Government response
The Government welcomes the Committee's report (published
on 7 July 2008) on the Ministry of Defence Main Estimates 2008-09,
which also included the Government response to the HCDC report
on the 2007-08 Spring Supplementary Estimate. The Main Estimate
sought Parliamentary approval for the MoD's core budget for 2008-09.
The Estimate did not include a request for the costs of operations
in Iraq and Afghanistan, which the Department will seek later
in the year, in the Supplementary Estimates round. However, an
initial request for Balkans costs was included in our Main Estimate.
We also outline a provisional forecast for costs in Afghanistan
and Iraq in our Main Estimates Memorandum. The Government's response
to the conclusions and recommendations contained in the Committee's
report is set out below.
1. (Recommendation 1) We intend to continue
this regular series of Reports on the Estimates throughout the
rest of this Parliament, in the context of what the Liaison Committee
has described as inadequate financial scrutiny by the House. We
aim to improve the clarity, detail and timeousness of the financial
information provided by the MoD to the House and to the country
at large. We understand that sometimes this information will be
most appropriately presented in memoranda rather than in the body
of the Estimates themselves, and we commend the MoD for the way
in which it has constructively engaged with us in discussions
about the content of these memoranda. (Paragraph 4)
The Department places great importance on continuing
to work with the Select Committee to improve further the financial
information it provides to the House and the public.
2. (Recommendation 2) RfR1 also shows that
spending by Land Command TLB is expected to increase significantly
in 2008-09 compared to last year, while the Defence Equipment
and Support (DE&S) TLB expenditure is expected to reduce significantly.
We call on the MoD to explain the reasons for these changes. (Paragraph
6)
The 2008-09 Main Estimate request for resources for
Land Command[1] contains
the expenditure for the former Adjutant General (AG) TLB, which
was shown as a separate sub head in 2007-08. The combined Land
and AG 2007-08 Main Estimate figures are: £6,544 million
Resource DEL (RDEL) and £268 million Capital DEL (CDEL) compared
with the 2008-09 Main Estimate figures for Land Forces of £6,463
million RDEL and £261 million CDEL.
The DE&S 2007-08 Main Estimates RDEL was £15,687
million and CDEL £7,156 million; for the 2008-09 Main Estimates
it is £14,666 million for RDEL and £7,311 million for
CDEL. The apparent decrease in RDEL is because of the transfer
of £1,360 million into the new single Administration Budget
sub head.
3. (Recommendation 3) The MoD ought to ensure
consistency in the headings used, and should amend the ambit of
RfR2 to make clear reference to military operations being undertaken,
if not specifically citing Iraq and Afghanistan operations then
at least recognising the true nature of some operations. Our suggestion
would be to add "war fighting and other military operations"
to the list. (Paragraph 8)
The MoD will ensure consistency in the headings used
in future. The Department is considering how the ambit could be
changed to make it more informative in time for the 2008-09 Winter
Supplementary Estimates.
4. (Recommendation 4) The MoD has provided
a figure of £16.875 million for the cost of Balkan operations
in 2008-09 in this year's Main Estimates. This figure represents
75% of forecast costs (Paragraph 9).
5. (Recommendation 5) The MoD expects costs
for Balkan operations to amount to some £22.5 million. Even
if this turns out not to be an underestimate, the MoD will have
to return to the House to seek further funds at the time of one
or both Supplementary Estimates. It seems a little odd for the
MoD therefore to claim only that it may have to do so. Unless
the Balkans forecast cost is highly conjectural or overstated
(neither of which it ought to be) then the MoD should state more
openly that it expects to come back to the House later in the
financial year for supplementary funds. (Paragraph 10)
This request for funds at Main Estimates reflects
a prudent approach agreed between Government Departments. Any
further request for funds will be handled in the Supplementary
Estimate round. The volatility of operations in the Balkans, including
the possibility of deploying the Over the Horizon Reserve Force
(ORF), was the reason for the use of the word may.
6. (Recommendation 6) Readers of the Estimates
would be assisted if the Main Estimates separately identified
Balkans costs (and Iraq and Afghanistan costs) and explicitly
stated that the costs were 75% of the forecast full-year figure.
(Paragraph 11)
The Department shares the Committee's desire to make
its Estimates as informative as it can, and is investigating the
implications of the HCDC proposal to enhance granularity of the
operations costs breakdown. The Estimates Memorandum does, of
course, provide a full break down of costs by operation.
7. (Recommendation 7) In response to our most
recent Report on the Spring Supplementary Estimates, those for
2007-08, the Government in addition offered to include a forecast
for the cost of operations in Iraq and Afghanistan in the memorandum
accompanying this financial year's Main Estimate. The MoD's "initial
estimate of operations is that there will be a net additional
cost of at least £2Bn...[to be] split between Afghanistan
and Iraq". Furthermore, the MoD has also given in this memorandum
its current estimate for Urgent Operational Requirements (UOR)
expenditure within that figure of £2Bn, amounting to some
£1,065Bn. We call on the MoD to explain the implications
of such UOR expenditure on its future capital and resource budgets.
These are both very welcome
developments for which the
MoD must be commended. (Paragraph 14)
The Department will continue to provide the Armed
Forces with the equipment and materiel they need for operations.
The UOR expenditure will be scored against peace-keeping and operations
(RfR2) and claimed against the Treasury Reserve as usual. There
will be no impact on the Department's core (RfR1) budget
for 2008-09. If the figure of £1.065Bn is exceeded, the Defence
budget will bear half the cost of the excess in 2010/11 under
the arrangements agreed in the 2007 Comprehensive Spending Review.
8. (Recommendation 8) Provisional forecasts
for each theatre in the same table form as provided to us in the
memoranda accompanying the Winter and Spring Supplementary Estimate
could be made available each year in the memorandum accompanying
the Main Estimate. The forecast overall figure for UORs could
also be provisionally broken down in the same way as it is in
the MoD's Annual Report and Accounts. In our Report on the Spring
Supplementary Estimate we expressed a desire to see the "working
assumptions" underlying the forecast figures for Iraq and
Afghanistan as early as possible in each financial year. The information
provided by the MoD this year with the Main Estimates, however
welcome, fails to achieve this. (Paragraph 15)
The MoD will request resources for peace-keeping
and operations in its 2009/10 Main Estimates, as recommended in
previous reports by the Committee. The accompanying Estimates
Memorandum will provide the same table form as provided in the
Winter and Spring Supplementary Estimates. The forecast figure
for UORs will be broken down in the same format as the Department's
Annual Report and Accounts. We will provide as much detail as
we can on the assumptions underlying the forecast without compromising
operational security.
9. (Recommendation 9) We acknowledge the difficulties
the MoD faces in assessing and forecasting indirect resource costs,
and commend the Ministry for working with the National Audit Office
to ensure that future indirect resource cost forecasts will be
more accurate. We do however find it hard to believe that a failure
properly to cost the use of Hellfire missiles and the damage to,
and loss of, equipment in theatre could lead to such a considerable
underestimate of cost as occurred in 2006-07. (Paragraph 16)
The Department will continue to refine its reporting
and forecasting of indirect resource costs, which the Committee
has acknowledged is challenging.
In 2006/7, the audited accounts showed an outturn
of £69M in indirect resources, which exceeded our Parliamentary
request for resources by some £21million. The reasons for
this overspend included the use of more Hellfire missiles in Afghanistan
than had been forecast at the time the Department submitted Supplementary
Estimates, and increased depreciation charges for some military
equipment damaged or destroyed on operations. The 2007/8 outturn
of £424M is a much more robust figure than the £69M
reported for 2006/7, but the increase from 2006/7 to 2007/8 is
a consequence of a far wider variety of factors than those which
were responsible for the 2006/7 overspend. It reflects improved
processes for capturing costs such as cost of capital, stock write
offs and the creation of provisions along with increased equipment
depreciation.
10. (Recommendation 10) For the first time
in the MoD Main Estimates, and in the memoranda accompanying them,
we have forecasts for operational costs in Iraq and Afghanistan,
an estimate of UOR costs, and a formal request for a stated proportion
of expected Balkan operational costs. It remains to be seen how
robust these figures will prove when it comes to the Supplementary
Estimates and the final outturn for the financial year. (Paragraph
17)
The Department always strives to present robust and
timely forecasts. Peace-keeping and operations costs are volatile,
and estimates do change during the year.
11. (Recommendation 11) We are concerned about
the robustness of forecasts and estimates we are offered during
the financial yearly cycle. We continue to call for these forecasts
and estimates because we believe the MoD can and ought to provide
as early a sight as possible of what it believes operations are
likely to cost in the financial year. Nonetheless, it has to be
asked whether the MoD is
doing enough to provide
robust cost forecasts to the House, robust not just in terms of
stating as accurately as possible expected costs, but is doing
so in a timely fashion, using information that is up-to-date.
(Paragraph 19)
12. (Recommendation 12) In the last financial
year, the estimate for the full-year cost of operations in both
Iraq and Afghanistan increased between the Winter (November 2007)
and Spring (February 2008) Supplementary Estimates by approximately
50%. The cost of Balkan operations likewise shifted from a £20
million forecast in November to an expected cost of £31 million
by February, again an increase of c50%. We cannot however agree
with the MoD that the scale of this increase between two fixed
points only a few months apart within a financial year is solely
down to the inevitable volatility of military operations. (Paragraph
21)
The Department is continuing to increase the robustness
and accuracy of its forecast cost of operations in a timely fashion.
A workshop was held in August 2008 with the major Top Level Budgets
to discuss some of the issues raised by the Committee, and the
NAO 2007-08 audit. Additional scrutiny will also be undertaken
in preparation for the Defence Board quarterly reviews, and for
the operational costing forecasts used for the Winter and Spring
Supplementary Estimates. We expect the Winter Supplementary Estimate
for RfR2 in 2008/9 to be more accurate than it was in 2007/8 subject,
of course, to subsequent changes in operational policy.
The revised Balkans costs in our Spring Supplementary
Estimates reflected the possibility of deploying the Over the
Horizon Reserve Force (ORF) in 2007-8. In the event, the ORF was
not, in fact, deployed in 2007-08. If the ORF had been deployed,
and we had not requested additional funds in our Estimate, we
would have run the risk of an excess vote and accounts qualification
for breach of our Estimate.
13. (Recommendation 13) The Winter Supplementary
Estimate forecast of costs, for both Iraq and Afghanistan, was
effectively four months out-of-date when the House saw it; and
five months out-of-date when it voted to approve the funds in
question. The Spring Supplementary Estimate, laid in February,
approved by the House in March, was based upon a marginally more
timely forecast produced in the MoD at the end of November, some
two-and-a-half months before laying, and three-and-a-half before
the House voted to approve the funds in question. (Paragraph 23)
14. (Recommendation 14) Given how out-of-date
both forecasts were when the House first saw them, the statement
by the MoD in response to our supplementary questions appears
questionable: "the forecast in the Winter Supplementary Estimate
represented the best estimate of the likely costs of Iraq and
Afghanistan when the Estimate was submitted". This suggests
that there was no available forecast between July and October
that could better inform the figures to be laid before the House
in November, or that the procedures involved are so cumbersome
that any forecast in this period would have been too late to inform
the Winter Supplementary Estimate. Either way, this is unsatisfactory.
It is one thing to say that estimates vary because of the volatility
of operations, and another to say that a late July decision to
increase manpower in one theatre came too late to inform figures
placed before the House in November, some three-and-a half months
later. (Paragraph 24)
We have put in place processes to reflect the latest
available figures in our Winter and Spring Supplementries, although
the procedures for collating Estimates across Government for presentation
to Parliament inevitably necessitates some time lag between the
availability of the raw forecast and the publication of the Estimate.
15. (Recommendation 15) According to the Government
response to our Report on the 2007-08 Spring Supplementary Estimate
and the answers to the questions we asked the MoD concerning that
response, the drawdown of UK forces in Iraq was decided before
the end of July 2007, although it was only announced to the House
in October 2007. Thus the Winter Supplementary Estimate forecast
of costs was based upon knowledge of the drawdown. We are further
told that the higher Spring Supplementary Estimate figures (made
public in February 2008) were based upon end of November 2007
forecasts, produced fewer than ten weeks after this announcement
to the House. This increase in costs thus predates the assessments
ofthe military situation in Iraq made in the first quarter of
2008 that led to the decision to postpone the drawdown. (Paragraph
25)
As we said in our Main Estimate supplementary memorandum
in response to further HCDC questions: "The estimates for
the cost of operations in Iraq for Winter Supplementary Estimate
were based on end of July forecasts; those for the Spring Supplementary
Estimate were based on end of November forecasts. The Department
must base its requests for resources at Supplementary Estimates
on as robust forecast data as it can. Inevitably, there is also
a degree of time lag between receiving accurate forecasts from
our TLBs and incorporating them in our Supplementary Estimates."
On the question of the increase in costs predating
the decision to postpone the drawdown, we based the Spring Supplementary
Estimate on a prudent assessment of spending patterns and plans
that were evident at the time. In particular, the increase reflected
capital spending plans for urgent operational requirements for
force protection measures and equipment support costs that were
not materially affected by the drawdown assumptions.
The Department is, however, determined to improve
the accuracy and timeliness of its Operational cost forecasting
and has put in place process changes for the current financial
year to ensure that the
Winter Supplementary
Estimate provides the latest (at the end of August) information
on projected outturn and actual expenditure.
16. (Recommendation 16) No proper relation
seems to exist between operational decisions, political announcements,
and financial scrutiny. This simply cannot be satisfactory. It
is essential that the House has available to it accurate and up
to date forecasts before it is asked to vote on the Defence Estimates.
(Paragraph 26)
The Department does not agree with the Committee's
suggestion that there is no coordination between operational decisions,
political announcements and financial scrutiny. Our operational
policy/PJHQ staffs engage with the resources and plans staff to
try to ensure a shared understanding of future plans and requirements,
as the basis for costings that are as robust as possible.
To the extent possible, realism is built into our
Estimates requests, based on known future changes to the forces
deployed on operations and the nature of the operations being
planned, resulting from political announcements.
We take the Committee's concerns very seriously.
We have instigated new procedures to provide more rigorous scrutiny
of forecasts.
17. (Recommendation 17) It is essential that
the MoD should provide late each calendar year the forecasts generated
at that time which were subsequently used to inform the Spring
Supplementary Estimate. This would allow any increase in funds
likely to be sought formally from the House the following March
to be flagged up well in advance. We also consider that the House
should see at as early a stage as possible the forecasts generated
in the summer upon which the Winter Supplementary Estimate is
founded. (Paragraph 27)
The Department stated in its supplementary memorandum
dated 5 June 2008 (in the response to question 5) that a further
forecast could be provided to the Committee between Supplementaries
if the Committee would find that helpful (Ev 15 of HC 885).
18. (Recommendation 18) We recommend that
the House of Commons approve the MoD's Main Estimate and have
identified no issues which require a debate before it does so.
But the House should continue to be aware that, because of the
omission of the costs of military operations in Iraq and Afghanistan,
the Main Estimates greatly underestimate the total expected cost
of the MoD's activities in 2008-09. (Paragraph 28)
The Department is grateful for the Committee's continued
support.
For 2009-10 the Department will formally request
funding for operations and peace-keeping in Main Estimates for
the first time. This request for funding will be updated as usual
in the Supplementary Estimate rounds, reflecting the volatility
of operations. We will provide as much detail as we can without
compromising operational security.
1 The Main Estimate should have referred to Land Forces
as the correct name of the new combined TLB. This sub head will
be re-named in the 2008-09 Winter Supplementary Estimate. Back
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