Select Committee on Defence Written Evidence


Memorandum from the Ministry of Defence

WINTER SUPPLEMENTARY ESTIMATES 2006-07

1.  INTRODUCTION

  1.1  This Memorandum covers the Winter Supplementary Estimate for the Ministry of Defence (MoD). The Department's spending plans for 2006-07 are based upon the outcome of the Government's Spending Review 2004, which was published in the Government's Expenditure Plans 2006-07 to 2007-08 (Cm 6822).

  1.2  There is no requirement for a Winter Supplementary Estimate for the Armed Forces Retired Pay, Pensions vote.

2.  SUMMARY OF RESOURCES SOUGHT IN THE ESTIMATE

  2.1  The Ministry of Defence's Winter Supplementary Estimates seek additional funds of:
Resource/Annually Managed Expenditure £ million
Provision of Defence Capability (RfR1) 120.272
Conflict Prevention (RfR2)1,040.000
War Pensions and Allowances (RfR3)7.710
Capital Expenditure£ million
Provision of Defence Capability (RfR1) 72.000
Conflict Prevention (RfR2)360.000
Cash£ million
Near Cash in Resource DEL1,260.272
Near Cash in Capital DEL432.000
War Pensions and Allowances AME7.710
Net Cash Requirement1,699.982


  2.2  The most significant changes to the Defence Expenditure Limits (DEL) for both RfR1 and 2 are:

    —  the take up of end year flexibility of £120 million Resource DEL Direct (near cash) and £72 million Capital DEL, which includes our entitlement in 2006-07 to the proceeds of the sale of QinetiQ last year;

    —  transfers in of £0.272 million from other Government departments under RfR1; and

    —  to increase the RfR2 by £1,040 million Resource DEL and £360 million Capital DEL to reflect the forecast costs of peace-keeping in Iraq and Afghanistan.

  In addition, there is a transfer from Resource DEL Indirect (non-cash) to Resource DEL Direct (near cash) of £100 million, mainly for fuel costs.

  2.3  There is also a £7.2 million increase to the RfR3 War Pensions Benefits Programme costs and £0.5 million for Far Eastern Prisoner of War Pensions Benefits Programme Costs.

3.  DETAILED EXPLANATION OF CHANGES

  3.1  The transfers and other changes outlined in the Introduction to the Estimate are analysed in this section of the Memorandum.

  3.2  The table below shows how the Winter Supplementary Estimate is compiled, taking the figures for 2006-07 Main Estimates, and identifying subsequent changes.
£ millionDirect R DEL Indirect R DELTotal R DEL AMENon budget Near cash Total

Net

Resources

Capital DEL Capital AMETotal

Net

Capital

[1]12 3456 789
RfR1 Total as at Main Estimates21,140.2 10,655.031,795.2178.1 12.431,985.76,926.0 -7.06,919.0
Transfers in0.3 0.3 0.3
Transfers out0.0 0.0
EYF120.0 120.0 120.0 72.0 72.0
Flexibility100.0-100.0 0.0
RfR1 Total
as at WSE
21,360.510,555.0 31,915.5178.1 12.432,106.0 6,998.0-7.0 6,991.0
RFR2 Provision47.3 47.3 47.3
1,040.0 1,040.0 1,040.0360.0 360.0
RFR2 Provision
as at WSE
1,087.30.0 1,087.3 1087.3 360.0 360.0
RFR3 Provision 0.01,030.0 1,030.0
7.77.7
RFR3 Provision

as at WSE
1,037.7 1,037.7
WSE Estimate Total[2]22,447.8 10,555.033,002.8 1,215.812.4 34,231.07,358.0 -7.07,351.0

[1]  Definitions of the column headings are shown at Annex C.1

[2]  Minimal differences may occur due to roundings.

4.  RFR 1 PROVISION OF DEFENCE CAPABILITY—EXPLANATION OF CHANGES

4.1  Transfers in

  The Estimate includes two transfers from Other Government Departments.

Table showing Transfers in to MoD from Other Government Departments in RfR1
Exporting Department£ million Purpose
Cabinet Office0.072 Contribution for the expansion of the Parliamentary Counsel Office.
Department for Trade and Industry0.200 Contribution to the Principal Non-industrial Superannuation Scheme (PNISS) for individuals who transferred to the MoD from the UK Atomic Energy Authority.
Total0.272
4.2  Indirect Resource DEL to Direct Resource DEL Transfer—£100 million


  4.2.1  HM Treasury have agreed the transfer of £100 million from non-cash to near-cash. Of this £80 million has been allocated to Strike TLB to cover increased fuel costs and £20 million to the DLO to cover increased logistical costs.

4.3  End Year Flexibility: £120 million RDEL and £72 million CDEL

  4.3.1  The take up of our entire End Year Flexibility (EYF) available at Winter Supplementary Estimates of £120 million Resource DEL Direct (near cash) and £72 million Capital DEL, which includes our 2006-07 entitlement to the proceeds of the sale of QinetiQ last year.

  4.3.2  The £120 million Resource EYF has been allocated to Defence Logistics Organisation (£60 million), Adjutant General (£10 million), Central (£30 million), Defence Estates (£10 million) and Fleet (£10 million). These alterations reflect changes in allocations between TLBs to match required defence outputs.

  4.3.3  The £72 million Capital EYF has been allocated to Defence Procurement Agency (£60 million) and Defence Logistics Organisation (£12 million). Once more these alterations reflect changes in allocations between TLBs to match required defence outputs.

4.4  Top Level Budget (TLB) Sub Head Changes

  4.4.1  The changes under these sub-headings reflect alterations to TLB allocations of Resource and Capital funding to bring the allocations into line with responsibility transfers between TLBs, and other adjustments to reflect the defence outputs required since Main Estimates. These comprise a number of individual changes, and reasons for some of the more significant allocations are set out in the table:

Table: Major TLB re-allocations
TLBRDEL Direct £ million Capital £ millionNotes
FLEET5.0790 1,4
PTC-69.8610 2,4
DPA72.752-2.866 3,4
DLO-67.738-7.134 3,4
LAND-7.052-10.637 4
AG-4.8870 4
GOCNI0.077-3.267 4
STC1.4600 4
CTLB-4.453-0.581 4
DE127.77524.485 2,4
CJO-53.1520 4
Total0 0

Notes:

1.  Transfer of RAF St Athan's training responsibilities and costs to Fleet as part of the Defence Training Review.

2.  Reallocation of RAF Single Living Accommodation and married quarters' income to Defence Estates (DE) who are incurring the costs.

3.  Transfer of specialist advice costs for projects from DLO to DPA.

4.  Transfer of fixed assets to Single Balance Sheet Owners (SBSOs).

4.5  Indirect Resource DEL

  4.5.1  MoD has a fixed asset management project which is part of the Defence Resource Management Programme to "simplify and improve" financial processes across the Department. The second stage of this is the centralisation of fixed asset management under four single balance sheet owners (SBSOs) Defence Estates (DE), Defence Logistics Organisation (DLO), Defence Procurement Agency (DPA) and the Defence Communications Services Agency (DCSA), which is part of the DLO. When the Main Estimate was prepared, the budgetary implications had not been finalised, and the effect of these transfers is shown in the Winter Supplementary Estimates. There will be further adjustments in the Spring Supplementary Estimates.

4.6  Operating and non-operating Appropriations-in-Aid (A-in-A)

  4.6.1  The Appropriations in Aid forecasts have been reviewed in August 2006 (Accounting Period 2005) and the changes to the Estimate reflect the latest estimate of outturn for each Top Level Budget Holder.

5.  REQUEST FOR RESOURCES 2: CONFLICT PREVENTION

  5.1  This estimate requests £860 million for the costs of operations in Iraq and £540 million for operations in Afghanistan. This reflects the latest estimate of outturn for each Top Level Budget Holder, and is detailed in the table below. The Department has not included a contingency in this Estimate, which will be updated at Spring Supplementary Estimates if required. The Department has not included an estimate for Indirect Resource DEL for Conflict Prevention. As in previous years, it is expected that this will be funded internally by a transfer from RfR1to RfR2, which will be requested at Spring Supplementary Estimates.
Cost Type Iraq—

Actual

£ million

2005-06

Iraq—

Forecast

£ million

2006-07

Afghanistan—

Actual

£ million

2005-06

Afghanistan—

Forecast

£ million

2006-07

Resource—Direct
Personnel 9477 932
Stock/Other Consumption219 19157103
Infrastructure Costs82 1061173
Equipment Support Costs220 1892481
Other costs and services111 1123867
Income Foregone105 84
Total736 680147360


Capital
Capital Additions 160 18051180
Total160 18051180
Grand Total896 860198 540


6.  NON-VOTED ITEMS

  6.1  No changes have been made to the Non-Voted element of the Estimate.

7.  RFR3 WAR PENSION BENEFIT

  7.1  RfR3 has increased by £7.2 million for annually managed expenditure for War Pensions Benefits Programme costs and £0.5 million for Far Eastern Prisoner of War Pensions Benefits Programme Costs. This reflects the latest forecasts received from the Veterans Agency.

8.  ADDITIONAL RESOURCES THAT WILL BE REQUESTED IN SPRING SUPPLEMENTARY ESTIMATES

  8.1  The Department plans to request the following major additional resources in the Spring Supplementary round:

    —  The Indirect Resource DEL claim for RfR2, which will be funded from a transfer from RfR1 Indirect Resource DEL;

    —  The tax-free bonus to Personnel on designated operational deployments; and

    —  The RfR2 Conflict prevention claim for operations in the Balkans.

9.  THE DEPARTMENTAL EXPENDITURE LIMIT (DEL)

  9.1  The following table shows the DEL from 2003-04 to 2006-07 for all RfRs
2003-04
SSE £ million
2004-05
SSE £ million
2005-06
SSE £million
2006-07
ME £ million
2006-07
WSE £ million
Resource DEL 32,31532,831 33,72732,64333,803
Capital DEL6,4216,662 6,7986,9267,359
Depreciation1-7,437-8,049 -8,168-7,551-7,551
Total DEL31,299 31,44432,357 32,01833,611

1.  Depreciation, which forms part of resource DEL is excluded from total DEL, since capital DEL includes capital spending and to include depreciation of those assets would lead to double counting.

2.  The figures are for voted and Non voted DEL the Non voted figure for 2006-07 is £331.294 million net of depreciation.

10.  ADMINISTRATION COSTS LIMIT

  10.1  The Department is not subject to an Administration Costs Limit.

11.  PROVISIONS AND CONTINGENT LIABILITIES

  11.1  There are no additional provisions for liabilities and charges requested at Winter Supplementary Estimates. We acknowledge that the contingent provision for QinetiQ, contained in the 2006-07 Main Estimates, is no longer extant following the sale of QinetiQ, and this will be removed in the 2007-08 Main Estimates.

12.  MACHINERY OF GOVERNMENT CHANGES

  12.1  There are no Machinery of Government changes in this Estimate.

13.  NET ADDITIONAL CASH REQUIREMENT

  13.1  The Net Cash impact for the Winter Supplementary Estimate is an increased requirement of £1,700 million, of which £1,692 million relates to DEL (£1,260 million Resource DEL and £432 million Capital DEL) and £7.71 million relates to War Pensions and Allowances AME.

14.  VOTES A

  14.1  We will be laying a Supplementary Estimate for Votes A alongside the Winter Supplementary Estimate; this will be published as HC18. The reason for this amendment is to increase the maximum numbers of personnel in the Royal Fleet Reserve Marine Other Ranks category from 1,200 to 1,350. This potential increase in numbers of Reservists is caused by higher than anticipated numbers of Regulars leaving the Royal Marines and automatically entering the Reserve this year. This increases the Tri-service Votes A maxima by 0.04%. The MoD has proposed to the Armed Forces Pay Review Body measures that aim to improve retention within the Royal Marines.

Definition of terms

1.  DIRECT RESOURCE DEL

  This is a control aggregate within the resource budget it excludes the non-cash items such as depreciation, cost of capital and movement in provisions, however, it does in the expenditure that, in generally accepted accounting practice (GAAP) terms, is financed by the release of provisions. Direct Resource DEL is also known as "near cash in the resource budget".

2.  INDIRECT RESOURCE DEL

  This covers items such as depreciation, cost of capital charges and movement in provisions, and the notional auditors' fees for the NAO. This is also known as non-cash.

3.  TOTAL RESOURCE DEL

  This is the sum of Direct and Indirect Resource DEL.

4.  ANNUALLY MANAGED EXPENDITURE (AME)

  Annually Managed Expenditure (AME) are Programmes that are demand-led, such as war pensions, or exceptionally volatile in a way that could not be controlled by the department and where the programmes are so large that the department could not be expected to absorb the effects of volatility in their programme, such as cash release of nuclear provisions.

5.  NON-BUDGET

  Items of expenditure which are included in the Estimate, but are outside of DEL and AME. This is a Parliamentary control but not a Treasury control.

6.  TOTAL NET RESOURCES

  This is the net of items 1 to 5.

7.  CAPITAL DEL

  This is for new investment, including Capital additions, disposals, and the capital repayment of loans.

8.  CAPITAL AME

  Includes the capital element of the loan repayments for self-financing public corporations, such as QinetiQ.

9.  TOTAL NET CAPITAL

  This is the sum of the above capital items.

10.  TOTAL NEAR CASH

  This is the total accrued expenditure spend and is the sum of Direct RDEL and Capital DEL.

20 November 2006




 
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