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ARA 01
Memorandum from the Ministry of Defence
(1) PSA Targets
Why does the Annual Report not use the standard terminology for reporting performance against PSA targets, as set out in Treasury guidance (PES 2006 18, Annex A)?
In reviewing top level performance against each target in the department's quarterly PSA Reports, including the Annual Report and Accounts, the Defence Management Board considers how to express that performance in a way that is clear for the reader and best reflects the nature of the assessment it is making, particularly with regard to the level of risk being managed. The Board has judged that where this is best served by variation from the standard Treasury terminology (which is not drawn up with military targets in mind), doing so best meets the spirit and purpose of our reporting obligations. These assessments are visible to Treasury officials.
(2) PSA Target 1
[Achieve the objectives established by Ministers for Operations and Military Tasks in which the United Kingdom's Armed Forces are involved....]
(a) Over the year April 2006-March 2007, the proportion of regular forces deployed on operations and other military tasks increased from just under 20% to 21.4% (page 14). What is the percentage, overall and for each service, for the first quarter of 2007-08 (April-June 2007)?
There have always been some minor differences in the way the three Services have individually measured their level of commitment to operations, reflecting their different operating procedures and environments. We have been working to regularise this for some time, and from 1 April 2007 they have now been brought onto a fully consistent basis to measure the proportion of the Armed Forces deployed on Operations and undertaking Military Tasks. We have also changed the baseline for this figure from total strength to trained strength. This means that these figures are not directly comparable with those from previous years. Given the discontinuity, we have provided a rough indication of the previous quarter's activity levels compiled on the new basis. This provides a degree of comparability with our previous reporting (which stretches back to April 2001).
Between 1 April and 30 June 2007, 19% of the Royal Navy, 25% of the Army and 17% of the Royal Air Force were deployed on Operations and undertaking Military Tasks. In total, some 22% of all regular forces were deployed on Operations and undertaking Military Tasks. This was a decrease of 3-4% from the previous quarter, reflecting the withdrawal of UK combat forces from the Balkans at the end of March, continuing normalisation in Northern Ireland, and continuing progress in building Iraq's political institutions and its security capacity, counterbalanced to some degree by the deployment of additional forces to Afghanistan. The reduction in Royal Navy activity levels reflects the replacement of 3 Commando Brigade by 12 Mechanised Brigade in Afghanistan in April.
(b) What impact is the ending of Operation BANNER in Northern Ireland on 31 July 2007 expected to have on the proportion of each Service's trained strength undertaking operations?
We have not yet formally assessed the impact of the end of Operation Banner on Activity levels; these are routinely calculated in arrears every quarter and the full effect will not be visible until figures for the third quarter of 2007-08 (September-December 2007) are published in the spring of 2008. We expect the end of Operation BANNER in itself to reduce the proportion of the Army deployed on Operations and undertaking Military Tasks by about 4% and of the RAF by about 2%. Overall published quarterly activity levels will of course also reflect parallel reductions or increases in the forces deployed on other operations and Military tasks, so the net figures are unlikely precisely to match these numbers.
(3) PSA Target 3 [Generate forces, which can be deployed, sustained and recovered at the scales of effort required....]
(a) For each of the three indicators for PSA Target 3, what are the percentages for the first quarter of 2007-08?
Owing to the continuing high level of operational commitment, we do not now expect to reach the target level by April 2008. On average from July 2006 to June 2007:· 65% of force elements reported no critical or serious weaknesses against their required peacetime readiness levels, against a target of 73% by April 2008; · 58% of force elements reported no critical or serious weaknesses against the ability to generate from peacetime readiness to immediate readiness for deployment on operations, against a target of 71% by April 2008; and · 79.5% of force elements reported no critical or serious weaknesses against the ability physically to deploy on operations at what is likely to be the most demanding level for many enabling functions (2 medium scales and a small scale concurrently), sustain in theatre and thereafter recover to their home bases, against a target of 82.5% by April 2008.
(b) For each of the three indicators for PSA Target 3, what are the percentages for each of the Services for 2006-07?
This information is not available. Readiness requirements are set for and reported against the individual Force Elements that provide the building blocks of military capability, and not by Service.
(4) PSA Target 5 [Recruit, train, motivate and retain sufficient military personnel to provide the military capability necessary to meet the Government's strategic objectives]
(a) An MoD press notice of 23 August 2007 provides 'provisional' manning figures for the Royal Navy and Royal Air Force as at 1 July 2007, and manning figures for the Army as at 1 April 2007. What are the manning figures for each of the Services as at 1 July 2007? When will the manning figures as at 1 October 2007 be available?
Provisional Army Manning figures for 1 July 2007 and 1 August 2007, and provisional Tri-Service data for 1 September 2007 were published on 19 October on the internet and in the Library of the House by the Defence Analytical Services Agency in Tri-Service Publications 1 and 3, in accordance with National Statistics publication regulations. Provisional Tri-Service data for 1 October 2007 will be published later this month.
(b) Table 19 on page 161 sets out, for each Service, the Trained Requirement and Trained Strength. What is the MoD's current forecast for the likely Trained Requirement and likely Trained Strength for each Service as at 1 April 2008?
The personnel requirement for 1 April 2008 set out in the MoD Defence Plan 2007 was: · Royal Navy: 36,260 · Army: 101,855 · Royal Air Force: 40,790
The Defence Management Board last reviewed the forecast for the likely trained strength when considering likely performance against the Public Service Agreement manning balance target for the 2007-08 First Quarter Performance Report, at which time the predicted Trained Strength for 1 April 2008 was about:
· Royal Navy: 34,800 · Army 99,300 · Royal Air Force: 40,800.
(c) A Parliamentary Written Answer of 17 July 2007 provided a list of 'pinch point' trades in each of the three services. What is the latest position on 'pinch point' trades and the percentage shortfall against each? What progress is being made to address the shortfalls?
A manning pinch point is defined as "a trade, or area of expertise where there is insufficient trained strength to perform directed tasks. This might be as a result of adherence to single-Service harmony guidelines, under-manning, and/or levels of commitment that exceed the resourced manpower ceiling for the trades or areas of expertise involved." The most recent position is set out below. The Department has put in place a range of short and long term measures to ameliorate this situation. This includes training and recruitment initiatives, financial retention and re-engagement incentives, flexibility in the rank employed in some posts, the mobilisation of Reservists, some contractorisation where appropriate, and regular reviews of force levels required for each operation. Reducing force levels in Iraq should also help relieve some pressure.
(d) The Written Answer showed substantial shortfalls relating to pilots, observers and aircrew for Merlin Helicopters. What impact are these shortfalls having on current operations and what impact will they have when the six new Merlin helicopters come into service in 2008? Will there be sufficient crew to operate these six helicopters?
The majority of RN Merlin crew shortages are held against non operational front line appointments which require RN Merlin operational experience. There are also some gaps in the Merlin Force in the training fleet as opposed to the front line, but there is at present no significant impact on current operations. The six new Merlin helicopters are for the RAF, not the RN, and their operation will therefore be unaffected by RN manpower shortages.
(e) Table 24 on page 166 shows that all three Services did not meet their targets for 'UK Ethnic recruitment'. What action is being taken to improve performance in this area? Why does the RAF appear to have a particular problem?
The Department has an annual Action Plan with specific diversity targets to increase UK ethnic minority recruits by 0.5% above the previous year's achievement, or rolling forward the previous year's target where this would provide a greater challenge. Targets for 2007-08 are: Navy 3.5%; Army 4.3%; RAF 3.6%. As set out in the Essay on Improving Service Diversity on page 173 of the Annual Report and Accounts, the Armed Forces have an active programme to improve recruiting among the United Kingdom's ethnic minority communities. The Army and Royal Air Force received Gold Awards from Opportunity Now in 2006 and the Royal Navy a silver award in 2005. In the Race for Opportunity scheme the Army came top among public sector organisations for the 6th consecutive year, RAF 3rd and Navy 5th. Of the 104 public and private sector employees who participated, the Army was 5th and the RAF 10th, an improvement on previous years' assessments. Each Service has a dedicated team raising awareness of Armed Forces careers amongst the UK's minority ethnic and faith communities. Activities include:
· presentations in schools, colleges and to Community and Faith leaders;
· providing role models to young members of ethnic minorities and faith communities;
· organising and operating Personal Development Courses;
· attending careers fairs, and cultural and religious festivals and events;
· Community Liaison Officers working within regional networks to engage potential recruits and their gatekeepers;
· arranging visits for ethnic minorities to military bases.
There are a number of factors currently challenging ethnic minority recruitment which broadly affect each of the three Services: commonly held aspirations of young members of ethnic minorities; prevalent views on current operations amongst ethnic minority communities; and concerns about ethnic imbalances and racism in the Armed Forces in general. However, of the three Services, the RAF's recruitment patterns have been most affected in recent years by the personnel reductions set out in the July 2004 Future Capabilities White Paper. As a consequence, recruitment opportunities in the RAF have been particularly limited, reducing the overall number of new RAF recruits and the number of new ethnic minority recruits and thus constraining the scope for change in the proportion of personnel from ethnic minorities across the RAF as a whole. Moreover, members of ethnic minority communities with high aspirations and the necessary educational qualifications for RAF entry have not generally considered the Armed Forces as a career of first choice, and awareness and knowledge of RAF careers in ethnic minority communities has traditionally been poor compared with the Army and Royal Navy. As a result of this legacy and the nature of Service career progression, there are at present fewer role models in the RAF who can reach out to and motivate potential recruits from ethnic minority communities compared to the RN and the Army. The RAF marketing campaign and the work of the RAF Motivational Outreach Team are both intended to counterbalance these challenges.
(f) What is the latest position regarding Armed Forces ethnic minority representation for each of the three Services and the Armed Forces overall (Table 25 on page 166)?
Ethnic minority data is published quarterly on the Internet and to the Library of the House by the Defence Analytical Services Agency in Tri Service Publication 3 in accordance with National Statistics publication regulations. The most recent data, for the Royal Navy and RAF for 1 July 2007, were published on 23 August 2007. Tri-Service data for 1 October should be published later this month.
(g) The Army and the RAF did not meet individual or unit harmony guidelines in 2006-07 (page 21). What are the latest available figures for the performance against individual and unit harmony guidelines for each of the three Services?
The latest figures are:
(5) 2004 Spending Review Efficiency Target
(a) In written evidence to the Committee following its October 2006 hearing, the MoD provided some further information on the results of the 2002 Spending Review 'value for money target'[1], but not the outturn data for each of the components of the target or the final overall position. What is the MoD's final assessment of performance against the 2002 Spending Review vfm target?
The Department achieved the 2002 Spending Review value for money target overall. As set out in paragraphs 269-70 and table 16 of the 2005-06 Annual Report and Accounts, the Department at that time judged that, on the basis of the lower end of the range of forecast achievement against the Defence Logistics Organisation's Strategic Goal in 2005-06 (£350M), which was at that time still subject to validation, it had met the overall 2002 Spending Review target of 10%. As reported to the Committee, the Defence Logistics Organisation in fact achieved £475M of efficiencies against the Strategic Goal, substantially exceeding the amount required.
(b) The NAO report, The Efficiency Programme: A Second Review of Progress (HC 156-I Session 2006-2007), examined three MoD efficiency projects (pages 48-49 of NAO report). The NAO rated the measurement methodologies for each of the programmes as 'Amber' (the reported figures represent efficiencies, but carry some measurement issues and uncertainties). How is the MoD addressing the concerns identified by the NAO?
The projects referred to are:
· The Defence Logistics Transformation Programme. The NAO has observed that the efficiencies claimed include savings in depreciation, and that this is in line with centrally-issued (i.e. Treasury) guidance. It was concerned that there is a risk that measuring such reductions in depreciation may lead to perverse incentives or simply be an accounting exercise with no real efficiency improvement taking place;
· Army Manpower. The NAO has observed that while all the manpower reductions are defence policy compliant, they include headcount reductions in front line personnel as well as administrative and support posts; and
· Fast Jets. The NAO has observed that the element arising from earlier decommissioning of fighters and missiles (about 20%) only represents a financial saving over the period of the original budgets up to the original decommissioning date of 2008-09. It has noted that this can be scored within OGC guidelines and has allowed redirection of resources to other defence priorities, but in its view they cannot be considered sustainable.
As the NAO has observed in its comments, the Department is working within the central guidelines laid down by the Treasury and Office of Government Commerce on how efficiencies under the 2004 Spending Review efficiency programme should be measured and scored. As set out in the responses to questions 5(a) and 5(c), the Department has a robust approach to measuring and validating the very substantial efficiencies achieved by the Defence Logistics Transformation Programme and the Defence Logistics Organisation's original Strategic Goal. The Defence Logistics Transformation Programme benefits have been audited by Defence Internal Audit (MoD's independent provider of systems appraisal) since 2004-05. In its July 2007 report on Transforming logistics support for fast jets the NAO concluded that Tornado and Harrier costs have reduced from £771M in 2001-02 to £328M in 2006-07, providing a cumulative saving of some £1.4 billion over the six-year period, that the Department continued to achieve broadly the same level of performance in terms of flying hours throughout the transformation, that consequently the Department's transformation of logistics support represents good value for money to date and that although there are risks, the Department is working to manage them. Overall, therefore, the Department judges that it already has appropriate and proportionate processes in place to provide assurance that it is achieving the efficiencies it claims in accordance with central guidelines.
(c) The Annual Report (paragraph 152, second bullet) states that, for the Defence Logistics Transformation Programme, "work is in hand to validate the efficiencies achieved in 2006-07". Has the validation now been completed and, if so, what was the outcome?
Defence Internal Audit has now completed its audit of the new benefits being claimed by the Defence Logistics Transformation Programme (DLTP) in 2006-07. As a consequence, £360M of new input benefits have been validated. These include some non-repeatable efficiencies. The audit also verified achievement of £139M of output benefits. The DLTP cumulative achievement to the end of year was £1,030M, against the range of £780-830M published in the Department's Annual Report and Accounts.
(d) In his statement to the House on 25 July 2007 on the Comprehensive Spending Review settlement for defence, the Secretary of State said that "we will make savings against the Department's overheads, including a 5 per cent year-on-year saving in our administrative overhead over the next three years and a 25 per cent reduction in our head office. These are additional to the £2.8 billion efficiencies delivered over the spending review 2004 period". How does the MoD plan to make a 25 per cent reduction in head office costs and over what period will the reductions be delivered?
This will be delivered through the Head Office streamlining programme established in parallel with the MoD's Capability Review (see question 9(b) below). Detailed proposals are set out in the attached consultation document, published on 23 October.
(6) Departmental Resource Accounts 2006-07
(a) There was a £150 million under-spend on the Capital-DEL budget (Table 15 on page 154). The Annual Report explains that this was "due to receipts from estates disposal in a PFI project" (paragraph 285). What project was this, and what were the circumstances of the disposal?
The receipts arose from the first disposal of estate assets within Project MoDEL (MoD Estate in London). Project MoDEL will combine the operations from a number of Defence sites within Greater London, providing improved facilities and quality of life for about 1,800 personnel subsequently based at RAF Northolt and freeing up to 100 hectares of predominantly brownfield land within the M25 for development. Estate disposals will take place through to 2012.
(b) The Resource Accounts for 2006-07 have been qualified by the C&AG because net expenditure was nearly £21m (1.4%) more than the Estimate for Request-for-Resources 2, mainly because of higher than expected use of guided weapons and bombs in Afghanistan and depreciation costs associated with capital spares used in-theatre. What are the emerging findings of the MoD's review into the causes of the Excess Vote, and what measures are likely to be needed to avoid a future repetition? What discussions has the MoD had with the Treasury about reintroducing a contingency element for RfR-2 Estimates?
Following the Defence Committee's criticism of the size of the contingency included in the previous year estimate, in 2006-07 the MoD provided a taut and realistic forecast without a contingency element. This meant that that even a relatively minor change in the tempo of operations had the potential to cause an excess vote. Working with the NAO, the Department has identified areas where our reporting and forecasting systems can be improved and allocated these to the appropriate areas for remedial action. The NAO will undertake a review at the mid-year point of 2007-08 to ensure that our systems are robust. The Department is also implementing processes to improve data capture for reporting writes-off, impairments and other charges relating to RfR2, including use of guided weapons, missile and bombs, to ensure costs are correctly charged and additional expenditure identified in time to be included in the Spring Supplementary Estimates. We will be discussing with Treasury the reintroduction of a small contingency element to anticipate any unforeseen increases in cost.
(c) RfR-2 Capital expenditure was lower than expected in both Iraq and Afghanistan, because not all UORs that were approved were delivered within the year (page 239, paragraph 2.5). To what extent does this reflect delays in delivery of UORs, and what UORs were affected?
The lower than expected expenditure on Urgent Operational Requirements does not reflect a delay in delivery. Rather it reflects an earlier over-estimate of the rate at which approval levels translated into actual spend.
(d) Paragraph 183 of the Annual Report describes financial control failures resulting from teething problems with the Joint Personnel Administration (JPA) system, some of which were expected to be dealt with 'by autumn of 2007'. When does the MoD expect to have resolved all the outstanding problems?
As set out in the Annual Report and Accounts, the Joint Personnel Administration system has now been successfully rolled out across all three Services. It is delivering effective front office personnel and payroll administration and is providing management information that broadly meets the Department's business needs. However, it has not yet delivered its full potential management benefits as work continues to improve back office financial accounting functions and the quality and timeliness of personnel data. Software developments in this area planned for the summer and autumn of 2007 have been delivered as intended, although some will only be used generally for the first time in November following the processing of the October payroll. Investigation of control account balances continues. Some further problems have been identified with the way that in-service and post-discharge debts are managed, and this may lead to further process and systems changes. Progress is kept under review by the Defence Audit Committee on behalf of the Accounting Officer, and is visible to the National Audit Office, but it is unlikely that all the known issues will have been resolved by the end of this financial year.
(7) Financial Savings
An MoD press notice of 27 June 2007 says that a DE&S project team has combined MoD's office supplies requirement with those of eight other Government departments in the biggest ever public sector reverse auction to generate combined savings over existing spending of £100m over the next four years - a saving of £50m for MoD over the life of the contract. Is the MoD working with other Government departments / public bodies to identify other areas where a similar approach could deliver financial savings? If so, in what areas and what sort of savings might be delivered for the MoD?
MoD's Category Management approach extends beyond office supplies to a range of commodity categories and services that apply not only pan- defence but also pan-Government. MoD is an active member of the Office of Government Commerce's (OGC) pan-Government Commodity procurement stakeholder groups and is planning further collaboration with a number of other Government departments across a range of categories. Details are below. Collectively this represents a significant level of collaboration by MoD, with the department leading in some areas. Category Management has already delivered £250M cash benefit to MoD. Existing arrangements include:
· MoD's Information Communications Systems catalogue has been used by other Departments for several years. Savings have been in the region of 20% in this volatile fast moving market. In addition MoD is to become the lead for Government's basic IT/IS information assurance requirements, which will include the Foreign and Commonwealth Office (FCO) and extend to other departments in time;
· MoD's Print Contract is open to use for any other department. MoD's own Print Manager can also call-off the Department for Transport's recycled paper framework. Savings from April to July, as a result of using the collaborative arrangement were £6.1K;
· MoD is collaborating with the Office of Government Commerce Buying Solutions (OGC b.s.) on furniture, where the department's spending power adds weight to OGC b.s.' overall ability to leverage the market. Predicted MoD savings are £0.5M per year. Other public sector bodies expected to commit to this arrangement include the Department for Environment, Food and Rural Affairs (DEFRA), the Home Office, the Department for Transport, the Ministry of Justice, and Lancashire County Council;
· The National Health Service Purchasing and Supply Agency (NHS PaSA) is leading the pan-Government tender for Water Coolers and Dispensers. This will have a significant effect on the MoD's sustainability targets. The MoD is also collaborating with the FCO on travel arrangements and the Electronic Booking Interface Service. The Home Office has also expressed an interest;
· The MoD has made significant savings through using the Department of Works and Pensions management consultancy framework, plus its own Gate and Governance process for all management consultancy requirements. The department is also collaborating on a Consultancy work-stream - one of three within the Consultancy Value Programme;
· The MoD is collaborating with OGC, OGC b.s, NHS PaSA, DEFRA, and Local Government (Regional Centres of Excellence) on an energy pilot. Work is underway on a collaborative half-hourly electricity contract requirement, led by PaSA. DEFRA are leading on potential gains from a cross government approach to emissions trading liabilities.
Planned collaboration includes:
· The MoD, OGC b.s. and the Higher Education Institute will begin collaborating on print output from May 2010 and work is underway to collaborate across IT/IS hardware and software. No projected benefits are available yet;
· The MoD is a member of the Office Solutions Collaborative Category Board and will participate in formulating the pan-government strategy for stationery, print, paper, multi-functional devices and post and courier services;
(8) Defence Agencies
A Parliamentary Written Answer of 29 June 2007 provided a list of MoD Executive Agencies (8) and Trading Funds (5). Are further changes to the number of Executive Agencies and Trading Funds planned?
The MoD keeps the business models of all its agencies under regular review to ensure that Next Steps status continues to be the best means of supporting wider defence outputs. The number of agencies in the department has decreased substantially over the last few years as the benefits derived from agency status have become embedded within the wider department. We are currently reviewing the status of the Defence Analytical Services Agency and the Defence Medical Education and Training Agency. No decisions have been made or conclusions reached on whether or not to change their status as Executive Agencies as this work has not concluded and Ministers have not yet been consulted.
The Minister of State for the Armed Forces announced the merger of ABRO and DARA Trading Funds to Parliament on 25 July 2007. (9) Capability Review
(a) What progress has been made against the MoD Action Plan which set out how the MoD planned to address the issues identified in the Capability Review which was published on 27 March 2007?
The Defence Management Board (DMB) set a number of specific six month objectives. The Department is making good progress across the four Areas for Action
Area for Action 1 (Strengthen the corporate leadership of the Department) We committed to:
· the DMB championing a defence wide statement of what we stand for and how we work; and
· an accessible statement of Departmental strategy in a single document incorporating the business strategy necessary to deliver continuous improvement.
We have in place a Board development programme addressing the drivers behind the Review's observations on corporacy. A group led by the Permanent Secretary and Chief of the Defence Staff is considering proposals for a departmental strategy, which is being developed alongside the normal departmental planning process following a spending review.
Area for Action 2 (Clarify and simplify the MoD's operating model) We committed to:
· agreeing a new structure for the top of the Department which is simpler, and will have reduced the number of committees;
· generating a new departmental business model, setting out the future roles and relationships of the Centre and other TLBs; and
· undertaking a review of Head Office to define its future functions and broad structure.
Details are set out in the Head Office Streamlining consultation document.
Area for Action 3.1 (Punch our weight in Whitehall and work more closely with others) We committed to:
· Developing a strategy to promote the reputation of Defence among key stakeholders inside and outside government; and
· agreeing processes for joining-up cross-Government strategic analysis and planning on security issues.
We have taken forward work on identifying the underlying causes of the Department's perceived insularity and developed possible solutions, and are providing a team to support the Cabinet Office on drafting the first UK National Security Strategy.
Area for Action 3.2 (Defence Industrial Strategy Implementation) We committed to: · agreeing, publicising and delivering on demanding Defence Industrial Strategy delivery milestones for 2007-08 and reflecting these in senior staff objectives;
· making the merged DE&S an organisation that contributed to overall improvement in Defence acquisition;
· being judged by industry as having delivered on transparency;
· establishing a commercial framework with Through-Life Capability Management embedded
We have achieved these and we are on course to agree a Transparency Policy that allows industry to align their forward investment plans.
Area for Action 4 (Redouble our efforts to build MoD's human capability) We committed to:
· DMB members re-emphasising line managers' responsibilities, and leading by example in people management;
· changing the civilian appraisal system so that managers are judged on their development of staff;
· delivering an incentivising package for key acquisition posts; · implementing more structured civilian performance assessments;
· agreeing civilian succession planning with the Cabinet Office, and changing our internal processes (both military and civilian) to ensure that greater account is taken of department's corporate needs when succession planning;
· updating the Department's diversity programmes; and
· agreeing and implementing measures for increasing internal promotions to Senior Civil Service and feeder grades.
We have changed the appraisal system for civilians, developed the incentivising package for acquisition specialists, set in train more rigorous performance assessment programmes, updated the criteria for, and Defence Management Board engagement in, Senior Appointments Committee work for the military, and updated the diversity programme. However, the nature of the streamlining programme will increase the challenges associated with refreshing the Senior Civil Service and feeder grades.
(b) The MoD response to the Capability Review envisages delivering a zero-based review of the 'head-office operating model' 'by the autumn'. What are the emerging findings of this review?
These are set out in the attached copy of the Streamlining consultation document.
(10) Comprehensive Spending Review
(a) What progress has been made in developing a price index for defence products? Does the MoD have estimates for defence inflation in each of the years of the CSR07?
Earlier approaches to build a price index for defence products using information supplied by defence companies to the Office of National Statistics' (ONS) existing sample survey of producer prices has failed to deliver a sufficiently robust measure. Work is now underway to assemble an index combining details of all the "Variation of Price" clauses applied to MoD "Fixed Price" contracts (which are based on weighted combinations of existing ONS price indices), with appropriate "deflators" for all "Firm Price" contracts (which are invariant to inflation) and allowance for price increases in MoD's "commodity purchases", making use of appropriate information from existing ONS indices.
The MoD does not have estimates for defence inflation for the years of the CSR07. The MoD uses the Gross Domestic Product deflator (currently 2.7%) as the measure of overall inflation, in line with all Government Departments
(b) In his statement to the House on 25 July 2007, the Secretary of State announced that the MoD would be placing orders for two aircraft carriers. The aircraft carriers will cost around £3.9 billion. When the Committee examined the future carrier programme, it was told that the cost of the two ships would be just over £3 billion.[2] How will the increased costs on this programme, just under £1 billion, be funded?
Industry has committed to manufacture the CVF at an Initial Target cost of £3.9Bn. However, the Aircraft Carrier Alliance is incentivised to drive costs below this before a Final Target Cost is agreed by 2010. As the Department set out to the Committee in previous evidence (HC822, Ministry of Defence Annual Report and Accounts 2004-05: Sixth Report of Session 2005-06, Ev26-27) it is impossible to hypothecate the impact of changes in the estimated cost of individual projects to specific changes in the overall programme. As part of the Department's routine planning process we review the underlying plans and assumptions which make up the Equipment Programme. This takes into account changes in the strategic background, fresh operational experience, alterations to project plans, assumptions and risks - which may include both increases and decreases in forecast costs - and pressures elsewhere in the Department, with reference to the outcome of Spending Reviews. All these factors have to be weighed and our plans and assumptions about the Equipment Programme adjusted accordingly to ensure that we are still able to deliver the balanced military capability our forces requires within the funds available for Defence. Consequently, whilst it is inevitably the case that if we have to spend more resources on one project, less will be available for other purposes, there is not a simple relationship between increased costs of one project and reduced spending elsewhere; the adjustments the Department makes are the result of the interplay of a wide range of issues across the Defence budget as a whole.
c) The CSR report [Cm 7227, p233] sets the MoD's CSR settlement against a 'baseline' for 2007-08. What significant areas of expenditure are in the baseline (£32.579 bn) but are excluded from the MoD expenditure figure (£33.561 bn) in Public Expenditure Statistical Analyses 2007 [Cm 7091, Table 1.12], to account for the approximately £1bn difference?
The Comprehensive Spending Review (CSR) settlement baseline is derived from the 2004 Spending Review settlement for 2007-08. The Public Expenditure Statistical Analyses (PESA) figure for 2007-08 is derived from Main Estimates 2007-08. Both figures are for "total DEL", which is RDEL + CDEL minus depreciation and impairments.
There a number of (predominantly technical) differences between these figures:
· there has been a budgetary regime change in relation to stock write-offs in 2007-08, reflected in the latest Consolidated Budgeting and Guidance. The 2007-08 figure in Estimates and PESA reflects a lower depreciation charge, where, under the previous regime, stock write-off were not considered part of depreciation in calculating Total DEL. This correspondingly increased our Total DEL figure by £272M - although our near cash position is unaffected;
· similarly, we made a number of adjustments within our Indirect RDEL budget for Main Estimates, reflecting expected higher cost of capital charge and release of provisions in 2007-08 amounting to some £351M. This was balanced by a reduced forecast for depreciation of the same amount (£351M). As above, because the Estimate shows a reduction in depreciation, there is a corresponding increase in the value of the Total DEL figure compared to our CSR baseline, which doesn't reflect in-year fluctuations in the composition of non-cash;
· baselines for Spending Reviews are set excluding time-limited ring-fenced budgets. For MoD, this meant the discontinuation in CSR07 of the Defence Modernisation Fund, reducing our baseline by £146M Direct RDEL and £190M CDEL;
· Main Estimates include £44M RDEL Direct for programmed conflict prevention activities in RFR2 for 2007-08 funded from the Conflict Prevention Pools. Funding for such activities is not reflected in the Defence baseline as the conflict prevention pool is settled separately;
· a number of other minor technical adjustments also come into play, such as the discontinuation of a number of PES transfers into and out of the Department that do not reflect Machinery of Government changes.
12 November 2007
[1] Defence Committee, Ministry of Defence Annual Report and Accounts, Second Report of Session 2006-07, HC 57, Ev 35 [2] Defence Committee, Future Carrier and Joint Combat Aircraft Programmes, Second Report of Session 2005-06, HC 554, paragraph 14. |