Select Committee on Defence Minutes of Evidence


Examination of Witnesses (Questions 220-239)

MR TOM WATSON MP, MR IAN ANDREWS AND MR MARK HUTCHINSON

24 MAY 2006

  Q220  Mr Jones: Why has that been excluded?

  Mr Andrews: There are other issues associated with the future of DARA which mean that, I suspect, it does not come into the frame.

  Q221  Mr Jones: I am sorry, I do not understand that.

  Mr Andrews: There are issues around DARA in terms of the transformation of our logistic support arrangements, and there is a question mark, and that is subject to formal study (on which we have been very open, I think, with the Committee in that and other contexts), which may call into question the future of that. The purpose of this session, as I understand it, is not to inquire into DARA. I am very happy to provide a note, if that is what the Chairman would like.

  Q222  Chairman: It would be helpful if we could have a note about this entire process[2] because although the purpose of this exercise is to look into the Met Office, when an issue like the examination of all of your trading funds except for one arises during the evidence that you give us, I think it is relevant for us to pursue it, not least if we have already been taking evidence about the future of Fast Jet repair.

  Mr Havard: That is exactly the point. We do need to know because during our previous discussions about DARA—I will not go into the details of it—the status of the agencies changes partway through the exercise. We did not understand how that came about, why it came about, and a lot of other people did not understand it. If there is this review, maybe not now, but we are going to have to find some time to look. This is a very big issue, it is bigger than just the Met Office, quite clearly. If there is such a review going on we need to deal with that, either separately as part of our procurement discussions, or something else, but we have definitely got to deal with it.

  Q223  Chairman: Could you let us have a note, Mr Andrews?

  Mr Andrews: I am very happy to get that information.[3]


  Q224 Mr Crausby: The 2004/05 MoD annual report already indicates this direction, does it not, in the sense that it explains that there had been a measure of rationalisation in relation to defence agencies driven mainly by cost considerations. So the MoD is, clearly, reducing the number of agencies it is responsible for. Does that not already signal, in advance of this review, a change of mood in the way that the department is moving away from agencies? Have you not already made your mind up, to some extent, that there should be fewer agencies?

  Mr Watson: Mr Crausby, if I can just say, two weeks in, I am keeping an open mind on all of these things. I do not know whether Ian would like to give more clarity to that, but certainly I do not come with any hard and fast views on this.

  Mr Andrews: We are constantly looking at the ways in which we can manage our business better to deliver better returns for the taxpayer, better service to the public and, also, delivering to MoD and other government departments. We also have, as a separate exercise going on at the moment across government, questions being asked in the context of the Comprehensive Spending Review. So we ask ourselves on a regular basis, most recently in the case of the Met Office, back in 2002/03, which was the quinquennial review of the Met Office, which actually looked at all of these options and came up with the view that the trading fund was the right way to move forward. We are looking, at the moment, at whether that is still a valid consideration against the background of the questions we would expect to be asked in the Comprehensive Spending Review. However, as the Minister said, there is no pre-determined outcome to this: it is making sure that we work through all of the issues to ensure that the trading fund is the appropriate structure for the Met Office to move into the future.

  Q225  Mr Crausby: Am I right in saying that there is clearly a policy already to rationalise agencies? That was last year's business. Are you now saying that that could extend to trading funds and, indeed, the Met Office? Is that a change?

  Mr Andrews: I do not think it is a change, Mr Crausby, at all. It is an application of a consistent policy and approach that we have. We are always asking ourselves—and, as I say, the quinquennial review is the formal process of doing that—whether the current status of a trading fund agency remains appropriate for the next five years. So I do not think there is any sense of a change in direction. We are quite properly asking ourselves whether indeed the way we are going is right. There is no suggestion that we believe it is not or that it needs to change, but it is right that we should ask that question.

  Q226  Linda Gilroy: The turnover of the Met Office was £165,580,000 in 2004/05 and the year before it was £160 million. The proportion of that accounted for from defence work represents 37.3% in 2003-04 and it has increased to 47% in 2004-05. Is the Met Office too reliant on income from defence work?

  Mr Hutchinson: I think it important to distinguish between the two sorts of funding from the MoD. One is in respect of direct services that we supply to the MoD and to the Armed Forces, in particular, and the other is in relation to the funding we receive from something they call the National Meteorological Programme (NMP) which sits within the MoD budget structure but which provides the investment funds for some of our underpinning capability, so to produce the weather forecast for not just defence but for a range of other users. So although the funding sits with the MoD it is different from the funding that comes directly from the MoD customer, if I may say so. Notwithstanding that, certainly the MoD is a major source of our funding and there is a dependency simply by definition of that relationship. I do not think it is a threatening dependency; I do not think it stops us doing things to extract funding from other sources—whether they are elsewhere in government or from the commercial sector.

  Q227  Linda Gilroy: It is a fairly substantial increase from 2003-04 to 2004-05 from defence; it went up from £60 million to nearly £78 million and, at the same time, on the civil department side it went down from £37 million to £22 million. Unpack that a bit for me.

  Mr Hutchinson: If I can. I think in terms of the direct services we supply to the MoD they did not change dramatically between the two years. I think there was a fairly flat level of business and, therefore, revenue income from the MoD, but the characteristics of the National Meteorological Programme—the funding that goes into our basic underpinning capability—is lumpy; it goes up at times where we have to make major investments in international bodies, in satellite programmes and it goes down in times when we do not. So I suspect the answer is, and I may have to give you a note on this[4] to give the precise detail, that in the year in question there was a major lump of funding through the National Meteorological Programme which increased the percentage and increased the real term—


  Q228 Linda Gilroy: It is certainly welcome knowing a bit more about it, because it is a fairly substantial change in direction in MoD as main customer. Equally, I would like to know a bit more about what the civil departments' falling from £37 million to £22 million is about. Was that a loss of a particular department or a particular area of activity?

  Mr Hutchinson: I am not aware of any significant change in direction that would explain an increase in MoD funding. As I say, I think the increase is largely attributable to the phasing of investments, in particular in international subscriptions and satellite programmes, rather than a change of direction. As to the answer on why we have our contributions from other civil government departments declined, I will have to find out the reasons and give you a note.[5] I do not think it is related to a significant loss of business.


  Q229 Linda Gilroy: Is the Met Office doing enough to generate income from commercial sources? It was pretty well the same in 2004-05 as it was the previous year.

  Mr Hutchinson: We have been through a period where, perhaps, we did not put as much effort into the commercial side of our business as we could have done. Certainly in the course of the last 12 months, in the course of the financial year 05-06 just ended, we made a significant and determined attempt to revitalise our commercial trading business, and that work continues. One of the things that we found out was that some of these issues have quite long lead times, in that you need to invest significantly in advance of getting some of the benefits of that investment in commercial product development, entering into new markets. So I suspect that we can do more still in the course of the current financial year to really get our commercial business up and running to the maximum extent, but that is certainly the intention.

  Q230  Linda Gilroy: I think others might want to return to whether the Met Office has become a bit risk-averse in that sense as a result of previous experience, so I will not go into that further at this stage. However, if I could just refer to page 41 of the annual report and accounts, where it states that a proposed dividend of £6 million will be paid to the Ministry of Defence for the year, was this the actual dividend paid and what dividend has been paid for 2005-06?

  Mr Hutchinson: The dividend has been paid and it was to the value that you just quoted, £6 million, or so.

  Q231  Linda Gilroy: Is there not a case for MoD foregoing a dividend so that the profit can be put back into all these major investments which we know the Met Office have no shortage of needing in coming up work?

  Mr Watson: If I can just come in there, Ms Gilroy, the others will explain the detail of the funding arrangements but I want to say that, provided there is a robust business case put, any future investment that is required in the Met Office will be made. I think you are referring to the dividend going straight to the MoD, which was a departure from the position in 2003. I think, perhaps, Ian might be able to best explain the context in which that change was made.

  Mr Andrews: Yes. Just to set some of the background here, this goes back to before my involvement in this but my understanding is that in the past when the trading funds were established there was a view that they should be allowed to generate their own capital in order to reinvest. Therefore, there was a relatively light touch. It is fair to say that in 2003 the view of trading funds across government changed with departments encouraged to be much more proactive in their engagement in the role of shareholder. That prompted the formation of the shareholder executive and, indeed, in defence we were already ahead of the game on that because we had formed our own business ownership unit to exercise that function. As the Minister said, the quid pro quo for the department taking a dividend—and that has, in fact, been reduced in terms of Treasury guidance on the profit margin to be charged on government work—is that the department stands behind the Met Office investment proposals and is committed to provide loan funding where, as the Minister said, there is a compelling and persuasive business case for that to be done. So that is the sort of background to how it has changed.

  Q232  Linda Gilroy: Just going back to the question I asked earlier about the apparent upward trend—although you have said it may be a lump in this particular year—it would be quite good to be able to see the trend of what has been the dividend. I hear what you say about there being a change in how this is dealt with but if it is possible to see it over a period of several years and see it in relation to the sort of investment you are talking about always being available, then I think that would be helpful to the Committee.

  Mr Hutchinson: We have only paid two dividends to date, so there is not much of a trend in that sense, but 04-05 was the first year we paid a dividend, 05-06 the current year—

  Mr Andrews: Can I help, Ms Gilroy, in terms of understanding why the MoD customer role may appear to be more significant? Until the end of 2003-04 there was an arrangement for ensuring that all of the government customers across the bodies known as the National Meteorological Service were loosely co-ordinated through what was called the core customer group. In 2002 we had a review by Professor David Westbury of whether that was the best way to do things. As a result of his recommendations the National Meteorological Service Commissioning Group was formed, under an independent chair, and the funding from the various departments that contributed to the core customer group was repatriated, if you like, as a single budget line within the MoD. So in terms of headline, in terms of income for the Met Office, that would be an explanation for why in 2004-05 the MoD appeared to be a more significant source of income.

  Q233  Linda Gilroy: I think I understand that! So the commission group you were talking about was set up in?

  Mr Andrews: That took formal responsibility for the programme on 1 April 2004 and from that date the individual department funds were, in effect, consolidated in a single budget line within the MoD.

  Q234  Mr Breed: Minister, can we turn now to some of the objectives and the key targets. The Met Office, as we know, is owned by the MoD, and it is by far and away its largest customer—something like 47% of its turnover. Does it surprise you, therefore, that none of the key targets that the Met Office has actually relates to defence?

  Mr Watson: Yes. If I can just explain the key targets that you have in front of you. I have inherited these targets in draft, and the targets that you have got have percolated through the system and landed on my desk in draft, and for me to be convinced that they are meaningful in that they stretch the organisation as far as it can go, that they take it in the right direction and that they are the actual right targets, I need to test it out with officials more robustly. I thought it was important that the Committee saw the kind of thinking that was going on behind the scenes. So the targets you have got are the draft ones; I need to sign that off and I will be looking very closely to the discussions that take place in the Committee to see whether I think they are appropriate or whether they need modification.

  Q235  Mr Breed: How did the MoD know whether it was getting value for money then, with the quite considerable chunks of money it was actually spending with the Met Office.

  Mr Watson: Our key targets are not the only way you judge value for money, and it might be that in light of your discussions we want to modify some of these key targets. Ian, if you want to take this.

  Mr Andrews: Yes, Minister, thank you. It seems to me that the key targets are about driving the corporate direction of the trading fund, and therefore they need to capture, in essence, what it does: its outputs in terms of accuracy and forecasting skill: how it relates to its government customers—and clearly the important issue there is the output focused customer supply agreements—and to capture the services that the customer really wants (I will come back to that point, if I may in a moment); how it is working to realise its commercial potential and, therefore, contribution into profit: and that it is a good investment for the taxpayer, which is the return on capital employed. Clearly, the performance of the Met Office at the strategic level needs to be driven by those and, possibly, other issues. The key point in terms of delivering what departments want is driven by performance against those customer supply agreements and, in turn, that requires the department to be a much more intelligent and effective customer because it is what departments contract to be delivered and what they will then fund that drives the performance of the Met Office. In addition that is a very, very powerful driver for the realisation of internal efficiencies and effectiveness. As far as the, one might say, parochial concerns of defence are concerned, they are wrapped up, again, as part of our contribution to that National Met Service, and part of the direct delivery of services to frontline commands and others. So the direction of the Met Office is driven by a combination of those key strategic targets and the execution of intelligent customer behaviour by individual departments, because that is what the Met Office is judged by at the end of the day.

  Q236  Mr Breed: Yes, it is judged by that but to a certain extent do you not think that the targets are rather overly focused on the sort of financial considerations than, perhaps, on the whole purpose of the Met Office, which is accurately forecasting the weather?

  Mr Andrews: There are issues about accuracy of forecasting skill in the Met office which, it seems to me, are central to the key targets. One of the key targets proposed for the current year (as the Minister said, he has yet to reach a view) is focused quite specifically on the accuracy of its forecasting and how that is defined.

  Q237  Mr Breed: That is one out of how many key targets?

  Mr Andrews: I went through the issues that it seems to me that I should be focused on, and they are at the strategic level. There is the accuracy of forecasting, there is how the Met Office delivers to its government customers (and those are, as I say, the issues around the customer supply agreements), it is how it is realising its commercial potential and it is whether it is representing good investment for the taxpayer. That, I think, is quite a powerful package in order to drive both those things because the key targets are just one element of managing the performance of the Met Office. What they deliver to the customers is another axis on which they need to be judged.

  Q238  Mr Breed: Looking at the commercial capability target in 04-05, it failed to achieve it because of significant commercial competition. Can you give us some idea and details of what that commercial competition actually is?

  Mr Hutchinson: There are a range of relatively small sized, private sector weather service provider competitors to the Met Office in the market place. They have access to our data, which we make freely available, and they use that data to supply services to a range of users. We were not particularly effective in the year in question, 04-05, at maintaining our market share and our commercial position against that competition. I do not think there was any one particular contract that we lost that would account for the whole story of under-performance in that year; I think it was more a question of pressures across a range of our services.

  Q239  Mr Breed: So what have you put in place to address that particular issue?

  Mr Hutchinson: As I mentioned in answer to an earlier question, I think we were going through a period, at that point, where we were not investing a complete and significant management focus on ensuring that our commercial operation was as effective as it could be in winning business and maintaining business. In the course of the most recent financial year, 05-06, actually, I think we have done rather better than that and we have achieved our commercial profit capability of in excess of £2.9 million commercial profit this year, which is slightly above the targets. So I think there are signs that we are now regaining market share, becoming a more effective competitor and maintaining our role within the market place, but I would not want to be complacent. Last year was the first year of a five-year programme. As I said before, a lot of the commercial benefit from our investment will be recouped in later years, because there is quite a long lead time associated with new product development and accessing new markets. So I hope the progress will continue this year but it is a challenge and we have to be ready to face competition, and I am sure that competition will increase.

  Mr Andrews: May I add to that, Chairman? One of the big challenges the Met Office faces is that what it has to offer is something which, under international agreements, has to be made freely available to everybody. Therefore, the competitive edge of the Met office comes both from the strength of the brand and from the maintenance of the scientific excellence and ensuring that the Met Office science is recognised as being at the real cutting edge. I believe that those two are absolutely crucial to be able to maximise the commercial income generation potential. It is those two things which are the key differentiators between what the Met Office offers and what other people offer, because it is very easy to go on the internet and get a weather forecast from anywhere. Why go to the Met Office? Because of the scientific excellence on which that brand fundamentally depends.


2   See Ev 59 Back

3   See Ev 59 Back

4   See Ev 60 Back

5   See Ev 60 Back


 
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