Sri Lanka19100 144,055347,475
Rounded Totals Sep 2004 (latest available data) 4,8004,9002,500,000 1,300,000
% Difference between 2006 target and 2004 actual (minus figure indicates performance within target) -31%-71%-26% -4%
AFRICA POOL
Baseline Figure 20006,500 48,0002,400,00010,300,000
Target for 20065,200 38,0001,900,0008,200,000
Sierra Leone-- 41,801-
DRC-4,000 462,2032,170,000
Rwanda26- 63,808-
Uganda1,6001,000 31,9632,030,802
Burundi4151,000 485,764117,000
Sudan3,24750,200 730,6126,000,000
Angola2550 228,83891,240
Nigeria521,350 23,888200,000
Rounded Totals Sep 2004 (latest available data) 5,30057,6002,000,000 10,600,000
% Difference between 2006 target and 2004 actual +2%+52%+5% +29%
(minus figure indicates performance within target)


(iv)   On PSA Target 2, what systems and procedures have been put in place to ensure that the three Government Departments collect the required data and measure performance against the PSA Target in a consistent way?

  The PSA reports are written by the lead Department representative within the Pools and agreed by all Departmental representatives. Therefore, only one performance assessment is produced for each Pool across the three Departments. These are then combined to create a joint Conflict Prevention assessment. Reports are compared with those of previous quarters to ensure that they are consistent. The final assessment is endorsed by senior officials in each Department and considered by Departmental Management Boards before Departmental PSA performance is reported to the Treasury. The MoD's quarterly reports to the Treasury are also published on the MoD website. As noted above, the NAO recently conducted a study into Joint Targets, including that for Conflict Prevention.

SR2002 VALUE FOR MONEY TARGET

(v)   PSA Target 7 (pages 14-15) covers value for money. The target will not be finally assessed until the end of 2005-06, but the target is assessed as "on course" in the Performance Report. Is the target still considered to be on course some three-quarters of the way through 2005-06?

  As stated in the MoD's Autumn Performance Report (page 18), which is our most recent assessment, this target is still judged as being "on course".

(vi)   Please can you explain what the "organisation changes" were which mean that it is now no longer possible to measure the sub-target of reducing the per capita cost of successfully training a military recruit. Does MoD still see the cost of training military recruits as an area for generating efficiency savings?

  Before 2004, multi-disciplinary specialist training was delivered across 24 different sites with the site controlling training output standards. After the recommendations made in the Defence Training Review (DTR) Report published in 2001, "virtual" Defence Training Establishments were created which realigned the management of training delivery by specialism, not site. Six specialisms were initially chosen and "virtual" Defence Colleges created under a lead Agency for each:

    —    Defence College of Electro-Mechanical Engineering—Lead Naval Recruiting and Training Agency.

    —    Defence College of Aeronautical Engineering—Lead RAF Training Group Defence Agency (TGDA).

    —    Defence College of Communications and Information Systems—Lead Army Training and Recruiting Agency (ATRA).

    —    Defence College of Logistics—Lead ATRA.

    —    Defence College of Police and Personnel Administration—Lead TGDA.

    —    Defence College of Security, Languages, Intelligence and Photography—Lead Defence Intelligence and Security Centre.

  The original Training efficiency measure derived a per capita cost of training for each Service by relating the overall cost of training to the throughput of trainees. With the rationalisation of training outlined alone, it is no longer possible to identify an overall cost of training by Service nor hence of a per capita cost by Service.

  Although the creation of these virtual Establishments has not involved the physical relocation of any existing training, it was an important early signal of the Department's commitment to rationalising the number of sites that training would be delivered on in the future. It also defined the transitional federated arrangement under which the existing, geographically dispersed training organisations would operate pending implementation of any final partnered solution(s) that deliver further efficiencies. The virtual establishments have taken forward planning of the changes to structures, budgets, contracts and site development across a number of sites to ensure that once decisions on further rationalisation are taken, they can be implemented on the ground promptly and effectively. We are consequently now well placed to implement quickly any of the partnering arrangements currently under consideration in the Defence Training Rationalistion Programme should they prove to offer better value for money. Under this programme we aim to modernise the delivery of specialist training using best practice learning techniques through newly created national centres of excellence for each specialism and to rationalise and improve the quality of the remaining training estate. Other expected benefits include the transfer of risk for training demand and the increase of first time pass rates achieved by students. We expect the rationalistion process to be completed by 2012, and for the overall programme to produce benefits in the order of £3 billion over a 25 year period. We are currently evaluating several bids and therefore cannot provide detailed figures.

  Although this Programme is the main way that training efficiency benefits are now being pursued, all three Services continue to look at ways to improve the management of recruits and to reduce the numbers of recruits choosing to leave, sharing ideas and good practice. If successful, such measures will increase the efficiency of the initial training system. But in the light of the changes made to implement the HCDC, Director of Operational Capability and Adult Learning Institute recommendations into initial training, we are not looking for efficiency savings through changes to supervisory training ratios at training establishments.

SR2004 EFFICIENCY TARGET

(vii)   Annex A (page 200) to the Annual Report and Accounts sets out the 2004 Spending Review Targets. The Efficiency Target for 2005-06 to 2007-08 is for MoD to realise total annual efficiency gains of at least £2.8 billion by 2007-08, of which three-quarters will be cash releasing. What efficiency gains are expected to be realised in 2005-06, and in what areas will they be utilised?

  A more detailed breakdown of the department's efficiency targets are set out in the attached MoD Efficiency Technical Note, published on the MoD website on 5 December. We plan to deliver over £1.2 billion of efficiencies by the end of the current financial year. The Department's Autumn Peformance Report provides detail of the progress made against this target. All the savings will be re-invested in the defence budget and will help fund the improvements in military capability set out in the Defence White Paper on Future Capabilities.

(viii)   MoD's Autumn Performance Report 2005-06 provides further details (page 19) of the SR2004 Efficiency Targets. As part of its efficiency programme MoD will, by 2007-08, reduce its civilian staff by at least 10,000, and be on course to have relocated 3,900 posts out of London and the South East by 2010. What progress has been made to date in reducing civilian staff and relocating posts out of London and the South East? What are the implications for MoD Main Building ie will there be excess capacity as a consequence of these initiatives? What savings are expected to be made in central London?

  Details on reductions in the civilian workforce and relocations outside of London and the South-East are set out in the Autumn Performance Report. The civilian workforce (including locally employed civilians working in non-operational areas overseas) reduced by 1,230 in 2004-05 and by a further 1,210 up to 30 September 2005. 1,220 posts have been relocated out of London and the South East to sites dispersed throughout the country through closure of the Army Technical Foundation College at Arborfield in Berkshire, its function being absorbed into the Technical College at Harrogate in Yorkshire.

  Following on from the significant efficiencies achieved through the rationalisation of central London accommodation and the redevelopment of the Main Building, optimising the utilisation of the remaining three MoD office buildings in central London remains a priority. Work is in hand to determine whether reductions in staff numbers and changes to working practices could allow the Department to reduce to two central London offices, which remains our longer term aim.


FINANCIAL MANAGEMENT AND DEPARTMENTAL RESOURCE ACCOUNTS

(ix)   MoD is expected to have its 2005-06 accounts audited and laid before the Parliamentary Summer recess. Is MoD confident that it will meet the pre-recess deadline for audit and certification of its Resource Accounts? What are the main challenges to meeting this deadline, and how is MoD seeking to address them?

  We recognise that it will be a challenge to complete and lay the 2005-06 accounts prior to the summer recess. The 2004-05 accounts were certified on 15 August, so the acceleration required for the 2005-06 accounts amounts to about a month. Through working with the NAO and planning to undertake an interim accounts closure and an audit as at 31 December 2005 (AP9), we are confident that we shall meet the target. A detailed timetable was agreed and promulgated internally in October 2005, and an internal working group, with representation from Top Level Budget Holders and corporate organisations, has been meeting regularly to identify and mitigate the known risks.

  The reduction in the timetable for 2005-06 is the final step in a progressive programme of faster closing of the Departmental accounts that began a few years ago. For 2005-06, time savings will be made primarily at the corporate consolidation level and in the time available to the NAO. Consequently, the NAO will look to take as much assurance as possible from the audit as at 31 December 2005—concentrating on the final quarter transactions during the year end audit.

(x)   The Operating and Financial Review notes that MoD moved to a single platform for all accounting operations during 2004-05. What impact did this have on the accounts production process in 2004-05? What benefits does MoD expect the unified system to yield?

  The move to a single platform for accounting operations (using Oracle 11i) did not have any direct effect on the accounts production process, as the business process was common to all areas of the Department, irrespective of the supporting financial systems. However, the consolidation process within Oracle was generally accepted to be more "user friendly" than it had been with the previous tool.

  The main driver for the Oracle Convergence project was a desire to reduce the cost of ownership of accounting operations. In addition we realised a number of intangible benefits, including greater ease of mobility of finance staff between business areas, faster delivery of systems changes and fixes, and the enabling of further strategic developments within the overall finance change programme.

(xi)   Was MoD included in the recent review of financial management in Government Departments undertaken by the Treasury and the NAO? If so, what were the main findings from the review relating to MoD and how are they being taken forward?

  A Treasury team reporting to the Head of the Government Accountency Service undertook a review of the MoD's financial management processes and presented their findings in July 2005. The report said "the overall picture is of positive progress. The Department has or is putting in place the process, systems and standards to deliver an effective strategic financial management function." As well as finding much to commend in our current arrangements, the review supported our plans for the future—including our strategic determination to shift the focus of the finance function from transactional processing to improved support for decision-making at all levels. Specific actions underway include the following:

    —    Introduction of Biennial Financial Planning to bring greater stability and discipline to the forward Defence Programme and allowing for a more measured timetable and approach to the planning round;

    —    Implementation of the "Simplify and Improve" programme in finance, which includes:

    —  centralising common functions such as account processing and the financial management of Departmental fixed assets (due for completion in April 2006); and

    —  the introduction of a new finance information system—the Planning, Budgeting and Forecasting tool—which will help to improve financial planning and forecasting across the Department. This is being rolled out for in-year management of 2006-07 and the 2007 planning rounds.

  We have actively engaged other organisations to review our internal performance and plans for simplifying and improving financial processes, structures and systems, including Halifax Bank of Scotland, American Express and Tetra Pak.

(xii)   Contingent Liabilities (page 180) increased in the year. The increase was due to a new liability of some £400 million, for the possible environmental clean-up and site restoration liabilities relating to the British Army Training Units in Canada. What is the nature and extent of MoD's liability with respect to the restoration and clean-up? Is this liability expected to crystallise?

  The Memorandum of Understanding for our use of training facilities in Canada is being renegotiated and we expect to sign a revised agreement in July 2006. We expect this to be open ended, but subject to termination by either party. We have no plans to stop training in Canada, but in the event that UK training in Canada were to stop we are liable to clean-up any sites we vacate to the standards required by Canadian Law. The estimated liability of £400 million is an approximate assessment of the likely costs of such environmental measures, including the removal of unexploded ordnance

(xiii)   MoD identified some £402 million of losses (excluding gifts, special payments and war pensions) in 2004-05. What control procedures were implemented in 2004-05 to minimise losses? Have additional control procedures been introduced in 2005-06 to minimise losses further?

(xiv)   Many of the losses are constructive losses and relate to changes in procurement strategy or the cancellation of procurement projects, for example, some £51 million relating to a change in procurement strategy for the BOWMAN battlefield communications system. Why does MoD have such a large amount of constructive losses arising from changes in procurement strategy or cancelled defence projects? Are such losses likely to continue, or indeed increase, in future years?

  For 2004-05, £322 million of the total £402 million reported losses related to projects covered by advance notifications in previous years' accounts. Newly identified losses in 2004-05 were £80 million. The losses statement provides a level of visibility and transparency not matched by commercial accounts as private sector organisations are not required to disclose similar information. The size of the MoD and of its capital assets under active management, together with the range and complexity of defence business, means that the MoD also faces a scale of challenge unique in the public sector.

  Reported losses are not necessarily indicative of a failure of control, although we obviously seek to identify those that are and learn appropriate lessons. But losses also result from sensible management decisions (such as the £8.995 million increased development costs for Brimstone as a result of trial platforms being unavailable because they were needed for operations in Iraq, or the £6.221 million for cancellation of new aircraft lifts for RN aircraft carriers when increased technical knowledge identified a more cost effective solution).The changes envisaged in the December 2003 Defence White Paper Delivering Security in a Changing World, in the July 2004 Future Capabilities paper, and the significant organisational efficiencies and rationalisations contained in the Department's SR2004 Efficiency programme following the Lyons and Gershon reviews, will inevitably generate further write-offs in future years as force structures and our organisation are adjusted to meet changing circumstances.

  The Department is working to improve processes for losses and special payments in three areas:

    —    greater consistency in recording and reporting, based on a clearer understanding of the purpose of the losses statement in public sector accounting;

    —    improvements in the identification and dissemination of lessons learned; and

    —    more systematic review by MoD management boards and audit committees of the information and actions relating to losses, with due regard to materiality and proportionality.

  We are also working to ensure that losses and special payments are assessed and closed as early as possible in order to ensure that any lessons arising are learned in a timely fashion. In this respect it is worth noting that the value of our advance notifications has reduced by 12% since last year, and of that value only 15% relates to cases identified during 2004-05 as opposed to a number of long-standing historic cases (see paragraph 108 on page 55). It can take some time to complete write off from the time of advance notification. This can be for a variety of reasons, including legal issues and the valuation of complex cases. The consequence can be to mislead the reader of the accounts as the same losses appear each year until the case in finally closed. The MoD Head Office will review the developing Departmental losses statement for 2005-06 at AP9 as part of the early closing process. This will provide an indication of the position on losses well before year end. Where necessary, action will be taken to expedite any cases that have been outstanding for some time. Any further losses rising in the last three months of the year will then be reviewed at year end. This should help to reduce the number of advance notification cases.

  The existing central Departmental guidance on losses and special payments is under review, with the aim of identifying where it can be improved and issuing revised guidance later this year. The Treasury has also undertaken to review the rules on losses and special payments in Government Accounting. The Defence Audit Committee (DAC) is pursuing improvements in identifying and disseminating lessons learned. Further information on this is contained in the DAC's Annual Report, published on the MoD website. TLB Audit Committees are now expected to review losses and special payments, and TLB Holders are required to draw any concerns raised that are significant at TLB level to the attention of the PUS in their annual submissions to him as Accounting Officer that underpin his Statement on Internal Control in the Departmental Resource Accounts. The Defence Audit Committee also reviews losses at the Departmental level as part of the year end process. Individual TLBs have developed specific approaches tailored to their own circumstances, for example requiring cases over a certain value to be addressed personally by the TLB holder. Others are identifying trends and involving their audit committee in commissioning remedial action. Whilst the DAC addresses the spreading of best practice we do not believe it would be right to adopt a "one size fits all" approach as the issues are different in different TLBs.

  Most of the constructive losses closed in 2004-05 are not new and reflect earlier decisions such as the change in procurement strategy for BOWMAN made in 2000 and the reduction in the number of Nimrod MRA4 aircraft from 21 to 18 decided in 2002. These have been notified in previous years' accounts. With such a large capital investment programme (£15.6 billion of equipment under development and manufacture as at 31 March 2005) there will inevitably be cases where we decide not to proceed with programmes because of changed priorities or requirements reflecting the wider defence need, or judgements that the technical challenge is too demanding. As part of the Smart Acquisition initiative we have sought to increase the level of investment in the concept and assessment phases of programmes more carefully to bound risk prior to the major investment decisions. In this way we should limit losses arising from a subsequent project failure—but this will not impact on major changes in requirement or procurement strategy.

19 January 2006





 
previous page contents next page

House of Commons home pageParliament home pageHouse of Lords home pagesearch pageorderingindex

© Parliamentary copyright 2006
Prepared 20 April 2006