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ARA 01
Memorandum from the Ministry of Defence
Annual Report and Accounts 2005-06: House of Commons Defence Committee Written Questions
(1) PSA Target 1 - page 13
(a) Over the year April 2005 - March 2006, the proportion of regular armed forces deployed on operations and other military tasks increased from 18% in the first quarter of the year to just under 20% in the last quarter of the year. What is the percentage for the first quarter of 2006-07 (April - June 2006) overall and for each Service?
Between 1 April and 30 June 2006, 12.6% of the Royal Navy, 25.9% of the Army and 13.4% of the Royal Air Force were undertaking operations or other military tasks. In total, some 20.2% of all regular forces (measured as man-day equivalents for each service) were undertaking operations or other military tasks.
(b) What are MoD's planning assumptions for the percentage of forces deployed, for each Service, in the remaining quarters of 2006-07?
Since April 2006 we have deployed the Headquarters group of the Allied Rapid Reaction Corps (ARRC) and the Helmand Task Force to Afghanistan, thereby increasing our level of commitment to about 6,000 personnel in Afghanistan. We expect our commitment to remain at this level until February 2007, falling to around 5,000 personnel in March 2007 when the ARRC is withdrawn. We expect force levels to remain broadly constant in the Balkans (around 900 personnel) and Iraq (around 7,200 personnel) for the rest of 2006-2007. We also expect to continue to meet other commitments such as our support to the Police Service of Northern Ireland; other UK based standing commitments; and our commitment to support the NATO Response Force and EU Battlegroup. In summary, the percentage of our forces undertaking operations and military tasks is therefore likely to remain at current levels for the remainder of 2006-2007, reducing slightly toward the end of the period.
(c) Are there performance indicators for this target? By what criteria is it assessed that the UK Armed Forces achieved the objectives for Operations and Military Tasks in 2005-06?
The success of operations or Military Tasks is judged against the Military Strategic Objectives given to each relevant commander by the Chief of Defence Staff. These objectives set out the military contribution to the overall UK national objectives in, for example, Iraq or Afghanistan. Progress against every objective for each operation and Military Task is reported quarterly by the relevant Commander. These reports are subject to review by the Permanent Joint Headquarters, the Directorate of Joint Capability and the Directorate for Performance and Analysis. A summary report is presented to the Defence Management Board (DMB) for its consideration as part of the Defence Balanced Scorecard report against Objective A of the Departmental Plan. This summary report forms the basis of our PSA report against target 1. The aggregate assessment - based on the reports from the relevant Commanders - is that we are meeting our Military Strategic Objectives, despite significant challenges in Iraq and Afghanistan in particular.
(2) PSA Target 2 - page 14
(a) In describing the performance on the 12 indicators in the shared 'conflict prevention' PSA target, why has the MoD adopted a different system of traffic-light colours from that used by FCO - the MoD using green for "on course" where the FCO uses amber, and amber for "slippage" where the FCO uses red [MoD Annual Report p 14; FCO Annual Report pp113-115]?
(b) Why does MoD's Annual Report not include the performance indicators and assessment of progress along the lines of that provided in FCO's report?
The performance indicators and detailed assessments of progress against them are set out in Annex C of the Annual Report and Accounts. They are identical to those in the FCO Annual Report. In representing this in the traffic-light PSA summary of performance to date at the front of the Annual Report we simply categorised those areas assessed as fully or generally on course as green, and those with significant slippage as amber.
(3) PSA Target 3 - pages 15-16
(a) The target for 'peacetime readiness' of ensuring that by 2008 73% of force elements show no serious or critical weaknesses against their required peacetime readiness levels, was reported as being achieved two years early. However, the proportion of force elements reporting critical or serious weaknesses increased in the last quarter of 2005-06 [page 38]. What was the proportion in the first quarter of 2006-07?
On average from July 2005 to June 2006, 76% of force elements reported no critical or serious weaknesses against their required peacetime readiness levels, remaining above the level of performance required to be achieved by 2008. As explained in the Annual Report and Accounts 2005-06, our continuing high level of operational commitment has limited our ability to maintain the higher level of performance achieved during 2005. The proportion of force elements reporting no critical or serious weaknesses against their peacetime readiness levels has declined from 81% in September-December 2005 to 69% in April-June 2006 and the proportion reporting no critical weaknesses from 100% to 97%.
(b) The target for 'immediate readiness' of ensuring that by 2008 71% of force elements report no serious or critical weaknesses against the ability to generate from peacetime readiness to immediate readiness for deployment on operations was achieved in the second and third quarters of 2005-06, but the average was 70% in the fourth quarter. The proportion of force elements reporting critical or serious weakness increased in the last quarter of 2005-06 [page 38]. What was the proportion in the first quarter of 2006-07?
On average from July 2005 to June 2006, 67% of force elements reported no critical or serious weaknesses against the ability to generate from peacetime readiness to immediate readiness for deployment on operations. As explained in the Annual Report and Accounts 2005-06, the level of performance reflects the pressure on the Armed Forces resulting from operating above Defence Planning Assumptions, and the constraints on conducting collective training over and above that required for current operations until commitments return to the levels within Defence Planning Assumptions. Over the period April-June 2006, 92% of force elements reported no critical weaknesses in their ability to generate from peacetime readiness to immediate readiness and 60% of force elements reported no serious or critical weaknesses.
(c) What are the practical consequences of the critical weaknesses relating to Royal Navy readiness [paras 33, 39] and what action is the MoD taking to address them?
The two key factors contributing to the Royal Navy reporting critical weaknesses relating to readiness in the final quarter of 2005-06 were shortages of Merlin Helicopter spares and specialist manpower, and shortages of amphibious support shipping.
The critical weakness relating to Merlin restricted the availability of some helicopters taking part in routine commitments to deliver the full range of Anti Submarine Warfare capabilities. All current operations were fully supported during the period. Two main initiatives have now been put in place to address the spares shortage. Firstly, the Integrated Merlin Operational Support shore support initiative went live in September 2006. This aims to provide appropriate levels of spares support in sufficient time to meet the mandated readiness profiles. In addition, the Critical Spares initiative has sought to address spares delivery rates. This has been a major partnership with industry to combine efforts to address the impact of spares shortfalls thus improving readiness. This improvement is bearing fruit and more of the Merlin Fleet is now available for longer periods. In addition, efficiency schemes covering Royal Fleet Auxiliary Naval Support Units (afloat support) and the individual Squadron logistic departments have identified a variety of local efficiency measures to add further robustness to spares provision. Even without the increased maintenance burden caused by unforeseen component failures, the availability of aircraft in each Squadron were reduced on account of a lack of sufficiently trained mechanical supervisors and aircraft engineer technicians. An increase in training capacity and the short term employment of civilian maintenance personnel is helping to mitigate these manpower shortfalls.
There was also a critical shortfall in amphibious support shipping. Although operational commitments were unaffected, the transition between the old Landing Ship (Logistic) Class and the new much improved Landing Ship Dock (Auxiliary) affected the level of contingent capability available to Defence. The new ships were delayed in entering service by considerable industrial difficulties at Swan Hunter; this was resolved in May of this year when remaining elements of the contract were passed to BAES to complete. Prolonging the older ships in service would have incurred a disproportionate cost for extending lapsed safety certification. As a result we were not able to retain a full contingent Brigade level amphibious capability during this period. This shipping shortfall did not affect the Royal Navy's ability to deploy a Lead Commando Group, which remained at very high readiness throughout. The introduction of the new Landing Ship Dock (Auxiliary) will substantially increase the amount of sealift available and will improve overall Littoral Manoeuvre capability. Royal Fleet Auxiliary MOUNTS BAY, the first of the Landing Ship Dock (Auxiliary) class, came into service in July 2006 and will be followed by LARGS BAY and CARDIGAN BAY in early 2007, and LYME BAY towards the end of 2007.
(d) Please provide details of those RAF Force Elements identified as having a readiness level lower than required [para 41] and their consequences.
RAF Force Elements with readiness levels lower than required were Hercules, Nimrod MR2, Nimrod R1, Sentry E-3D, the RAF Regiment and Air Transport:
· Hercules. The high levels of tasking of Hercules C130 aircraft equipped for Special Forces (SF) operations, combined with the loss of two Hercules aircraft on operations and a major modification programme aligned to scheduled maintenance, means that the availability of such aircraft is at a premium. However, they are being carefully managed to ensure that all operations are achieved. This in turn means that aircraft availability for all training is reduced and, given the level of support required for concurrent operations, core SF crews have to be supplemented with non-core SF capable crews, which also affects other training. This limits readiness to undertake other commitments beyond those already being met, and this situation is forecast to remain until early 2007.
· Nimrod MR2. The Nimrod MR2 fleet is committed to continuous operations. A planned reduction in aircraft numbers (the aircraft fleet of 18 reduced by two during 2006 and will reduce by a further three around 2009) resulting from Nimrod MR2 aircraft entering the MRA4 programme coupled with the recent loss of a Nimrod MR2 on operations in Afghanistan, modification programmes and trained manpower shortages combine to place pressures on the Nimrod fleet. These will continue whilst operations remain at their present levels. This limits their readiness to undertake further commitments beyond those already being met.
· Nimrod R1. The reduced readiness of the fleet is caused by a shortfall in linguists. Whilst manning and recruiting action is ongoing to rectify this, there is a long training lead time of 18 months for linguists. This exacerbates the cumulative effects of continued deployed service on a relatively small, specialised Force Element that is planned to be available for initial, rather than continued, deployment. The impact is to limit readiness to undertake further commitments beyond those already being met.
· Sentry E-3D. The capability of the Sentry E3D fleet is limited by a shortage of Weapons Controllers. This is being addressed by a review of the trade structure and specialist training, with a view to improving the operational availability of qualified controllers. The impact is to limit readiness to undertake further commitments beyond those already being met.
· RAF Regiment. RAF Regiment Field Squadrons are committed to concurrent operations and are meeting the high level of tasking at the expense of harmony guidelines, where squadrons are currently deployed in breach of those guidelines for six in every 18 months. Manning shortages of around 20% (caused by overlaps between planned RAF manpower reductions, a contribution of RAF Regiment personnel to the formation of the Special Forces Support Group, and the future disbandment of the two UK Ground Based Air Defence RAF Regiment Squadrons) mean that insufficient regular RAF Regiment personnel are available to the RAF Regiment Field Squadrons. An increase to recruiting is being considered, which would restore the balance by 2011-12. The shortfall is currently being managed by augmentation with Royal Auxiliary Air Force (RAuxAF) Regiment Squadron and Operations Support Squadron personnel. Furthermore, before their planned disbandment in 2008, two Ground Based Air Defence Squadrons will be combined, equipped and trained to deliver a Field Squadron capability for a deployment in 2007-08. This will alleviate the harmony position. Subsequently, that manpower will be redistributed to the RAF Regiment Field squadrons, reducing the requirement for RAuxAF Regiment personnel. The current high level of operations limits readiness to undertake further commitments.
· Air Transport. Limitations on the employability of Air Transport aircraft in operational theatres will be significantly reduced by the fitting of Defensive Aids Suites to Tristar. This will greatly improve the resilience of the TELIC/HERRICK airbridge. The aircraft included in the programme will be equipped by May 2007.
(4) PSA Target 5 - pages 18-20
(a) Page 18 of the Annual Report shows the Service manning position in percentage terms, and page 137 the actual levels, up to April 2006. What are the trained requirement levels for each Service for April 2007 and April 2008 and what levels of trained strength does the MoD anticipate for those dates?
The requirement and forecast are set out below:
(b) When does the MoD expect 'manning balance' to be achieved for the Royal Navy and what action is the MoD taking to achieve this? Please explain how the Royal Navy achieves harmony guidelines given its undermanning.
The Royal Navy expects to achieve manning balance in 2008 through a continuing programme of planned reduction in the requirement combined with continued progress in both recruitment and retention. Headline manning balance will mask areas of shortages in particular groups including pinch points, such as Royal Marine Other Ranks, where we are considering the case for a Financial Retention Initiative.
The Royal Navy delivers individual harmony through unit programming and, for Junior Ratings/Ranks, by providing an additional proportion of posts to allow rotation of deployed people. In areas of manpower shortfall or higher than planned operational commitment, harmony is delivered partly by increased operational risk. People are released to return to their base port without replacement when the unit is deployed. Part of this risk is offset by increased multi-skilling.
(c) What percentage of Army personnel exceeded harmony guidelines as at 31 March 2006?
15.1% of Army personnel exceeded harmony guidelines as at 31 March 2006, and 14.5% as at 30 June 2006.
(d) The Committee would like to have an updated list of the 'pinch point trades' previously provided to the Committee during its inquiry on last year's Annual Report [HC 822, Ev 23], indicating where new trades have been added to the list and noting trades taken off because they no longer present manning problems. An update of progress in addressing these pinch points would be helpful.
A revised list of pinch point trades is attached at Annex. These can vary on a monthly basis as initiatives and regulators take effect. Operational Pinch points are continuously monitored by a tri-Service Working Group to ensure that harmony breaches are minimised. Regulators in place include: post reviews in-theatre; rank-ranging of appointments to open up the pool of manpower; more training; increased recruitment; financial incentives; extension of engagements; mobilisation of reserves; and contractorisation. Further initiatives are in place for the longer term, including the Army's Future Army Structure programme.
e) Please provide an update on the conclusions of the work to refine the Deployable Medical Capability needed to meet planning assumptions [para 280] and an explanation of how the significant reduction in this requirement mentioned could be justified. A note indicating pay rates for doctors in the Armed Forces and the NHS would be helpful.
The lack of an endorsed Defence Medical Service liability had led to imbalances in both liability and in manning. Work was therefore put in hand under a new 2 Star (Director General Medical Operational Capability) to define the minimum deployable medical capability required to support current Defence Planning Assumptions. Methodologies to calculate casualty numbers (and thus the medical requirement) were based on new Operational Analysis developed during LOGWAR[1], scrutinised by a military judgement panel and then adjusted to reflect best current medical practice and operational experience. The liability required on deployed operations was endorsed in June 2006. Further work, which we expect will be endorsed soon, was then put in hand to identify additional uniformed liability required by the Armed Forces, including the size of the training requirement.
The work highlighted various imbalances in both specialist and non-specialist categories across all three Services. In particular, the sum of the single Service requirements exceeded the Defence requirement, especially where some options would be met by either the Royal Navy or the Army. We therefore decided that some hospital-based capability (including Surgical Team support) should be delivered on a joint basis with, for example, the Royal Navy and the Royal Air Force contributing 75 beds hospital capability to mature operations. This has now been implemented; the Royal Air Force provided the major element of the last roulement to Iraq. The requirement was also adjusted to bring it into line with modern medical practice. The main impact of this was to increase specialist nurses at the expense of general nurses. There are also some increases and some decreases in some medical specialist groups. The overall outcome, after rebalancing between the various specialist groups, is a reduction in the total requirement of about 250, giving a new requirement (excluding the manning and training margin) of approximately 7,200.
Once we have endorsed the overall requirement, work will follow to align the established liability with the requirement, and manning with the established liability. A significant manning shortfall in overall nursing numbers and in medical specialists will remain. Nurses are currently in overall deficit, including a surplus of general nurses and a shortage of specialist nurses, although there is a healthy training tail. The nursing workforce is also relatively young, reflecting the successful recruiting campaign of recent years. The medical specialist workforce, although currently undermanned with trained specialists, also has a significant training tail working through and future surpluses are predicted in some areas.
The Department submits an annual Medical and Dental Officer paper of evidence to the Armed Forces Pay Review Body (AFPRB), which covers comparable pay issues. Last year we submitted evidence that Medical and Dental Officers had fallen behind their civilian counterparts. This was endorsed by the AFRPB. Defence Medical Services Medical and Dental Officers therefore received an across-the-board pay award of 2.2% from 1 April 2006. In addition, and closely matching the recommendation of the AFPRB, they received a further consolidated payment of £6,500 effective from 1 November 2006 to address the pay disparity which had opened up with their civilian counterparts. We are currently preparing further evidence for the AFPRB for the 2007 pay round which will take into account the 2006 military and National Health Service pay awards and any new evidence on the average pay of civilian doctors and dentists under their separate contractual arrangements.
(f) Please provide an update on progress in delivering management systems allowing pressures on individuals to be monitored.
The Joint Personnel Administration (JPA) programme will provide a significant improvement to the management of pressures on individuals. The system will provide common reporting of separation against harmonised criteria across the Services and information to allow analysis of pressures on harmony.
(5) 2002 Spending Review Value for Money Target and 2004 Spending Review Efficiency Target - pages 22-23
(a) When does the MoD expect to reach an assessment of its performance against the 2002 Spending Review target of a 10% efficiency improvement by 2005-06 [p22]?
The final assessment of performance against the 2002 Spending Review value for money target is dependent upon the final assessment of the Defence Logistics Organisation's (DLO) performance against the Strategic Goal it was set on its creation in 2000. We are finalising this work and expect to reach an agreed assessment in time for the Committee's evidence session with the Permanent Secretary on 24th October.
(b) Of the £400m of DLO efficiency savings previously claimed for 2004-05, £280m have now been validated [para 231]. What main types of claimed efficiency savings could not be validated and why was this?
In auditing the Defence Logistics Organisation's benefits for 2004-05, Defence Internal Audit reviewed a total of £201M out of the total DLO claim in respect of Total Operating Costs. Of this sample it was found that £129M (64%) was valid. The main reasons for the remaining £72M (36%) being invalidated were:
· A lack of supporting rationale and subsequent evidence (£23M). A significant element of this related to a claim relating to the Gas Pipeline Storage System;
· Data recording errors identified in the Benefits Tracking Tool for which there was no evidence or satisfactory explanation as to their inclusion (£18M);
· Inclusion of efficiency savings attributable to a different financial year (£20M);
· Savings included which were not related to genuine efficiency (e.g. reduction in programme costs or cost transfers) (£11M).
The 2004-05 audit report made twelve recommendations including improving existing processes, providing better guidance on benefits reporting, recording and validating, and instituting better review and assurance processes. The DLO is implementing all the recommendations and we expect that this will lead to an improvement in the outcome of the 2005-06 audit.
(c) To what extent do the future planned efficiency gains relating to 'procurement and logistics' [p23] take account of the proposed merger of the DPA and DLO announced in July 2006?
The future planned efficiency gains for procurement and logistics do not take account of the DPA and DLO merger announced in July 2006. Although the merger is likely to bring about more effective and efficient working, it is too early to predict the efficiency gains.
(d) The Report claims an efficiency saving of £65m in 2005-06 relating to force structure changes [para 127]. What further force structure changes are planned for 2006-07 and 2007-08, beyond those listed in para 127, to achieve the future planned efficiency gains in those years (£196m and £90m, it appears)?
In addition to the force structure changes for 2005-06 reported at paragraph 127 of the Annual Report and Accounts, further efficiency savings in 2006-07 will be delivered from reductions to Army and RAF Ground Based Air Defence units as a result of the decreasing requirement for short range and very short range air defence and the creation of a single Joint Ground Based Air Defence Headquarters. These reductions were planned as part of the Future Capabilities work and will be reported in the Department's next Annual Report as planned efficiency savings start to accrue. The majority of the forecast planned efficiency gains for 2006-07 and 2007-08 (£192M and £90M respectively) is a continuation of support and operating cost savings generated by the 2005-06 force structure changes, in particular the early write-down and decommissioning of equipment which generate cost of capital and depreciation cost savings from 2006-07 onwards.
Departmental Resource Accounts
(6) The Chief of Defence Logistics's Resource-DEL was underspent by £346m [p129]. Its voted RfR-1 was underspent by £484m [p199]. What main aspects of CDL expenditure, outside that covered by its DEL budget, accounted for the £484m vote underspend?
The DLO's underspend against Estimate was higher than that against the DEL because the former was prepared on the basis of the 2005-06 AP08 forecast of expenditure. Subsequent to that the DLO's Indirect Resource DEL was reduced by £220M and Direct Resource DEL was increased by £40M in line with revised forecasts. In addition the non-budget and AME element of DLO's outturn was some £213M - an overspend of £44m caused by the difference between the budgeted in-year changes to and unwinding of the Treasury Discount Rate and the actuals for 2005-06.
(7) CDL's £346m Resource-DEL underspend is attributed to a review of stocks and fixed assets [para 263]. To what extent was the underspend a result of (i) reducing asset acquisitions; (ii) increased asset disposals; (iii) reassessments of asset values; (iv) lower depreciation and impairment charges associated with asset disposals; (v) lower depreciation and impairment charges associated with asset revaluations; and (vi) other factors?
A range of issues within Indirect Resource DEL movements contributed to the variance between the DLO's Total Net Resource Outturn compared to its Net Resource Estimate. The vast majority related to improving the quality of the accounts by applying accounting policies consistently across the DLO. The outcome of this work could not have been predicted easily and it was therefore difficult to factor into the planning and estimating process. A number of accounting adjustments were made to the DLO's resource accounts between submission of the forecast for Spring Supplementary Estimate purposes and the final outturn reflected in the audited accounts. These adjustments, in the main, resulted in credits to the DLO's operating cost statement in the Indirect Resource DEL categories. The main adjustments were:
· £107M from the release back to the operating cost statement of part of an accelerated impairment provision for aircraft spares made in previous years but no longer required;
· £110M from releases back to the operating cost statement arising from a continuing review by Integrated Project Teams to ensure a consistent application of the DLO's stock provisioning policy; and
· £200M from a technical accounting adjustment to reconcile the Department's asset holdings with balances recorded on the asset management systems.
(8) The MoD called-down £816m of its £881m Departmental Unallocated Provision in 2005-06 'to cover forecasts of indirect resource spend' [para 263, last bullet-point], but in doing so its Resource-DEL budget was underspent by £771m (2.4%) [Table 13]. Why was the level of Resource-DEL overspend so much over-estimated in deciding on the amount of DUP to call down?
The Spring Supplementary Estimates were prepared at AP08 (November), using the latest available internal forecast information of outturn from Top Level Budget (TLB) organisations. TLB forecasts of indirect resource DEL indicated that the Department needed to draw down most of the available DUP to ensure that Resource DEL was not breached. In particular, the forecasts assumed increased redundancy provisions (£ 273M), additional depreciation, and cost of capital, which had not been included in earlier estimates. In the event, the actual outturn was £ 771M below that expected and forecast at AP08. This was because the Department was overly pessimistic in its forecasts of indirect resource, which did not materialise at the year end. Since then we have improved our control procedures to ensure that in future years forecasts for indirect resource DEL are scrutinised more closely.
(9) What were the main factors behind the 43% increase in Defence Estates' RfR-1 net expenditure in 2005-06, compared with 2004-05 [p199]?
This increase represents the transfer of responsibility from other Top Level Budgets to Defence Estates for facilities maintenance in Germany and Northern Ireland, a full year of expenditure on Regional Prime Contracting in the South West and the South East, the implementation of Regional Prime Contracting in Central and East regions, the introduction of the Housing Prime Contract for married quarters estate and the first full year of Project Aquatrine PFI Projects B and C.
(10) What factors lie behind the 16% increase in the costs of Property Management in 2005-06 [p207]? When does the MoD expect the property disposal programme to result in a reduction in the cost of property management?
The increase in property management expenditure of £238M reflects additional PFI commitments of £150.4M and an increase in expenditure on the estate of £87.6M.
PFI Expenditure
The increase in PFI expenditure is set out by TLB below:
TLB 2004-05 2005-06 Inc/(Dec) Land - £32.7M £32.7M DLO - £10.5M £10.5M 2SL - £7.6M £7.6M AG - £18.3M £18.3M PTC £4.6M - (£4.6M) CTLB £35.5M £70.3M £34.8M DE £52.5M £103.6M £51.1M Total £92.6M £243.0M £150.4M
The increase for DE relates to the full year costs for Aquatrine Projects B (£11.2M) and C (£32.4M). Both projects went live during March 2005. Additional expenditure was also incurred in respect of Project A for electrical health and safety issues.
Expenditure on the Estate
The increase in expenditure on the estate is set out by TLB below:
TLB 2004-05 2005-06 Inc/(Dec) Land £294.0M £231.5M (£62.5M) DLO £77.3M £48.8M (£28.5M) Fleet £26.8M £25.0M (£1.8M) GOCNI £38.9M £7.4M (£31.5M) STC £126.0M £118.1M (£7.9M) AG £88.8M £51.0M (£37.8M) CJO £87.5M £74.7M (£12.8M) 2SL £26.5M £14.5M (£12.0M) PTC £71.9M £65.7M (£6.2M) CTLB £65.9M £51.7M (£14.2M) DPA £11.5M £12.9M £1.4M DE £501.2M £802.6M £301.4M Total £1,416.3M £1,503.9M £87.6M
We expect expenditure on property management to remain broadly level in real terms as we seek to improve the condition of the estate.
(11) DPA's DEL outturn was relatively close to budget (a £31m underspend on Resource-DEL and a £177m overspend on Capital-DEL [p129]). What main factors accounted for its £1,359m underspend on its RfR-1 vote [p199]? What were the principal factors behind its 2005-06 RfR-1 provision being so much higher than the outturn for the previous year?
The underspend of £1,359M on the RfR-1 vote arose mainly as a result of the change to Treasury discount rate (3.5% to 2.2%) on the unwinding of nuclear provisions. The principal factor behind the difference between 2005-06 RfR-1 provision and the restated outturn for 2004-05 is that the latter was adjusted to reflect the effect of the transfer of responsibility for managing and cleaning of civil nuclear sites and associated value of provisions and funding for decommissioning costs from the MoD to the Nuclear Decommissioning Authority on 1 April 2005, while the 2005-06 provision did not reflect the transfer because the details had not been agreed at the time of Main Estimates.
(12) Non-operating appropriations-in-aid were £374m compared with a provision of £607m [p187]. What accounted for this large variation?
At the time of compiling the Spring Supplementary Estimates our internal financial data suggested that we would receive this revenue. We have since improved our procedures to ensure that in future years, forecasts for this sort of activity are scrutinised more closely.
(13) The gross cost of some force elements changed significantly between 2004-05 and 2005-06 [p226]. The cost of frigates/destroyers fell by 14%; amphibious ships by 15%; fleet support ships by 16%; and strike/attack RAF aircraft by 24%. And costs increased for Army field units by 13%; reconnaissance/maritime patrol aircraft by 21%; and tanker/transport/comms aircraft by 23%. For each of these highlighted changes, what percentage changes in the number of ships/aircraft/units took place between the two years; and to what extent were the changes in the highlighted force element costs attributable to changes in force element quantities and how much to changes in the running cost of the force elements?
The costs in note 24 to the Accounts are based on the total operating costs of the category of force element concerned. It is not possible to isolate changes in costs arising from changes in force elements from the costs of the force elements themselves.
(14) The gross value of assets held under PFI contracts and finance leases was £624m in April 2006, down from £737m the year before [p211]. What are the main factors behind this reduction? Which, if any, leases/contracts came to an end?
There were major reductions in the following categories of assets held under PFI contracts and finance leases:
· a reduction of £109M for Other Land & Buildings from the impairment to Main Building following the 2004-05 Quinquennial Revaluation. Although the impairment was correctly accounted for within 2004-05, it was not disclosed as a movement to a PFI asset. Consequently the gross cost balance of "Assets held under PFI contracts" at 1 April 2005, was overstated, whilst the gross cost of "owned assets" was understated. The disclosure note was corrected during 2005-06; hence the movement shown in Note 14.1;
· a reduction of £29M for Fighting Equipment Transport as a result of the finance lease for RFA Bayleaf ending during 2005-06. The ship has been retained under a short term operating lease. This is offset by an increase of £60M resulting from correct disclosure of assets within the Defence Helicopter Flying School (RAF Personnel and Training Command) as "Assets held under PFI contracts". These assets existed in 2004-05 but were disclosed as "owned" rather than "held under PFI contract". The assets have now been disclosed correctly. The total net Book Value of assets held (owned and under PFI contract) was correct, and no accounting action was required;
· a reduction of £40M for Other Transport, reflecting reclassification by the DLO following a review of all asset classifications on formation of the DLO/DPA Joint Accounting Operations Centre. Assets previously disclosed as "held under PFI contract" could not be reconciled with the actual assets known to be "held under PFI contract" and therefore the disclosure note was corrected. The total net Book Value of assets held (owned & under PFI contract) was correct, and no accounting action was required;
· a reduction of £8M for Information Technology and Communications Equipment, as a result of impairments following annual revaluation; and
· an increase within Dwellings and Plant & Machinery following revaluation.
(15) The Accounts report capital values for the MoD's off-balance sheet PFI projects [p230]. For each of the on-balance sheet PFI projects also listed [p232], what are the capital values involved?
Capital values for each of the on-balance sheet PFI projects listed on page 232 of the Annual Accounts are set out below.
(16) A number of 'constructive losses' on equipment projects are identified in Note 31 in the Resource Accounts and paras 267-268. What 'savings' in recurring costs result from writing off these projects, and to what extent are such savings scored against the Efficiency Programme target?
Where projects are stopped, acquisition personnel are absorbed elsewhere. They are usually re-deployed in other project areas where there are vacancies due to staff churn. Efficiency targets are placed on the acquisition community as a whole, rather than on individual projects, and achievement reported accordingly.
(17) Constructive losses totalling some £310m [p236 and p239] relate to the decisions to withdraw from the long range and medium range TRIGAT anti-tank guided weapon systems. Give the scale of these losses, what benefits if any, were gained from the UK's involvement in the early stages of these equipment programmes? Is the MoD entitled to any Commercial Exploitation Levy should these weapon systems be sold to nations not involved in these collaborative programmes?
Involvement in the early stages of the Long Range and Medium Range TRI-national Guided Anti-Tank (TRIGAT) programmes improved MoD's understanding of Guided Weapon performance modelling and demonstrated the capabilities and limitations of relevant technologies. Under the terms of the Memoranda of Understanding and contracts, MoD is entitled to share with the participating nations the Commercial Exploitation Levy which would accrue from sales to 3rd parties.
(18) A loss of £205m relates to 8 Chinook Mk 3 helicopters [p239]. When are these helicopters expected to enter operational service? The terms of the contract for these helicopters were met, but the helicopters did not meet the operational requirement and could not acquire Military Aircraft Release. What is the additional estimated cost (additional to the original contract cost) of meeting the operational requirement and acquiring Military Aircraft Release?
The Department is working very hard to resolve the problems of the Chinook Mk 3. A Combined Operational Effectiveness and Investment Appraisal has indicated that recovery of the aircraft through a Fix to Field programme is likely to represent the best value for Defence. A risk reduction programme is now nearing completion and a recommendation is expected to be submitted to Investment Approvals Board early next year. The expected in-service date and costs of the programme will be confirmed at that time.
(19) In relation to the cost of operations in Iraq [p 201], please explain the considerable underspend between allocation and outturn for 2005-06 on capital costs. How was the contingency of £60m derived?
The capital estimate was based on Urgent Operational Requirements (UORs) that had been given financial approval. Not all of these UORs were delivered before the end of the financial year, which resulted in an underspend. The Committee is aware that the Estimate is based on costs incurred two thirds of the way through the year, so it is prudent to include a contingency. This contingency was derived from the delegated authority the Treasury has agreed with the MoD for general unexpected UORs of £5M a month, totalling £20M, and adding in an element, based on historical knowledge, for unforeseen changes to the threat which require large force protection UORs to meet it. This has been borne out both last year and this with the need for mine counter measures and armoured patrol vehicle UORs.
(20) In relation to the cost of operations in Afghanistan [p 201], please explain the reduction in the cost of Service manpower between 2004-05 and 2005-06 and the contrasting variation between allocation and outturn (2005-06) in respect of infrastructure costs and equipment support.
The costs of Operations reflect the net additional costs incurred. Costs that the Department would have incurred regardless of the operation taking place, such as wages and salaries, are not included. The additional costs of Service personnel on operations are mainly the additional allowances they attract, because their salaries are met from the core budget. These costs reduced in 2005-06 because of a reduction in the requirement for Territorial Army support. As this is not normally required (and not budgeted for) their salaries are all additional costs and chargeable to the operation. So in operational funding terms Territorial Army support is more expensive. A reduction in Territorial Army support between 2004-05 and 2005-06 therefore reduced costs, but not necessarily manpower levels. Infrastructure costs were less than the allocation because planned building programmes began later than expected when the Estimate was produced. The allocation for Equipment Support was based on forecasts by the relevant budgetary areas within the MoD. We allowed within the contingency a sum to cover the additional equipment support costs of the planned expansion into the Helmand Province.
(21) Will the cost of procuring the Vector and Cougar vehicles for Afghanistan and Iraq, announced in July 2006, be considered to be net additional costs and funded directly from the Treasury? If not, how will the expenditure on these vehicle be accounted for?
The cost of buying Vector falls mainly to RfR1 as it is an established Equipment Plan programme. We had originally planned to buy 62 Vector Protected Patrol Vehicles at a cost of £18.8M. We are now buying 166 Vectors at an additional cost of £29M. £19M of this will fall to RfR1. The remaining £10M will come from RfR2 to replace Snatch Landrovers destroyed on operations, which as a net additional cost of operations is funded directly from the Treasury.
Subject to the finalisation of procurement and support costs, we expect the cost of buying Cougar (the UK variant, enhanced by additional armour, communications and electronic counter-measures, and now known as Mastiff) to be funded from RfR 2 as a net additional cost of operations. ANNEX PINCH POINT TRADES BY SERVICE 2006
[1] LOGWAR is part of the force development process assessing UK defence logistic capability. |