Second memorandum from the Ministry of
Defence
Following its session on 24 January to take
evidence from the Permanent Under Secretary and the Finance Director
on the MoD Annual Report and Accounts 2004-05, the Committee
asked for a range of additional information. This is set out below.
1. What are the 25 pinch point trades referred
to in paragraph 113 of the Annual Report and Accounts, and how
is a pinch point defined and identified (Q5)?
A manning pinch point is defined as "a
trade, or area of expertise, where there is insufficient trained
strength (officers or ratings/other ranks) to perform required
tasks. This might be as a result of adherence to single-Service
harmony guidelines, under manning, and/or levels of commitment
that exceed resourced manpower ceiling for the trades or areas
of expertise involved." The Manning Pinch Point lists comprise
the trades that fall within the Manning Pinch Point definition.
These lists are dynamic with trades moving on and off them according
to the manning situation. Each Service manages its own Manning
Pinch Point list and is responsible for identifying a Pinch Point
when the criteria are met. The current Manning Pinch Point lists
for all three services are shown below.
Paragraph 113 of the Annual Report stated that
during 2004-05 there were over 25 Pinch Points Trades in the Army.
These were broadly the same as the 24 set out below, but at various
times during the year also included Royal Army Veterinary Corps
Dog Handlers, Vehicle Electricians, Movement Controllers, Royal
Signals System Engineering Technicians, Royal Signals Specialist
Operators, and Environmental Health Technicians. Military Engineer
(Geographic) was not identified as a pinch point trade during
2004-05, but is part of the current list.
Naval Service
Branch/trade
| Army
Branch/trade | RAF
Branch/trade
|
| Aircrew (Rotary Wing)—Merlin Pilot |
Vehicle Mechanic | Squadron Leader Flying Branch
|
| Aircrew (Rotary Wing)—Merlin Observer
| Recovery Mechanic | Junior Officer Pilots
|
| Aircrew (Rotary Wing)—Merlin Aircrewman
| Armourer | Junior Officer Weapon Support Officer
|
| Fast Jet Pilots | Ammunition Technician
| Operations Support Branch (Fighter Control)
|
| Junior Submarine Warfare Officers | Chef
| Operations Support Branch (Regiment) |
| Junior Hydrographical/Meteorological Officers
| Petroleum Operator | Operations Support Branch SB (Provost/Security)
|
| Submarine Steward (required for secondary duties)
| Explosive Ordnance Disposal | Engineer
|
| Submarine/Communications Ratings—Petty Officer
| Clerk of Works | Administration (Secretarial)
|
| Submarine/Communications Ratings—Leading Hands
| Military Engineer—Fitter | Administration (Catering)
|
| Submarine/Communications Ratings—Able Seaman
| Military Engineer—C3S | Administration (Physical Education)
|
| Fighter Controllers | Military Engineer—Geographic
| Administration (Training) |
| Surface Ship and Submarine Junior Warfare Ratings
| Information Systems Engineer | Medical
|
| Air Engineering Junior Ratings | Operator Military Intelligence
| Medical Support |
| Submarine Nuclear Watchkeeper Senior Ratings
| Operator Military Intelligence (Linguist) |
Dental |
| Royal Marines Junior Ranks | Operator Military Intelligence (HUMINT)
| Chaplains |
| Mine Clearance Divers Junior Ratings | Anaesthetist
| Legal |
| Radiologist | Weapons Support Operator (Linguists)
|
| Orthopaedic Surgeon |
Weapons Support Operator (Air Loadmaster) |
| General Surgeon | General Technician Electronics
|
| General Medical Practitioner
| Environmental Health Technician |
| Nurse—General Duties Officer
| Gunner |
| Nurse—General Duties Soldier
| Air Traffic Control/Flight Operations Manager/Flight Operations Assistant
|
| Nurse—Accident & Emergency
| Aero Systems Manager/Operator |
| Nurse—Intensive Theatre Unit
| Air Cartographer |
| | Medical Administrator/Assistant
|
| | Psychiatric Health Technician
|
| | Staff Nurse
|
| | Dental Technician
|
| | Dental Hygienist
|
| | Laboratory Technician
|
| | Radiographer
|
| | Operating Theatre Technician
|
| | Movements Operator/Controller
|
| | Mechanical Transport Technician
|
| | Mechanical Transport Driver
|
| | Fire Fighter
|
| | |
2. What impact do these pinch points have on operations
and what will be the impact of the deployment to Afghanistan (Q6)?
We judge that the impact on our planned deployment to Afghanistan
and on readiness for future operations is manageable. However,
tour Intervals for a number of Pinch Point Trades such as medical,
intelligence, helicopter crews, logistic, provost and engineers
are likely to breach harmony levels as we increase our scale of
effort in Afghanistan. We continue to encourage appropriate contributions
from our NATO Allies in Afghanistan in order to take some of the
pressure off these Pinch Points.
3. What computerised management information is available
on the situation of individuals in respect of the harmony guidelines
(Q8)?
Individual separated service and breaches of harmony are
currently managed under single-Service arrangements using several
information systems:
— Naval Service separated service relates to those
serving on ships with reports being aggregated manually.
— Army individual separated service is recorded
on a system called UNICOM and aggregate data is compiled manually.
— Two systems are used by the RAF—PACMIS (for
airmen) and ACMIS (for officers) which record individual separated
service and can compile aggregate data.
The Joint Personnel Administration (JPA) change programme
is introducing a harmonised personnel administration system for
all military personnel that will make it possible to work out
the separated service of every individual in the Armed Services
using a single IT system. After JPA roll out (starting with the
RAF in the Spring), a Unit Separated Service Report will be available
giving a breakdown for each individual covering a rolling period
(three years for the RN and Army, and two years for the RAF).
Individuals will be able to check their own Separated Service
records, and reports will be also available for Formation HQs
and MoD use.
4. What is the impact on civilian manpower of the re-organisation
of Land Command and the Adjutant General's Department (Q12)?
Project Hyperion is taking forward the re-organisation of
Land Command and Adjutant General's Department and the establishment
of a new collocated Headquarters Land Forces. This is expected
to generate savings of about 110 military and 240 civilian posts.
A decision on the preferred location of the new headquarters should
be taken in the late Spring, following which a comprehensive transition
plan will be drawn up. This will cover all personnel-related issues
in accordance with established MoD relocation procedures, including
full Trade Union consultation. There is a continuing internal
communication programme providing face-to-face briefings and regular
presentations to staff.
5. Have the £400 million reported savings in the
DLO's operating costs been validated and, if so, what was the
outcome of the validation (Q43)?
The DLO efficiency achievement in 2004-05 is still being
assessed in an internal audit to review the evidence supporting
judgement of the level of benefits realised in the year. It is
likely that this will indicate that some of the operating cost
savings included in the total of over £400 million reported
in paragraph 209 of the Annual Report and Accounts 2004-05
cannot be validated. Any revision will be reported in the
Department's quarterly PSA reports and the Annual Report and
Accounts 2005-06.
Overall the DLO is making good progress towards its demanding
target of achieving a 20% reduction in the cost of its output
from its creation in 2000 to April 2006. Since 2004, this target
has been taken forward under the Defence Logistics Transformation
Programme, which stretches across the whole Defence logistic process
from industry to the front line. This is a very complex programme
embracing several hundred individual projects. The measurement
of overall efficiency performance is challenging, but systems
for identifying and tracking input benefits are in place and continue
to evolve to provide more robust evidence-based demonstration
of benefit achievement.
6. An explanation of the process of target-setting for
Agencies, and their apparent variability (Q54). It would be helpful
if this could include an explanation of the change in number of
targets (Q56)
The MoD currently has 20 On-Vote Agencies and five Trading
Funds. These vary enormously in size and role and cover a wide
variety of different types of outputs. Details of individual agency
objectives and performance including information relating to key
targets can be found in individual agency Corporate Plans and
reports and accounts and on the MoD's internet site. A summary
is published in Annex E to the Department's Annual Report and
Accounts, including a table on key targets achieved that is
intended to be reviewed in the context of the supplementary commentary.
The Process of Target Setting
Defence Agencies' key targets are drawn up as part of the
wider business planning process. Targets for Defence Agencies
are formally set by Defence Ministers, assisted by senior advisors
within the Department responsible for scrutinising individual
agency key targets prior to submission to Ministers. These advisors
are in turn usually helped by Boards comprising key stakeholders
including major customers who can advise on strategic direction,
operational demands, possible targets and performance measurement
in relation to a particular agency. The specific process used
varies from agency to agency but it often makes sense for an individual
Agency to put together draft key targets in the first instance.
Following discussion and scrutiny between senior departmental
officials and individual agency Chief Executives, key targets
are then recommended to the relevant Minister for approval. This
is normally done on an annual basis. Such recommendations include
details of the proposed key targets, past performance, a supporting
rationale and information about how targets will be measured.
The rationale will normally include relevant contextual information,
such as how the proposed key targets relate to the outputs of
the agency, the relationship between the key targets and any higher
level targets (eg Top Level Budget Holders' Service Delivery Agreements,
the Defence Change Programme, and Public Service Agreement targets),
and how the chosen targets will drive and facilitate the monitoring
of performance improvement. Once the Minister has agreed an Agency's
Key Targets these are announced in Parliament and formally incorporated
into its Corporate Plan. All those involved in the process of
drawing up agency key targets are expected to draw on identified
best practice, including the Treasury's November 2003 guidance
"Setting Key Targets for Executive Agencies: A Guide"
and supplementary internal guidance issued by the Directorate
of Business Delivery.
Changes in Targets
Key targets seek to represent the main business of the organisation
concerned. In line with HMT best practice, Defence Agencies typically
have between five and 10 key targets. Precise numbers vary depending
on the size and complexity of the agency concerned and challenges
it faces in a particular year. We recognise that in judging performance
it is preferable to have a run of comparable data over a number
of years. However, a balance needs to be struck between continuity
and the need to improve and amend targets to reflect new or evolving
priorities. Any changes to key targets or the way they are measured
will be set out for Ministerial consideration. Ministerially endorsed
changes to Agency key targets are normally then explained in Agency
Corporate Plans and published on Agency web-sites.
As an example, Ministers agreed to increase the number of
key targets relating to Defence Estates from 11 to 15 in 2004-05.
This followed a major review in 2004 which assessed the relevance
of the existing targets to the Department's and Defence Estate's
business and the decision to merge the organisation with the Defence
Housing Executive in a single Agency. In light of that Ministers
approved the integration into Defence Estate's targets of a number
of the Defence Housing Executive's previous key targets, the rolling
forward and updating of some key targets from Defence Estate's
Corporate Plan 2003, and the introduction of a new customer satisfaction
target.
7. The nature of the Government's Golden Share in Rolls
Royce (Q74)
The Treasury Solicitor, as nominee for the Secretary of State
for Trade and Industry, holds the Government's Special Share in
Rolls-Royce Group plc, going back to when the Company was privatised
in 1987. This is one of a small number of special shares that
the Government holds in UK companies.
The purpose of the Rolls-Royce special share, which has a
nominal value of £1, is to protect the UK's national security
interests. These include security of supply issues associated
with its nuclear business (nuclear propulsion for Royal Navy submarines)
and for other defence equipments (mainly aero-engine and ship
propulsion). The provisions of the special share are tailored
as narrowly as possible and kept under review.
Key features of the Rolls-Royce special share include:
— A 15% limit on the percentage of foreign shares
in Rolls-Royce Group plc (the holding company) that can be held
by a single foreign shareholder, or foreign shareholders acting
in concert. (A foreign shareholder includes an EU national.)
— A requirement that the Chief Executive and the
majority of directors of Rolls-Royce Group plc (the holding company)
are British.
— Requirement that disposals of the whole or a material
part of the nuclear business, or the Group as a whole, require
the consent of the Special Shareholder.
8. A breakdown of the RAF personnel who exceed the target
for detached duty, referred to on page 13, target 4 (Q76)
The breakdown of RAF personnel who exceeded the guidelines
for individual separated service is as follows:
| Trade | Number of
personnel
|
Trade | Number of
personnel
|
| OFFICERS | |
| |
| Pilots | 60 | Engineer
| 26 |
| Navigators | 23 | Supply
| 28 |
| Air Electronics Operators | 1
| Administration | 1 |
| Air Engineers | 1 | Admin Secretariat
| 16 |
| Air Load Masters | 3 | Admin Caterers
| 1 |
| Air Traffic Controllers | 12
| Admin Physical Training | 1
|
| Fighter Controllers | 10 |
Admin Training | 2 |
| Intelligence Analysts | 16 |
Medical | 21 |
| Regiment | 35 | Dental
| 2 |
| Flight Operations | 9 | Legal
| 2 |
| Provost and Security | 3 |
Princess Mary's Royal Air Force Nursing Service
| 4 |
| OTHER RANKS | |
| |
| Aircraft Engineering Technician | 10
| Aerospace Systems Manager/Operator | 12
|
| Aircraft Engineering Technician | 16
| Fighter Controllers | 1 |
| Aircraft Technician (Mechanical) | 80
| Survival Equipment Fitter | 18
|
| Aircraft Technician (Avionics) | 70
| Painter and Finisher | 3 |
| Engineering Technician Airframe | 61
| Intelligence Analyst (Imagery) | 7
|
| Engineering Technician Propulsion | 32
| Photographer | 3 |
| Engineering Technician Weapon | 91
| Air Cartographer | 1 |
| Engineer Technical (Avionics) | 41
| Pharmacy Technician | 1 |
| Engineer Technical Air Electrical | 31
| Operating Theatre Technician | 1
|
| Engineering Technician Electronics | 107
| Environmental Health Technician | 1
|
| General Technician Electrical | 32
| Medical Administrator | 16
|
| General Technician Ground Service Engineers
| 37 | Staff Nurse (RGN) |
17 |
| General Technician Workshops | 6
| Dental Nurse/Administration | 4
|
| General Technician (Mechanical) | 8
| Dental Hygienist | 1 |
| Aerial Erector | 14 | Personnel Administrator
| 35 |
| Mechanical Transport Driver | 99
| Movements Controller/Operator | 83
|
| Mechanical Transport Technician/Mechanic |
21 | Supplier | 133
|
| RAF Police | 68 | Chef
| 35 |
| Gunner | 276 | Catering Account
| 1 |
| Fire-fighter | 25 | Steward
| 6 |
| Air Traffic Controller/Flight Operations Assistant (ATC)
| 7 | Musician | 2
|
| Flight Operations Manager/Flight Operations Assistant
| 29 | Air Engineers | 4
|
| RAF Physical Training Instructor | 11
| Languages | 3 |
| Intelligence Analyst (Voice) | 25
| Air Load Masters | 21 |
| Intelligence Analyst (Communications) | 9
| Air Electronics Operators | 7
|
| Telecommunications Controller/Operator |
51 | | |
| | |
|
As at 30 December 2005 4.0% of RAF personnel exceeded the
guidelines for separated service.
9. The impact of the c.£5 billion project cost increases
reported in MPR 03 (£3.1 billion) and MPR 04 (£1.7 billion),
and the project time slippage reported in MPR 03 and MPR 04, on
MoD's current and future procurement programme (Q79)
Cost growth on specific equipment projects inevitably has
undesirable consequences for the overall Equipment Programme,
because, over time, it reduces the available provision for equipment.
This is, however, only one of many variables and does not always
create short-term problems. It is impossible to hypothecate the
impact of changes in the estimated costs of individual projects
to specific changes in the overall programme. As part of the Department's
routine planning process we review the underlying plans and assumptions
which make up the Equipment Programme. This takes into account
changes in the strategic background, fresh operational experience,
alterations to project plans, assumptions and threats—which
may include both increases and decreases in forecast costs—and
pressures elsewhere in the Department, with reference to the outcome
of Spending Reviews. All these factors have to be weighed and
our plans and assumptions about the Equipment Programme adjusted
accordingly to ensure that we are still able to deliver the balanced
military equipment capability our forces require within the funds
available for Defence. Consequently, whilst it is inevitably the
case that if we have to spend more of our resources on one project,
less will be available for other purposes, there is not a simple
relationship between historic cost-growth on one project and reduced
spending elsewhere; the adjustments we make are the result of
the interplay of a wide range of issues across the Defence Budget
as a whole. What we can say is that the analysis we undertake
after the conclusion of the planning cycle demonstrates that we
will continue to deliver to our forces the military equipment
capability they require.
We continue to work to reduce cost-growth on equipment projects
because widespread and unchallenged cost growth puts pressure
on the total capability we can deliver. We are making progress
on this. The National Audit Office (NAO) noted in the Major Projects
Report 2005 that "There has been further progress on measures
to improve performance within the Defence Procurement Agency and
elsewhere in the Department. These improvements focus on the following
areas: performance of key suppliers; the skills and development
of staff; project and risk management; increased use of trade-offs
between time, cost and capability of equipment; better joint working
of those responsible for acquisition within the Department; and
stronger project scrutiny at all levels." The NAO added that
"It will take some time before the full impact of these measures
will be felt on the large and lengthy projects within the Major
Projects Report". Ministers and senior officials will continue
to drive forward the necessary changes.
10. Confirmation that MoD did not buy back any surplus
equipment in 2004-05 (Q94)
We have identified buy backs of the following equipment in
2004-05:
— the Sea King Integrated Project Team purchased
minor parts costing £500;
— the Maritime Logistic Support Integrated Project
Team purchased minor spares for workshop based repairs costing
£72,836. These replaced items that had previously been sold
under a stock rationalisation programme on the basis of low usage
but were then subsequently required.
11. An explanation and annual breakdown of the reported
cost savings of £88 million in respect of Tornado, referred
to in paragraph 210 (Q98)
The figure in paragraph 201 comprised:
| FY 2003-04 | FY 2004-05
| Total |
| Reductions in Tornado Propulsion Flight Local Unit Establishment:
| | £4 million | £4 million
|
Reduced engine rejections:
(approx 200 fewer rejections a year @ £250k per rejection)
| £21 million (part year) | £50 million
| £71 million |
| Introduction of pilot contract with Rolls-Royce Defence Aerospace in October 2003:
| £4 million (part year) | £9 million
| £13 million |
| TOTAL: | £25 million
| £63 million | £88 million
|
| | |
|
12. An explanation of the loss of £65 million relating
to the impairment of an operational building, referred to on page
194, including an explanation of why MoD incurred the loss if
the building could not meet the requirement for which it was designed,
and the future plans for the building (Q102)
The project to which this refers originated in a commitment
by the then Secretary of State for Defence in 1978 to replace
inadequate waste management facilities and overhaul safety procedures
at the Atomic Weapons Establishment (AWE) Aldermaston. As part
of this, work to build a substantial facility for treatment of
radioactive liquid waste was taken forward during the 1980s. However,
despite considerable further modifications during the 1990s it
proved impossible successfully to commission the facility and
bring it safely and effectively into service. The plant was eventually
formally declared unfit for purpose in 2000 and a commercial settlement
was reached with the contractor in 2003. No viable alternative
use was identified for the plant or the dedicated building containing
it, and the facility was formally written off in 2005. Further
details are set out below. AWE has continued successfully to meet
its safety and environmental obligations by other means despite
this facility never entering service.
There are two separate related entries in the Annual Report
and Accounts 2004-05 in respect of this loss:
— "A loss of £65,000,000 has been incurred
following the impairment of an Operational building. (DPA)"
(Page 194). This advance notification refers to building A91 at
AWE, which was completed in the late 1980s to house an integrated
Radioactive Liquid Effluent Treatment Plant (RALETP).
— "A loss of £82,000,000 has been incurred
in respect of plant and equipment. (DPA)" (Page 195). This
advance notification refers to the RALETP that was designed during
the 1980s and integrated into building A91.
The Radioactive Liquid Effluent Treatment Plant (RALETP)
was declared unfit for purpose in 2000 and was the subject of
a contractual dispute with the operations and management contractor,
Hunting Brae, in which £13 million was recovered. However
as most of the problems stemmed from before AWE was contractorised
in 1993, and there being no reasonable prospect of rectifying
the technical problems within any practicable timescale, we decided
in 2002-03 that there was no future for the facility, generating
an impairment of £82 million. A91 was built to house RALETP.
The building (excluding RALETP) was valued at £65 million
in the 1998 opening MoD Balance Sheet. Since 2000, AWE have examined
various options for its use. The following considerations were
taken into account:
— The defective plant was integrated into the fabric
of the building. Numerous structural columns exist which would
make the design and installation of any significant plant very
difficult.
— The building is a lot larger than any future facilities
would require so that the building would not be economical to
run over the longer term.
— By the time it could be converted to a new facility,
the standards to which it was built would be 20 years out of date.
Given these considerations, we decided there was no possibility
of alternative uses. It was therefore necessary to write off the
£65 million value of the building.
The RALETP and the building (excluding RALETP) are shown
separately in the accounts because in 2003-04 the NAO were content
that the Note to the Accounts on losses and special payments included
the building only. In 2004-05 it decided that the Note should
also include the £82 million write off for RALETP itself,
and that these should jointly be considered as one loss. The total
write-off of £147 million was approved by the Chief of Defence
Procurement on 22 November 2005.
The Department acknowledges that this project was handled
badly in a number of significant respects. Lessons have been drawn
from the experience, procedures have been changed, and the Department
is determined to avoid any recurrence.
13. An explanation of the loss of £63.8 million on
the Landing Ship Dock (Auxiliary) programme, and the latest estimate
of the cost of the programme compared to the contract price agreed
with the contractor (Q102-Qq 32-41 also refer)
Losses reported in Departmental Resource Accounts 2004-05
There are two separate losses related to the Landing Ship
Dock (Auxiliary) (LSD(A)) programme detailed in the Annual
Report and Accounts 2004-05 under Advance Notifications:
Page 194
Advance Notifications |
|
| Slippage in the construction programme for two Landing Ship Dock (Auxiliary) caused delay in supplying design information and equipment to a contractor. This resulted in a claim on the MoD relating to the associated delay and dislocation costs. In 2003-04, an amount of £40,000,000 was included in Advance Notification as an estimate of the likely amount of the claim. (DPA)
| £63.8 million |
Page 195
Advance Notifications |
|
| HM Treasury has agreed an ex-gratia payment of up to £84,500,000 to Swan Hunter subject to completion of certain contractual conditions relating to the construction of two Landing Ship Dock (Auxiliary) LSD(A). Total paid to date is £38,000,000. (DPA)
| £38.0 million |
| |
The £63.8 million provision is to meet delay and dislocation
claims, against the MoD, from BAE SYSTEMS following the impact
of the technical difficulties encountered by Swan Hunter in the
relaying of design information and equipment. The MoD has to date
paid £37 million against the existing provision. The scope
and scale of any additional costs are being negotiated with BAE
SYSTEMS.
The £84.5 million is the cost of the re-negotiated contract
amendment with Swan Hunter, agreed in December 2004, for the design
and build of the Landing Ship Dock (Auxiliary) vessels, as a result
of the technical difficulties encountered by the company.
LSD(A) Project background
The Landing Ship Dock (Auxiliary) project is for four ships
to replace the current Landing Ship Logistics capability provided
by RFA of Sir Geraint, Sir Percivale, Sir Galahad and Sir Tristram.
The prime contractor and design authority is Swan Hunter (Tyneside),
responsible for the build of RFA Largs Bay and RFA Lyme Bay at
its Wallsend shipyard. It also provides design information and
equipment to BAE SYSTEMS for the build of the two follow-on ships,
RFA Mounts Bay and RFA Cardigan Bay at BAE SYSTEMS (Govan and
Scotstoun yards). A contract was placed in December 2000 with
Swan Hunter and the follow-on contract with BAE SYSTEMS to build
an additional two LSD(A)s was agreed in November 2001. Swan Hunter
won the original competition with a modification to an off-the-shelf
design—the Dutch HNLMS ROTTERDAM and Enforcer Class vessel
by Royal Schelde. Subsequent difficulties have shown that the
design was not as mature as the company believed at the time.
Swan Hunter confirmed, in September 2003 it was unable to
meet the original programme requirements for the design and build
of the two ships. The company accepts that its initial programme
was optimistic and underestimated the extent of the development
issues inherent in the building of a new ship. The delays caused
by the build programme rework, as a result of the modifications
of the Royal Schelde design to the MoD specification, led to an
underestimation of the price of the overall contract. The slippage
to Swan Hunter's programme delayed the delivery of design information
to BAE SYSTEMS which impacted upon that company's own build programme.
Under the terms of the Swan Hunter contract, this design information
is defined as MoD Government Furnished Asset and enables BAE SYSTEMS
to claim against MoD for the additional costs incurred as a result
of the Swan Hunter delays and subsequent impact upon their build
programme.
The effect of the delays on the programme, together with
a range of options for the completion of Largs Bay and Lyme Bay,
were re-assessed by the MoD during 2004. The conclusion was that
further investment in the LSD(A) contract was the most effective
way of protecting the investment to date and in delivering this
much needed capability. Therefore the retention of Swan Hunter
as the lead yard offered the MoD and taxpayer the best value for
money solution for delivering this new capability. Re-approval
was sought for the resultant increased costs and revised In-Service
Dates. These were approved by the Minister for Defence Procurement
and the Chief Secretary to the Treasury and an £84 million
contract amendment was agreed on 9 December 2004.
All four ships have been successfully launched. RFA Mounts
Bay, the first of the BAE SYSTEMS vessels, was accepted off contract
on 15 December 2005 and is now undergoing her Stage 2 trials (capability)
in readiness for meeting her In-Service Date in late 2006.
Current contract values
Swan Hunter: The original contract value for the build of
the two Swan Hunter vessels was £148 million. Following the
order for a further two ships from BAE SYSTEMS, an additional
£62 million was added into Swan's contract for Lead Yard
Services and Equipment, enabling Swan Hunter to pass relevant
design information and equipment to BAE SYSTEMS. Following Swan
Hunter's confirmation of its underestimation of the engineering
requirement MoD increased the original contract by £84.5
million in December 2004. This together with the purchase of spares
at £11 million and minor variations to contract, means that
the total value of the contract for Swan Hunter is £309 million.
BAE SYSTEMS: The current contract value for the build of
the BAE SYSTEMS vessels is £176 million, which includes £48.5
million for known claims as a result of the impact upon their
programme of the Swan Hunter delays and an additional sum for
variations to contract and quantity growth. The £63.8 million
provision in the accounts includes a further £15.3 million
for potential future claims. The original contract value was £122
million.
Additional cost increases: Swan Hunter confirmed in June
2005 to MoD that it cannot complete its two vessels for the cost
agreed in December 2004. BAE SYSTEMS have also notified MoD of
likely cost increases, primarily as a result of the delays to
their programme caused by the further Swan Hunter delays. MoD
is currently in commercial discussions with both companies as
a result of these declared cost increases. All options are being
assessed and in view of the commercial sensitivities it would
be undesirable to give any further details at this point.
14. An explanation of the basis on which PSA target 1
has been judged to have been met, and why no supporting measures
are given in Table 1
The success of an Operation is judged against the Military
Strategic Objectives given to the UK commander by the Chief of
Defence Staff. It is formally assessed using military judgement
by a group chaired by the Deputy Chief of Defence Staff (Commitments).
Every Operation has been judged to have met its Military Strategic
Objectives over the period covered by this assessment (April 2003-March
2005). There are no supporting measures in Table 1 to the Annual
Report and Accounts 2004-05 because the Technical Note for
PSA Target 1 contains no supporting performance indicators.
15. A note on Private Finance Initiative commitments.
Please explain the difference between "on" and "off"
Balance Sheet transactions (as referred to on page 177, paragraph
22.1), and why they appear to be accounted for differently. What
assessment has MoD made of whether the PFI projects listed on
pages 178-179 are delivering the expected levels of service? And
to what extent do these substantial long-term financial commitments
impact upon MoD's future financial flexibility?
"On" and "Off" Balance Sheet
PFI transactions are accounted for in accordance with UK
Generally Accepted Accounting Practice and Financial Reporting
Standard (FRS) 5, Application Note F—Reporting the Substance
of Transaction: Private Finance Initiative and Similar Contracts.
The purpose of FRS 5 is to identify:
— whether the purchaser in a PFI contract has an
asset of the property used to provide the contracted services
together with the corresponding liability to pay for it or, alternatively,
whether it has a contract for services; and
— whether the service provider has an asset of the
property used to provide the contracted services.
Under the general principles of the FRS, a party will have
an asset of the property where the party has access to the benefits
of the property and exposure to the risks inherent in those benefits.
The reason that some PFI deals are "on" Balance Sheet
while others are "off" is due to the nature and type
of risks that each party has retained or transferred in the transaction.
The main difference between an "on" and "off"
Balance Sheet PFI is that an "on" Balance Sheet PFI
scores against Capital Departmental Expenditure Limit (CDEL) on
the Control Total Framework and therefore incurs cost of capital
charges up front whilst an "off" Balance Sheet PFI does
not. The Department only undertakes PFI when it delivers Value
for Money and not to secure a particular balance sheet treatment
to address affordability concerns. The NAO audit all MoD PFI accounting
transactions.
This is illustrated by way of a couple of examples. A major
factor in determining whether a PFI is "on" or "off"
our balance sheet is residual value risk. Main Building PFI is
"on" our balance sheet because the department has retained
the residual value risk for the building. In other words, the
department has retained the risk for delivering the required facility.
At the end of the PFI contract MoD will own the building. By contrast
almost all of our Defence Housing PFI contracts are "off"
our balance sheet as the residual value risk has been transferred
to the contractor. At the end of the contract the MoD can choose
to buy the properties at market value or walk away.
Private Finance Initiative level of service
In August 2005 the MoD Private Finance Unit initiated a review
of operational Private Finance Initiative (PFI) projects to assess
how PFI has performed to date, both in construction and in the
early years of operation, within the MoD. The structure of the
review was developed with the National Audit Office (NAO) and
Partnerships UK. The comprehensive review of all PFI projects
as defined by HM Treasury with total contract costs in excess
of £19 Billion concluded that:
— PFI in the MoD substantially delivers projects
on time and within budget. All projects were delivered on budget.
All except three were delivered within two months of the agreed
date;
— PFI projects in MoD are performing well and are
delivering the services required. All of the project teams surveyed
reported that the performance of their PFI project was satisfactory
or better. Three quarters of project teams rated the performance
of their PFI project as good or very good; and
— long term PFI contracts in MoD are flexible enough
to accommodate future change and to deliver on a sustained basis.
The review identified that 85% of projects reported that their
PFI contracts were suitably flexible to accommodate change and
had effective change management mechanisms.
The review was published on 12 December 2005. This is available
on www.mod.uk, and a copy is attached. It has been received well.
The NAO said "We welcome the MoD's review which provides
new insights into defence PFI and the conclusions of which chime
with many of our own findings across government."
Impact upon MoD's future financial flexibility
To date, we have signed 54 PFI deals that have brought over
£4.3 billion of private sector investment into Defence. A
further 12 PFI projects are in procurement, and are expected to
inject up to a further £6 billion. We use PFI as a core procurement
tool to deliver our investment programme and deliver key services
for which we know there is a requirement over the long-term when
it is the best way to deliver value for money. Thus our financial
flexibility is not constrained by the use of PFI as a procurement
tool per se, but by the fact that there is a long term requirement
for the service contracted for. It is also commonplace for PFI
projects to have a change mechanism set into the contract in order
to allow for evolution of the underlying requirement. The review
of operational PFI projects referred to above confirmed that long-term
PFI contracts in MoD were sufficiently flexible to accommodate
future change and to deliver on a sustained basis.
16. A note on nuclear decommissioning liabilities. Is
MoD confident that the current estimate of its nuclear liabilities
(page 175) will not increase substantially in the future, or the
estimated timescales over which the costs will need to be incurred
change significantly? How will MoD fund liabilities of this scale
when they arise?
Almost two thirds of the MoD's nuclear decommissioning liabilities
transferred on 1 April 2005 to the Nuclear Decommissioning Authority.
These related to facilities used for the production of Special
Nuclear Materials by British Nuclear Fuels Ltd and its predecessor
the UKAEA. In respect of the liability that remains on our balance
sheet, we are confident that the current undiscounted estimates
for cost and for timescales will not change significantly. Work
is in hand to produce revised estimates for the five-yearly review
due in 2007; so far these are in line with previous ones. The
change in the Treasury discount rate from 3.5% to 2.2% will however
cause an increase of some £0.7 billion in the stated provision
in the 2005-06 Departmental Resource Accounts. How such liabilities
will be funded will be the subject of negotiation with the Treasury
as and when the circumstances arise.
17. The Committee would also like to be kept informed
on the progress of negotiations with the Treasury on the division
of the proceeds of the flotation of QinetiQ (Q71)
We have agreed with the Treasury that we will retain £250
million of the receipts from the QinetiQ IPO for reinvestment
in the defence programme. The remainder of the receipt from the
IPO will go to the Exchequer.
27 February 2006
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