Select Committee on Defence Fourth Report

Report

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Background

1. The Spring Supplementary Estimates for the Financial Year 2005-06 were laid before the House on 14 February.[1] In total, the Government requests additional provision of £7,637.727 million.[2] Of this, £1,889.814 million is requested by the Ministry of Defence (MoD).

2. MoD's Spring Supplementary Estimate sets out the purposes for which this additional provision is required.[3] The item which is most significant, in both financial and political terms, is an increase of £933.565 million resources and £329.997 million capital to reflect the costs of peace-keeping in Iraq and Afghanistan.

Estimated costs of peace-keeping in Iraq and Afghanistan

3. MoD's Estimates Memorandum breaks down the costs of peace-keeping in Iraq and Afghanistan as follows:[4]

Table 1

Summary of Resources Requested for Operations in Iraq and Afghanistan at Spring Supplementary Estimates 05/06

Cost Type	Iraq £M 2004/5	Iraq £M 2005/6	Afghanistan £M 2004/5	Afghanistan £M 2005/6
Cash Resource Costs	732.300	784.877	48.900	148.688
Capital Costs	218.500	259.944	3.600	70.053
Non-cash Resource[5]	23.900	53.215	0.300	1.756
Total	974.700	1,098.036	52.800	220.497

4. The Estimates Memorandum explains that this expenditure is funded from the Treasury Reserve.[6] In other words, it is money that is new to MoD: the cost of operations is funded by the Treasury.

5. We considered the information provided in the Estimates Memorandum to be inadequate and sought a more detailed breakdown from MoD. The Department's response breaks down the requested increase as follows:[7]

Table 2

Make up of Iraq and Afghanistan Resource DEL estimate

RDEL Expense Category	IRAQ - £ M	AFGHANISTAN - £ M
Service Manpower	80.278	7.172
Civilian Manpower	11.688	1.116
Infrastructure costs1	84.082	25.663
Equipment Support2	243.097	14.832
Other Costs & Services3	103.984	46.070
Income foregone4	3.812	5.917
Stock Consumption	202.936	33.918
Contingency5	55.000	14.000
Total Direct Resource DEL	784.877	148.688

Notes:

¹ Establishment of forward/deployed operating bases.

² Maintenance and small repairs to equipment.

³ Consumables and other miscellaneous costs.

⁴ Income that would have been generated if the operation had not taken place.[8]

⁵ Contingency—to allow for changes in resources.

Table 3

Make up of Iraq and Afghanistan Capital DEL estimate

CDEL Expense Type	IRAQ - £ M	AFGHANISTAN - £ M
UORs and Recuperation	199.944	53.053
Contingency	60.000	17.000
Total Capital DEL	259.944	70.053

6. MoD's second memorandum explains that this capital expenditure relates principally to equipment purchased as Urgent Operational Requirements (UORs) and accelerated capital repair costs on equipment in operational use. And it states that the majority of UORs authorised over the last year, relate to Force Protection (around 87 per cent), helicopters, communications, surveillance equipment, and medical equipment.[9]

7. We questioned MoD on why it was necessary to include such a large element of contingency, so near to the end of the financial year, and how each of the contingency figures was calculated. MoD's response was as follows:

The Request for Resources is based upon forecast costs two thirds of the way through the financial year. Due to the often rapidly changing operational situation it is prudent to include a contingency figure within the estimates. This figure is based upon a comparison of previous years' final outturn figures and the latest forecasts available when we prepare Spring Supplementaries (effectively November), and an analysis of past UOR costs to give an indication of potential short notice operational equipment requirements.

More specifically, in Direct Resource DEL the contingency figure for Afghanistan was added because when we prepared the Estimate there were remaining uncertainties over the planned expansion of our commitments. In the case of Iraq the contingency of £40M represents only around 5% of the total cost and reflects the uncertainties mentioned above. In addition to this HM Treasury has recently approved additional expenditure for equipment support to the Iraq Security Services of which £15M is expected to be expended in this financial year.

In Capital DEL the bulk of the contingency arises from our need to be able to respond to the rapidly evolving threat to our forces on both a tactical and technical level. Against that need we seek additional funding for unforeseen Urgent Operational Requirements (UORs) for the purchase of, for example, force protection equipment.[10]

8. We do not find this explanation entirely convincing. Undoubtedly, the operational situation can change, and it is certainly prudent to include a contingency figure within the estimates. But the size of the contingency is surprisingly large: over 23 per cent in the case of capital. Of course, MoD needs to respond to the changing threat; and it is essential that it has the financial flexibility to buy new equipment when operational need arises. Force protection—notably, against increasingly sophisticated Improvised Explosive Devices—is a serious concern: a matter of life and death to our Service personnel in Iraq and Afghanistan. We were briefed on the acquisition of UORs when we visited the Defence Procurement Agency in January, and were impressed by the speed and efficiency with which this is managed. But none of this obviates the need for proper financial forecasting. Including £146 million contingency in the request for resources, without full supporting detail, is asking Parliament to take too much on trust.

9. It would have been helpful if the break-down of the requested resources had been provided in MoD's initial Estimates Memorandum, rather than having to be prised out of them in stages as the Estimates Day approached. We note that our predecessors raised the lack of information provided in support of the Spring Supplementary Estimate 2005 in its 2005 Report on Iraq: An initial assessment of post-conflict operations.[11] It recommended that "a more detailed breakdown of costs, for operations involving such substantial sums of money, should be provided in future to facilitate effective parliamentary scrutiny".[12] The Government's response did not directly address this:

While MoD forecasts future costs for planning purposes the costs remained uncertain and to publish them would be misleading. Actual annual costs … are reported at the end of the year.[13]

We regret that MoD does not appear to have taken seriously our predecessors' recommendation that more information be provided in support of the Spring Supplementary Estimate. We recommend that the Department ensure that in future its Estimates Memoranda contain a full break-down of the resources requested.

Information on outturn

10. The lack of information in the Estimates is not made up for by a wealth of information in the end-of-year Departmental Report. MoD's Annual Report and Accounts 2004-05 gives the overall outturn for each operation, but disappointingly little detail. It presents one small table:[14]

	Operating Costs £000
Operation
Balkans	84,677
Afghanistan	57,937
Iraq	747,068
	889,682
Programme Expenditure	48,499
Total	938,181

And it provides a few additional notes on the cost of the Iraq deployment:

1. The MoD had £0.975Bn (2003-04: £1.539Bn), including £219M (2003-04: £334M) for capital expenditure, in voted provision for Operation TELIC[15] in the Spring Supplementary Estimates 2004-05.

2. The resource outturn in 2004-05 for the operation was £0.747Bn (2003-04: £1.051Bn), which reflects the costs for the period to 31 March 2005.

3. The capital expenditure for Operation TELIC paid and accrued in the financial statements amounted to £163M (2003-04: £260M).[16]

We recommend that in future MoD's Annual Report and Accounts contain significantly more detailed information on the cost of operations.

Authority for expenditure on operations

11. The motion to approve the Spring Supplementary Estimates is the first and only occasion on which the House of Commons is asked to approve expenditure on operations. MoD's second memorandum states that:

historically the Department has not made any requests under RfR2 at either Main Estimates of Winter Supplementary Estimates for the costs of operations. The Spring Supplementary Estimates is the first time that we request such resources and we do then for the total forecast expenditure for the whole year.

That is not to say that we do not forecast and monitor expenditure on operations throughout the year. Indeed each TLB does so from the start of the financial year. You will appreciate, however, that, because of the nature of operations, there are usually significant changes in the demand for military involvement in conflict prevention activities through the year and it is often not possible to estimate the likely cost of any major new operations with accuracy early on. As a result forecasts will fluctuate during the year, and so, with the agreement of HM Treasury, we await the Spring Supplementary Estimates before requesting the additional resources, thereby ensuring the Estimate is as accurate as possible. In the meantime we provide regular information to HM Treasury, which includes a best estimate of outturn.[17]

12. We pressed MoD for further details on the rationale, and the historical basis, for it seeking parliamentary authority for expenditure on operational deployments (including those of a long-term and anticipatable nature) only in the Spring Supplementary Estimates. It responded as follows:

Expenditure on operations such as those in Iraq and Afghanistan varies depending on troop numbers, activities and force protection requirements. As a consequence we cannot provide a detailed forecast at the beginning of the financial year that is accurate to the standards which we would normally place before Parliament for figures for that financial year. At the time the Winter Supplementary Estimates are prepared the most up to date financial information on operations would be complete up to August: clearly much can change between then and the end of the year. We have therefore historically taken the view that it would be better to wait to provide a forecast until later in the year when the underpinning figurework is more robust and we have a more detailed understanding of the likely operational profile to the end of the year. We have therefore delayed the Estimate for operations such as Iraq and Afghanistan to Spring Supplementaries.[18]

13. It is clear from these explanations that the reason for delaying the request for resources to the Spring Supplementaries is financial uncertainty, not security considerations or the need to keep information about operations confidential. Financial uncertainty afflicts all Government Departments to a varying extent, and it is not seen as an excuse for not presenting full and proper Estimates to Parliament. The Estimates process is designed to allow for change. We fully accept that the demand for military involvement in peacekeeping operations can change significantly over the course of a financial year. New deployments may arise, and we accept that it can be—as MoD argues—"difficult to estimate the likely cost of any major new operations with accuracy early on". But, for an ongoing operation such as Iraq, we cannot accept that MoD is unable to report the broadly anticipated costs to Parliament at the beginning of the financial year. The fact that MoD cannot provide information that is accurate to the standards which it would normally place before Parliament is no reason for not providing Parliament with any information at all.

14. MoD's explanation gives the strong impression that, in its view, the important factor is providing information to, and satisfying the requirements of, the Treasury: Parliamentary approval seems to be regarded as a rubber stamp. For this, Parliament must take some of the blame: for too long we have allowed Parliamentary approval of the Estimates to be taken for granted. MoD must recognise that the agreement of the Treasury is not a substitute for Parliamentary approval, and that providing information to the Treasury is not enough.

15. We consider that the arrangement by which MoD waits for the Spring Supplementary Estimates before seeking Parliament's approval of expenditure on operations is unsatisfactory, and we recommend that it cease. We recommend that in future provision for commenced operations be made in the Main Estimates in the usual way, if necessary with a large element for contingency.

16. We also recommend that in future MoD provide to this Committee regular, perhaps quarterly, updates of the cost of operations, in the same way as it provides information to the Treasury.

The cost of Balkans operations

17. MoD's Spring Supplementary Estimate contains provision for the transfer of of £64 million from the Foreign and Commonwealth Office (FCO) in respect of the Balkans Conflict Prevention Pool.[19] MoD's third memorandum states that:

funding for the operations in the Balkans, which is now considered to be financially stable, is currently sought by the FCO at Main Estimates, and transfer made to MoD at Spring Supplementary Estimates.[20]

We fail to understand why funding is not sought directly by MoD in the first place, and we recommend that in future provision for operations in the Balkans be set out in MoD's Main Estimates.

Future cost of operations in Afghanistan

18. MoD has stated that the estimated cost of the UK's deployments to Afghanistan will be £1 billion over the five years 2005-06 to 2009-10.[21] We asked for a breakdown of this cost by financial year and by purpose. MoD responded as follows:

expenditure on operations varies depending on troop numbers, activities and force protection requirements. As a consequence, we cannot currently provide a breakdown of the estimate that is accurate in detail to the standards which we would normally place before Parliament.[22]

We fully appreciate that the costs of operations are uncertain, but that is not a reason to deny Parliament any information at all. Telling Parliament that the costs of the deployment to Afghanistan is "around a billion" is just not good enough. This is a very large amount of public money, and the public deserve better information on how it is going to be spent. We will be pursuing this further in our inquiry into the UK deployment to Afghanistan.

Form of the Estimates Memorandum

19. The Supplementary Estimates are very hard to understand by any but the most expert reader. The Departmental Estimates Memorandum is intended to present the information in a manner which is more accessible, and allows read-across to the resource priorities and Public Service Agreement (PSA) targets set out in the Departmental Annual Report. During our scrutiny of the Winter Supplementary Estimates 2005, we identified a number of deficiencies in the format of MoD's Estimates Memorandum and MoD was sent the guidance for Departments produced by the House of Commons Scrutiny Unit on the form and content of estimates memoranda.[23] It is disappointing that this guidance has not been followed in a number of respects in the preparation of MoD's Estimates Memorandum on the Spring Supplementary Estimate. The section relating to the impact on PSA targets does not comply with Treasury guidance: it merely gives a brief account of the current status of targets (reporting "slippage" on the procurement target and "on course with some slippage" against the conflict prevention target, with the rest "on course") and does not provide any information about how the changes in the estimate will impact on the progress towards targets.[24] The memorandum is not signed by anyone, and therefore offers no assurance that it has been reviewed by senior management. The memorandum states the change to the net cash requirement and to the Departmental Expenditure Limit, but fails to provide figures for the past three years to facilitate comparison. It would be helpful if the memorandum outlined the current End Year Flexibility position. We recommend that MoD take steps to ensure that the Scrutiny Unit's guidance on the production of estimates memoranda is followed in future.

Votes A

20. The Votes A for the financial year 2006-07[25] were laid before the House on the same day as the Spring Supplementary Estimates. The Votes A provide the mechanism by which Parliament exercises control over the maximum number of personnel in the Armed Forces. This has historical links to the provision in the Bill of Rights 1689 that "the raising or keeping a standing army within the kingdom in time of peace, unless it be with consent of Parliament, is against law". Motions to approve the maximum numbers for each Service, set out in the Votes A, will be put to the House after the debate on the Spring Supplementaries.[26]

21. The Votes A show a reduction in the Regular Forces: 2,130 for the Royal Navy/Royal Marines; 1,535 for the Army; and 3,820 for the Royal Air Force.[27] This reflects the drawdown in the size of the Armed Forces announced in the Government's 2004 Future Capabilities White Paper.[28] There is a decrease of 650 in the number of naval reservists, and an increase in the number of the special members[29] of the reserves to reflect the gradual transfer in of Royal Fleet Auxiliary personnel. There is no change to the reserves or special members of the Army or Reserved Air Force.

22. The Secretary of State announced to the House in December 2005 some minor changes in the presentational format of the Votes A.[30] The figures for "Commonwealth troops in the United Kingdom" are no longer reported, and the numbers of the Queen Alexandra's Royal Army Nursing Corps and Princess Mary's Royal Air Force Nursing Service are now incorporated in the figures for the Regular Army and Regular Air Force.

Conclusion

23. We do not propose that the House should refuse the request for resources set out in MoD's Spring Supplementary Estimate. On the contrary, we believe it is essential that peace-keeping operations in Iraq and Afghanistan should be properly funded. But we believe that the House should be properly informed of the expenditure it is being asked to approve and that it should be aware of our concerns about the manner in which MoD presents its estimates to Parliament. We believe that the House should have an opportunity to debate these matters before it approves the Spring Supplementary Estimates.

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1   HM Treasury, Central Government Supply Estimates 2005-06 Spring Supplementary Estimates, HC 827, February 2006 Back

2   Net additional cash requirement Back

3   HM Treasury, Central Government Supply Estimates 2005-06 Spring Supplementary Estimates, HC 827, February 2006, pp 227-229 Back

4   Ev 4, para 5.15, Table 5 Back

5   The non-cash resource figures reflect a transfer from Request for Resources (RfR) 1 (provision of defence capability) to RfR2 (conflict prevention) to cover depreciation and cost of capital charges associated with equipment purchased under Urgent Operational Requirement arrangements. See Ev 4, para 5.16 Back

6   Ev 4, para 5.15  Back

7   Ev 7, Table 1 Back

8   See Ev 9, for a further explanation of income foregone Back

9   Ev 7 Back

10   Ev 8 Back

11   Defence Committee, Sixth Report of Session 2004-05, Iraq: An Initial Assessment of Post-Conflict Operations, HC 65-I Back

12   Ibid, para 109 Back

13   Defence Committee, First Special Report of Session 2005-06, Iraq: An Initial Assessment of Post Conflict Operations: Government Response to the Committee's Sixth Report of Session 2005-06, HC 436 Back

14   Ministry of Defence, Annual Report and Accounts 2004-05, HC 464, 28 October 2005, p 188 Back

15   Operation TELIC is the name given to operations in Iraq. Back

16   Ministry of Defence, Annual Report and Accounts 2004-05, HC 464, 28 October 2005, p 188 Back

17   Ev 7-8 Back

18   Ev 8 Back

19   HM Treasury, Central Government Supply Estimates 2005-06 Spring Supplementary Estimates, HC 827, February 2006, p 228; see Ev 2, para 5.1, Table 2. Back

20   Ev 8 Back

21   HC Deb, 26 January 2006, Col 1532 Back

22   Ev 9  Back

23   By letter of the Clerk of the Committee of 21 December 2005. Back

24   Ev 5, para 6.1. Back

25   Ministry of Defence Votes A 2006-07, HC 869 Back

26   Under Standing Order No. 55 (1) and (3), the question on any outstanding vote relating to numbers for defence services is put at the conclusion of the Spring Estimates Day, without debate. Back

27   See Ev 6 Back

28   Delivering Security in a Changing World: Future Capabilities, Cm 6269, July 2004, para 3.6. Back

29   The category of "special members" or "sponsored reserves" was introduced under the Reserve Forces Act 1996. Employees become special members of the reserves pursuant to a contractual arrangement between their employer and MoD. Back

30   HC Deb, 6 December 2005, Col 86WS Back

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Prepared 16 March 2006