House of Commons - Defence

Select Committee on Defence Third Report

Report

1. The Winter Supplementary Estimates for the Financial Year 2006-07 were laid before the House on 21 November 2006.[1] The Ministry of Defence (MoD) is seeking a net increase in resources of £1,599.982 million—in cash terms a net increase of £1,699.982 million.[2]

2. The Supplementary Estimate includes funds taken up from some of the MoD's under-spends in previous years under the End Year Flexibility arrangements—£120 million resource and £72 million capital. It also splits out Defence Estates net expenditure into its gross expenditure and appropriations-in-aid components, correcting an error in the Main Estimates. And it reallocates funds between Top Level Budgets mainly to reflect changes in the way in which the MoD accounts for its fixed assets.[3]

3. Most of the additional funds requested in the MoD's Winter Supplementary Estimate are to meet the additional costs of operations in Iraq and Afghanistan, which the MoD estimates to be £1,040 million in resources and £360 million in capital in the current financial year.[4]

4. The House of Commons will be asked to approve the Winter Supplementary Estimates on Thursday 7 December.

Approval of expenditure for operations

5. The MoD does not make provision for the cost of operations in the Main Estimates, on the ground that the unpredictable nature of operations makes it difficult to forecast their cost with accuracy at the beginning of the financial year. Until this year, it has waited until the Spring Supplementary Estimates in February to present estimated costs of operations.

6. In our report on the Spring Supplementary Estimate 2005-06, we said that we considered the arrangement by which the MoD waited for the Spring Supplementary Estimates before seeking Parliament's approval of expenditure on operations to be unsatisfactory; and we recommended that in future provision for already commenced operations be made in the Main Estimates in the usual way, if necessary with a large element for contingency.[5] The Government's response did not accept this recommendation, arguing that costs were difficult to forecast in fast moving operational circumstances and Supplementary Estimates were the first occasion when the Department could reach a reasonably firm conclusion. However, in the light of our recommendation, the Government undertook to seek provision for conflict prevention for commenced operations in the 2006-07 Winter Supplementary Estimate, rather than waiting for the Spring Supplementary Estimates as in the past.[6]

7. In our report on the Main Estimates 2006-07, we recommended that the MoD reconsider whether provision for commenced operations might be included in the Main Estimates in future.[7] The Government's response merely reiterated that "Requests for resources for Conflict Prevention have normally been made in the Supplementary Estimates, because costs are difficult to forecast in fast moving operational circumstances".[8] We find this explanation insufficient. Military operations are by their nature unpredictable and it would be understandable if estimates made at the beginning of the financial year required revision. But the MoD will undoubtedly have made internal planning assumptions about the costs of the operations in Iraq and Afghanistan and we believe these should be shared with Parliament.

8. While we commend the MoD for bringing forward the presentation of estimates on the cost of operations in Iraq and Afghanistan to the Winter Supplementary Estimates, we still consider that there ought to be provision for the cost of commenced operations in the Main Estimates. We repeat our earlier recommendation that the MoD consider this. We expect this change to be made unless a more compelling argument can be offered for not doing so.

Approval of the costs of Balkans Operations

9. Our argument that the cost of commenced operations could, and should, be presented in the Main Estimates is strengthened by the fact that the Government manages to make provision for the cost of operations in the Balkans in the Main Estimates—albeit in those presented by the Foreign and Commonwealth Office (FCO) rather than by the MoD. The current practice is for the FCO to seek funding for peacekeeping in the Balkans in the Main Estimates, and for some of this to be transferred to the MoD in the Spring Supplementary Estimates.

10. In our report on the Spring Supplementary Estimate 2005-06, we stated that we failed to see why funding was not sought by the MoD in the first place and recommended that in future provision be set out in the MoD's Main Estimate.[9] The Government did not accept this recommendation, on the grounds that the FCO had always been the lead department for administering the Global Conflict Prevention Pool, that managing the UK's peacekeeping activities as a whole was beneficial and that the current arrangements allowed flexibility to respond to a volatile international scene.[10]

11. In our report on the Main Estimates 2006-07, we stated that, while we appreciated the value in managing peacekeeping activities centrally, we could not see why this should preclude separation of the anticipated costs by department. We recommended that the Government reconsider this.[11] In its response, the Government said it would reconsider this in the preparation of the Main Estimates 2007-08.[12] We repeat our earlier recommendation that provision for operations in the Balkans should in future be set out in the MoD's Main Estimate, and hope that this will be done in the Main Estimates 2007-08.

12. In the meantime, it was not clear to us why the transfer to the MoD had to wait for the Spring Supplementary Estimates, rather than appearing in this Winter Supplementary Estimate, alongside the costs of operations in Iraq and Afghanistan. The MoD's supplementary memorandum states:

Unlike operations in Iraq and Afghanistan, funding for operations in the Balkans comes from the Peacekeeping element of the Conflict Prevention Pools. This funding is sought from the FCO in the Spring Supplementary Estimates, when they will have received full funding for Global Conflict Prevention Pool activities.[13]

We do not find this a sufficient explanation.

Estimated costs of operations in 2006-07

13. The Winter Supplementary Estimate estimates the additional costs of operations in Iraq and Afghanistan in 2006-07 as £1,040 million in resources and £360 million in capital.[14] The MoD's Estimates Memorandum breaks this down as follows:[15]

Table 1: The cost of operations in Iraq and Afghanistan

Cost Type Iraq
Actual £ m
2005/06
Iraq
Forecast £ m
2006/07
Afghanistan
Actual £ m
2005/06
Afghanistan
Forecast £ m
2006/07

Resource - Direct

Personnel 94 77 9 32

Stock / other consumption 219 191 57 103

Infrastructure costs 82 106 11 73

Equipment support costs 220 189 24 81

Other costs and services 111 112 38 67

Income foregone 10 5 8 4

Total 736 680 147 360

Capital

Capital Additions 160 180 51 180

Total 160 180 51 180

Grand Total 896 860 198 540

Source: Ministry of Defence

14. The costs of operations are identified on the basis of net additional costs. Expenditure such as wages and salaries for permanently employed personnel are not included, as these costs would have been incurred anyway. Costs of activities such as training and exercises which have been cancelled owing to operational commitments are deducted.[16]

15. The MoD's supplementary memorandum states that, of the estimated personnel costs, £29 million is attributable to civilian personnel (£22 million for Iraq and £7 million for Afghanistan).[17] While the Department's estimate is that additional personnel costs in Iraq will be £17 million less this year than last, civilian manpower costs will increase from £14 million to £22 million.[18] Civilian manpower costs will account for over 28% of the MoD's additional manpower costs in Iraq this year, in contrast to only 15% in 2005-06, suggesting that the role of MoD's civilian personnel in Iraq is becoming increasingly significant.

16. The MoD's supplementary memorandum explains that the infrastructure costs cover estates and facilities management services, building rental or maintenance and provision of IT and communications. Examples of current major projects are, in Iraq, the development of the single Contingency Operating Base at Basrah Air Station, and a water generation plant; and, in Afghanistan, the upgrade of living accommodation at Kandahar Airfield and Camp Bastion, upgraded hospital facilities at Camp Bastion, and the relocation of the UK Task Force HQ to Lashkar Gah.[19]

17. Other costs and services include utility costs, personnel and freight movements, hire of transport, staff training, medical treatment, welfare services, food and administration costs.[20]

18. The MoD's Estimates Memorandum states that the MoD has not included a contingency in the Winter Supplementary Estimate, which will be updated at the Spring Supplementary Estimates if required.[21] We note that last year the MoD included a large element for contingency —£146 million—which in the event was not needed (see Table 3 and paragraph 26 below).

19. The Estimates Memorandum also points out that the MoD has not included in the Winter Supplementary Estimate an estimate for indirect resource costs (stock write-off, provisions, depreciation, cost of capital charges etc). These will be funded by an internal transfer from the main 'defence capability' Request for Resource estimate, which will be requested at the Spring Supplementary Estimates.[22] This could be significant. In 2005-06, indirect resource costs of Iraq and Afghanistan operations were £63 million.[23]

20. Nor has the MoD included in the Winter Supplementary Estimate the costs of the tax-free bonus to personnel on designated operational deployments, announced by the Secretary of State for Defence on 10 October 2006.[24] This is expected to cost around £60 million a year. Provision for the costs of the operational allowance in the current year will be requested in the Spring Supplementary Estimates.[25]

21. It seems likely, therefore, that the actual additional costs of operations in Iraq and Afghanistan in 2006-07 will exceed the amounts requested in the Winter Supplementary Estimate.

Outturn costs of operations in 2005-06

22. In our report on the Spring Supplementary Estimate 2005-06, we pointed out that the MoD's Annual Report and Accounts 2004-05 presented little more than an overall outturn figure for the costs of operations in the Balkans, Afghanistan and Iraq, and recommended that in future the Annual Report and Accounts should contain significantly more detailed information on the cost of operations.[26] The Government accepted this recommendation.[27]

23. The overall net additional cost of these and other operations in 2005-06 was £1,266 million, of which £957 million was for operations in Iraq, £199 million for operations in Afghanistan, and £63 million for operations in the Balkans (Bosnia and Kosovo). The Annual Report and Accounts first breaks this down as follows:[28]

Table 2: Costs of operations 2005-06

Net Additional Costs of Operations 2005-06 (£ million)

Final Voted Provision Outturn Variation

Resource

Iraq (Operation TELIC) 838 797 (41)

Afghanistan (Operation HERRICK) 150 148 (2)

Balkans (Operation OCULUS) 64 63 (1)

Programme Expenditure (African and Global Pool) 49 47 (2)

Total Resource 1,101 1,055 (46)

Capital

Iraq (Operation TELIC) 260 160 (100)

Afghanistan (Operation HERRICK) 70 51 (19)

Balkans (Operation OCULUS) - 0 0

Total Capital 330 211 (119)

Total Net Additional Cost of Operations 1,431 1,266 (165)

Source: Ministry of Defence

24. The Annual Report and Accounts 2005-06 also provides a much more detailed breakdown, as follows:[29]

Table 3: Costs of operations in Iraq, Afghanistan and the Balkans 2005-06

Total Outturn 2005-06 ( £000)

Iraq Afghanistan Balkans

Total Outturn Total Departmental Allocation
2005-06
Outturn
2004-05
Total Outturn Total Departmental Allocation
2005-06
Outturn
2004-05
Total Outturn Total Departmental Allocation
2005-06
Outturn
2004-05

Resource Cost (by area)

Direct costs

Service manpower 80,237 80,278 115,590 7,575 7,172 14,898 11,509 11,640 15,960

Civilian manpower 14,213 11,688 13,889 1,627 1,116 996 4,949 7,336 7,614

Infrastructure costs 81,407 84,082 87,550 10,522 25,663 7,197 12,633 13,954 15,912

Equipment support 220,232 243,097 198,273 24,399 14,832 6,488 7,840 7,339 4,399

Other costs and services 111,186 103,984 110,169 37,595 46,070 19,863 11,824 16,935 32,480

Income 10,054 3,812 2,110 7,792 5,917 (2,054) 2,369 (9,209) (8,681)

Stock consumption 218,920 202,936 156,280 57,171 33,918 10,178 9,332 8,566 7,642

Contingency - 55,000 - - 14,000 - - - -

Indirect Costs

Stock write-off 51 44 1,559 (2) (2) 9 - - -

Provisions 1,560 3,000 6,192 - - - (437) 87 299

Depreciation and amortisation (inc UORs) 33,611 15,577 41,270 1,255 1,596 177 2,376 6,944 8,608

Fixed asset write-off 21,848 30,000 8,000 - - - - - -

Cost of capital 4,441 4,594 6,186 183 162 185 284 408 444

Total 797,760 838,092 747,068 148,117 150,444 57,937 62,679 64,000 84,677

Capital cost (by area)

Capital addition (inc UORs and Recuperation) 159,838 199,944 162,862 51,231 53,053 9,097 174 - 2,430

Net Book Value of fixed asset disposals - - - - - - - - (547)

Contingency - 60,000 - - 17,000 - - - -

Total 159,838 259,944 162,862 51,231 70,053 9,097 174 - 1,883

Total by Operation 957,598 1,098,036 909,930 199,348 220,497 67,034 62,853 64,000 86,560

Source: Ministry of Defence

25. We commend the MoD for including considerably more detail on the cost of operations in the Annual Report and Accounts 2005-06, and recommend that it continue this practice in future.

26. We note that the outturn for 2005-06 was significantly less than the final voted provision: the MoD over-estimated the cost of operations by £165 million (12%). This included an over-estimate of capital costs by more than 36%. We appreciate that the cost of operations is hard to estimate, but the variation between anticipated and actual capital spend is surprising, particularly since the estimates were not made last year till more than half way through the year (and presented to the House in the Spring Supplementary Estimates in February). Where there is significant variation in the cost of operations between voted provision and outturn in future, we shall expect the Annual Report and Accounts to contain some explanation of it, just as there is for significant variations against budgets in other parts of the Defence Estimate. However, we fully accept that, if the MoD agrees to publish estimates of the additional costs of commenced operations at the beginning of the financial year, as we recommend, the scope for error in those estimates might be increased. We accept that in following this approach the MoD might subsequently need to seek additional funds to correct its initial estimates, by seeking a Supplementary Estimate later in the year.

Votes A

27. In addition to the Winter Supplementary Estimate, the MoD has also laid a Supplementary Estimate to the Votes A for the financial year 2006-07.[30]

28. The Votes A provide the mechanism by which Parliament exercises control over the maximum number of personnel in the Armed Forces. The Votes A for the financial year 2006-07, agreed by the House on 20 March 2006, provided for a maximum of 42,050 personnel serving in the Royal Navy and Royal Marines, and 16,550 in the Reserve Naval and Marine Forces.[31] The Supplementary Estimate increases the maximum number of personnel in the Royal Fleet Reserve Marine Other Ranks category from 1,200 to 1,350, raising the maximum for the Reserve Naval and Marine Forces to 16,700 overall. The MoD's Estimates Memorandum states that this increase is caused by "higher than anticipated numbers of Regulars leaving the Royal Marines and automatically entering the Reserve this year".[32]

29. An increase in 150 reservists is not a significant number, increasing the Tri-Service Votes A maxima by only 0.04%.[33] But it is worrying that more Regulars have been leaving the Royal Marines than anticipated. Evidence provided by the MoD to our inquiry into the MoD's Annual Report and Accounts 2005-06 showed that the voluntary outflow rates for Royal Navy and Royal Marine Ratings has significantly exceeded target for the past three years, and identified Royal Marine Junior Ranks as a pinchpoint trade.[34] The recent report from the National Audit Office on Recruitment and Retention in the Armed Forces states that, as at 1 April 2006, there was a shortfall of 9.6% of Royal Marines Other Ranks.[35]

30. The Estimates Memorandum states that the MoD has proposed to the Armed Forces Pay Review Body measures that aim to improve the retention within the Royal Marines. We welcome the MoD's proposal of financial incentives to aid retention in the Royal Marines. We shall be monitoring the retention figures closely.

Conclusion

31. While we continue to have some concerns about the manner in which the MoD seeks parliamentary approval for the costs of operations, we recommend that the House of Commons approve the request for resources set out in the MoD's Winter Supplementary Estimate.

1 Central Government Supply Estimates 2006-07 Winter Supplementary Estimates and New Estimates, HC 2, November 2006 Back

2 HC Deb, 21 November 2006, col 29WS; and HC 2, p 8, Table 1.3, and pp 171-184. The £1,599.982 million additional funding comprises £1,592.272 million additional DEL cited in the Written Statement on the Supplementary Estimates (for Request for Resources 1 and 2) and £7.710 million additional AME (for Request for Resources 3). Back

3 See Ev 1-3 and Ev 6-8 Back

4 HC 2, p 171-172 Back

5 Defence Committee, Fourth Report of Session 2005-06, Costs of Operations in Iraq and Afghanistan: Spring Supplementary Estimate 2005-06, HC 980, para 15 Back

6 Defence Committee, Fifth Special Report of Session 2005-06, Costs of Operations in Iraq and Afghanistan: Spring Supplementary Estimate 2005-06: Government's Response to the Committee's Fourth Report of Session 2005-06, HC 1136, Appendix, para 4 Back

7 Defence Committee, Ninth Report of Session 2005-06, Ministry of Defence Main Estimates 2006-07, HC 1366, para 9 Back

8 Defence Committee, Tenth Special Report of Session 2005-06, Ministry of Defence Main Estimates 2006-07: Government Response to the Committee's Ninth Report of Session 2005-06, HC 1601, para 2 Back

9 HC (2005-06) 980, para 17 Back

10 HC (2005-06) 1136, paras 11-14 Back