House of Commons - Defence

Select Committee on Defence Tenth Report

Report

Background

1. The Spring Supplementary Estimates for the Financial Year 2006-07 were laid before the House of Commons on 20 February 2007.[1] The Ministry of Defence (MoD) is seeking a net increase in resources of £682.274 million—in cash terms a net increase of £550.331 million. Table 1 provides a breakdown of the requested increase in expenditure.

Table 1: Changes in Resource and Capital Expenditure

£ million

Resource Expenditure

Provision of Defence Capability (RfR1) 243.074

Conflict Prevention (RfR2) 340.200

War Pensions and Allowances (RfR3) 10.000

Total Net Request for Resources 593.274

Capital Expenditure

Conflict Prevention (RfR2) 89.000

Total Change 682.274

Source: Ministry of Defence[2]

2. The requested increase in Request for Resources (RfR) 1 (Provision of Defence Capability) of £243.074 million is explained in the Department's Estimates Memorandum.[3] It includes £150 million of 'direct' (or 'near cash') resource expenditure to meet additional fuel and utilities costs in the Fleet command (£41 million), additional funding this year for a re-profiling of the Defence Logistics Organisation's 10-year Future Defence Supply Chain initiative (£14 million), and to accommodate several mostly small changes in the levels of Top Level Budget (TLB) holders' planned expenditure. It also includes a £58 million increase in 'indirect' resource expenditure, again spread across several TLBs to reflect their latest forecast outturns, and £42 million to accommodate the depreciation and cost-of-capital costs of Urgent Operational Requirements (UORs) for Iraq and Afghanistan (see paragraph 10 and 14 below).[4] On top of that, several TLBs' expenditure projections have also been increased by £115 million (resources) and £109 million (capital), but without changing the Estimates because these expenditure increases are covered by similar increases in off-setting receipts.[5]

3. The requested increase in RfR2 (Conflict Prevention) of £429.200 million is to fund the additional costs of conducting operations in Iraq, Afghanistan, the Balkans and elsewhere.[6] It is on this element of the Supplementary Estimate that this report focuses. In our view, the term "conflict prevention" is confusing, as it appears to cover military operations of all kinds, from war-fighting to peace-keeping operations.

Approval of expenditure on operations

4. The MoD does not make provision for the additional 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.[7] This year, it presented estimated costs of the operations in Iraq and Afghanistan in the Winter Supplementary Estimates, presented to the House in November, instead of waiting for the Spring Supplementary Estimates as in the past. It warned, however, that certain cost elements were not included, and would be requested in the Spring Supplementary Estimates. Our report on the Winter Supplementary Estimate commended the MoD for bringing forward the presentation of estimates on the costs of operations in Iraq and Afghanistan, but restated our view that there should be provision for the cost of commenced operations in the Main Estimates.[8] While we accept that it is difficult for the MoD to provide accurate estimates of the costs of operations at the beginning of the financial year, we cannot see how this can be a sufficient reason for making no forecast at all. We recommend that the MoD reflect the forecast costs of operations in Iraq and Afghanistan in its Main Estimates for 2007-08. The MoD could usefully include in its Estimates Memorandum (which we would intend to publish) an account of its planning assumptions for the costs of these operations.

5. Estimates for the cost of operations in the Balkans and peace-keeping operations in the rest of the world are included in the Main Estimates for the Foreign and Commonwealth Office (FCO), and are transferred to the MoD in the Spring Supplementary Estimates. We have repeatedly recommended that provision for operations in the Balkans should in future be set out in the MoD's Main Estimates.[9] The Government's response to our report on the Winter Supplementary Estimate stated that the Government would reconsider this in the preparation of Main Estimates for 2007-08.[10] The withdrawal of most of the UK's Forces in the Balkans, announced on 1 March 2007,[11] will reduce the financial significance of this element of the MoD's estimates. Nevertheless, we remain of the opinion that provision for all operations should be made in the MoD's Main Estimates, rather than left to Supplementary Estimates.

Estimated costs of operations in Iraq

6. At the Winter Supplementary Estimates, the MoD estimated that the cost of operations in Iraq in 2006-07 would be £860 million. The estimated cost has now risen to £1,002 million.

7. At the Winter Supplementary Estimate, the MoD warned that the estimated cost did not include any contingency, and that it would be updated at the Spring Supplementary Estimates if required. It noted too that the estimate did not include the costs of the new operational bonus, announced in October 2006, nor indirect resource costs (notional or 'non cash' costs such as stock write-offs, increased provisions being made for likely future costs, depreciation and cost of capital charges). Our report on the Winter Supplementary Estimate concluded that the actual additional costs of operations were likely to exceed the amounts requested in the Winter Supplementary Estimate.[12]

8. While it was expected that the Spring Supplementary Estimate would request additional funding for operations in Iraq, the scale of the increase is surprising. If the indirect costs and the operational bonuses are discounted, the forecast resource costs have increased from £680 million at the Winter Supplementary Estimates to £757 million (£785 million total direct resource costs, less £28 million for the Iraq share of the operational bonus). The cost of operations in Iraq in the current year appears to be over 10% higher than the MoD was expecting last November.

9. Table 2 breaks down the estimated costs of operations in Iraq for the current year, and compares them with the outturn for the two previous years.

Table 2: Cost of operations in Iraq

Cost Type Iraq
Outturn 2004-05
£ m Iraq
Outturn 2005-06
£ m Iraq
Forecast
2006-07 £ m —as at Winter Supplementary Estimate Iraq
Forecast
2006-07 £ m — now Increase / decrease since Winter Supplementary Estimate

Resource - Direct

Military Personnel 116 80 55 111* + 56

Civilian Personnel 14 14 22 15 - 7

Stock / other consumption 156 219 191 212 + 21

Infrastructure costs 88 82 106 89 - 17

Equipment support costs 198 220 189 214 + 25

Other costs and services 110 111 112 139 +27

Net income foregone 2 10 5 5 -

Total Direct Resource 684 736 680 785 + 105

Indirect Resource 63 62 - 22 + 22

Total Resource 747 798 680 807 + 127

Capital

Capital Additions 163 160 180 195 + 15

Total Capital 163 160 180 195 + 15

Grand Total 910 958 860 1,002 + 142

Source: Ministry of Defence[13]

* includes £28 million cost of operational bonus

10. It appears from this breakdown that the change in the forecast costs for the current year since the Winter Supplementary Estimate is attributable to:

a £56 million increase in the military personnel costs, only part of which (£28 million) is explained by the cost of the operational bonus. The MoD's supplementary memorandum states that the change in forecast expenditure is not due to changes in force levels, which will be reflected in costs next year.[14]
the inclusion of indirect resource costs, principally £22 million for the depreciation and cost-of-capital costs of UORs, the funds for which are transferred from RfR 1.
increases in the forecast cost of stock and other consumption, equipment support costs, and other costs and services.
a £15 million increase in capital additions, but a £17 million reduction in resource infrastructure running costs. The MoD's supplementary memorandum states that the reduction in infrastructure costs is because the building work on consolidating the UK base operations in Basra is taking longer than expected owing to the need to ensure the facilities incorporate adequate physical protection against the threat of attack by indirect fire.[15]

11. It is striking that the cost of operations in Iraq in 2006-07 is now expected to exceed the outturn cost in 2005-06 by £44 million. This may seem surprising, given that there has already been a significant drawdown in the UK's Forces there—most relevantly, a reduction from 8,500 to 7,200 at the end of May 2006.[16] We note that in 2005-06 the outturn was significantly less than the voted provision, and it may be that the actual costs this year will be lower than anticipated. We call on the MoD to explain in its response to this report why it expects the costs of operations in Iraq to be greater this year than last.

Estimated costs of operations in Afghanistan

12. At the Winter Supplementary Estimates, the MoD estimated that the cost of operations in Afghanistan in 2006-07 would be £540 million. The estimated cost has now risen to £770 million.

13. Table 3 breaks down the estimated additional costs of operations in Afghanistan for the current year, and compares them with the outturn for the two previous years.

Table 3: Cost of operations in Afghanistan

Cost Type Afghanistan
Outturn 2004-05
£ m Afghanistan
Outturn 2005-06
£ m Afghanistan
Forecast
2006-07 £ m —as at Winter Supplementary Estimate Afghanistan
Forecast
2006-07 £ m —now Increase / decrease since Winter Supplementary Estimate

Resource - Direct

Military Personnel 15 8 25 51* + 26

Civilian Personnel 1 2 7 3 - 4

Stock / other consumption 10 57 103 140 + 37

Infrastructure costs 7 10 73 99 + 26

Equipment support costs 7 24 81 122 + 41

Other costs and services 20 38 67 77 + 10

Net income foregone (2) 8 4 4 -

Total Direct Resource 58 147 360 496 + 136

Indirect Resource - 1 - 20 + 20

Total Resource 58 148 360 516 + 156

Capital

Capital Additions 9 51 180 254 + 74

Total Capital 9 51 180 254 + 74

Grand Total 67 199 540 770 + 230

Source: Ministry of Defence[17]

* includes £22 million cost of operational bonus

14. It appears from this breakdown that the change in the forecast costs for the current year since the Winter Supplementary Estimate is attributable to:

a £26 million increase in the military personnel costs, most of which (£22 million) is explained by the cost of the operational bonus. The MoD's supplementary memorandum states that the change in forecast expenditure is not due to changes in force levels, which will be reflected in costs next year.[18]
the inclusion of indirect resource costs for UORs' depreciation and cost of capital.
A £37 million increase in the forecast cost of stock and other consumption. The MoD's supplementary memorandum states that this is primarily due to increased ammunition and catering costs, and reflects the tempo of operations in Helmand Province.[19]
a £41 million increase in equipment support costs, and a £10 million increase in other costs and services. The MoD's supplementary memorandum states that the increase in equipment support cost is due to the increased number of approved UORs and repair of equipment.[20]
an increase of £74 million in capital additions, and an increase of £26 million in resource infrastructure costs. The MoD's supplementary memorandum states that the increase in infrastructure costs is due to additional planned building activity, for example the construction of a new runway at Camp Bastion.[21]

15. If the indirect costs and the cost of the operational bonus are discounted, the forecast resource costs have increased from £360 million at the Winter Supplementary Estimates to £474 million (£496 million total direct resource costs, less £22 million for the Afghanistan share of the operational bonus). The cost of operations in Afghanistan in the current year appears to be almost a third higher than the MoD was expecting last November.

Estimated costs of operations in the Balkans

16. The Spring Supplementary Estimate shows that the expected cost of operations in the Balkans in 2006-07 is £53 million.

17. Table 4 breaks down the estimated costs of operations in the Balkans for the current year, and compares them with the outturn for the two previous years.

Table 4: Cost of operations in the Balkans

Cost Type Balkans
Outturn 2004-05
£ m Balkans
Outturn 2005-06
£ m Balkans
Forecast 2006-07
£ m

Resource - Direct

Military Personnel 16 12 12*

Civilian Personnel 8 5 5

Stock / other consumption 8 9 13

Infrastructure costs 16 13 12

Equipment support costs 4 8 6

Other costs and services 32 12 14

Net income foregone (9) 2 (9)

Total Direct Resource 75 61 53

Indirect Resource 10 2 0

Total Resource 85 63 53

Capital

Capital Additions 3 - -

Net Book Value of fixed asset disposals (1) - -

Total Capital 2 - -

Grand Total 87 63 53

Source: Ministry of Defence[22]

* includes £3 million cost of operational bonus

Estimated costs of operations in other theatres

18. The Spring Supplementary Estimate also requests £4.2 million for the MoD's Conflict Prevention work in other theatres. As for the additional cost of operations in the Balkans, this additional £4.2 million was included in the FCO's Main Estimates and is now transferred to the MoD.[23] We recommend that the MoD clarify in its response to this report in which other theatres it has been carrying out conflict prevention operations during 2006-07.

Votes A

19. The Votes A for the financial year 2007-08 were laid before the House on the same day as the Spring Supplementary Estimates.[24] The Votes A provide the mechanism by which Parliament exercises control over the maximum number of personnel in the Armed Forces. 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 Supplementary Estimates.[25]

20. The Votes A for 2007-08 show a continuing reduction in the maximum size of the Regular Armed Forces, reflecting the gradual downsizing announced in the Government's 2004 Future Capabilities White Paper.[26] The reduction is most marked for the Royal Air Force, for which the maximum is to reduce by 7.2%, from 52,110 to 48,360. The maximum for the Royal Navy is to remain static at 34,070, but there is to be a 2.4% increase in the Royal Marines from 7,980 to 8,170. The Army maximum is to reduce by 0.9%, from 126,945 to 125,785, though the maximum for Army officers is to increase by 145. These changes are summarised in Table 5 below.

Table 5: Maximum number of the Regular Armed Forces

Service 2005-06 2006-07 2007-08 Percentage change 2006-07 to 2007-08

Royal Navy 36,200 34,070 34,070 0%

Royal Marines 7,980 7,980 8,170 + 2.4%

Army* 128,945 126,945 125,785 - 0.9%

Royal Air Force 56,140 52,110 48,360 - 7.2%

Total 229,265 221,105 216,385 - 2.1%

Source: MoD Votes A 2007-08 and 2006-07[27]

* Includes figures for Commonwealth, Colonial, etc. troops abroad and Gurkhas

21. The MoD's supplementary memorandum states that the increase in the Royal Marines Officers maximum from 880 to 930 and Other Ranks maximum from 7,100 to 7,240 is largely as a result of the creation of the Special Forces Support Group. It states that the 0.9% increase in the maximum of Army Officers, from 16,235 to 16,380 is required because mid-ranked Army Officers are currently required in higher numbers than previously expected to staff operational headquarters units.[28]

22. The MoD's supplementary memorandum emphasises that the

Votes A represent the uppermost limits of personnel retained for service in the Armed Forces. It neither predicts actual strengths nor acts as a control over numbers employed in the Services.[29]

We note that the Votes A maxima are considerably higher than the total figures for the UK Regular Forces set out in the MoD's Annual Report and Accounts,[30] and that they contain a large element for contingency. We recommend that the MoD clarify in its response to this report what it sees as the purpose of the Votes A, and how the maxima stated relate to the actual strengths of the Armed Forces.

Conclusion

23. The House of Commons will be asked to approve the Spring Supplementary Estimates, and the Votes A, on Monday 12 March. While we think it important to bring to the House's attention the increasing cost of operations in Iraq and Afghanistan, we believe it to be essential that these operations be adequately funded. We therefore recommend that the House approve the request for resources set out in the MoD's Spring Supplementary Estimate.

1 HM Treasury, Central Government Supply Estimates 2006-07 Spring Supplementary Estimates, HC 293, February 2007 Back

2 Ev 1, table 1 Back

3 Ev 3-4, para 4 Back

4 Ev 4, para 4.3 Back

5 Ev 4, paras 4.7-4.9 Back

6 RfR2 covers the net additional costs of operations: the costs that the MoD would have incurred regardless of the operation taking place, such as wages and salaries, are recorded against RfR1: see Ev 8, para 12 Back

7 Defence Committee, Fifth Special Report of Session 2006-07, Costs of peace-keeping in Iraq and Afghanistan: Spring Supplementary Estimate 2005-06: Government Response to the Committee's Fourth Report of Session 2005-06, HC 1136, Appendix, para 4 Back

8 Defence Committee, Third Report of Session 2006-07, Costs of Operations in Iraq and Afghanistan: Winter Supplementary Estimate 2006-07, HC 129, para 8 Back

9 For example, HC (2006-07) 129, para 11 Back

10 Defence Committee, Fourth Special Report of Session 2006-07, Costs of operations in Iraq and Afghanistan: Winter Supplementary Estimate 2006-07: Government Response to the Committee's Third Report of Session 2006-07, HC 317 Back