House of Commons - Defence

Select Committee on Defence Fifth Report

3 Consolidated Departmental Resource Accounts

91. In our report a year ago on the Ministry of Defence Annual Report and Accounts 2005-06, we reported that the Departmental Resource Accounts for 2005-06 were given an unqualified audit opinion by the Comptroller and Auditor General (C&AG). This was the third year running that the MoD's resource accounts had received an unqualified audit opinion.[112]

92. In 2006-07, the MoD expended more resources than Parliament had authorised on Request for Resources 2. This comprises the additional incremental costs of current operations being undertaken in Iraq and Afghanistan and other parts of the world such as the Balkans. The MoD breached Parliament's control of expenditure and incurred what is termed an "excess" for which further parliamentary authority is required. The C&AG therefore qualified his opinion on the MoD's 2006-07 resource accounts as the MoD incurred expenditure that was unauthorised by Parliament and thus not 'regular'.[113]

93. The limit for Request for Resources 2 was set at net expenditure of £1,427,526,000 together with a limit on Appropriations in Aid of £15,557,000. The accounts show net expenditure for Request for Resources 2 of £1,448,420,000 which is £20,894,000 (1.44%) in excess of the amount authorised. The MoD also earned excess Appropriations in Aid of £5,047,000.[114] The report of the C&AG to the House of Commons about the excess vote is published in the MoD Annual Report and Accounts 2006-07.[115] This sets out the causes of the excess and the actions taken, or proposed to be taken, by the MoD to help prevent a recurrence. The excess on Request for Resources 2 is described as being:

116

94. The C&AG reported that the MoD was undertaking a detailed review of the treatment of asset depreciation and stock consumption in operations, focusing particularly on Urgent Operational Requirements, in order to understand the origin of the issues which gave rise to the excess. The C&AG considered that the policy and guidance is "sound, but the Department should take steps to improve the application of the process in operational situations."[117] The MoD has identified improvements in both the forecasting and the accounting for Request for Resources 2 including:

Reissuing guidance to its "major departmental groupings and budget holders" and stressing the importance of accounting properly for urgent requirements;
An increased focus on accurate forecasting at the mid-year point, in time for Spring Supplementary Votes; and
At the mid-year point, undertaking a robust review of stock and spares consumption charged to Request for Resources 2, and the depreciation of equipment damaged or destroyed in conflict, and of weapons fired, to ensure that the accounting is accurate and provides a firm base for forecasts.[118]

95. The MoD told us that following our 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 even a relatively minor change in the tempo of operations had the potential to cause an excess vote." The MoD is discussing with the Treasury the reintroduction of a small contingency element to "anticipate any unforeseen increase in cost".[119]

96. We note that the C&AG qualified his audit opinion on the MoD's 2006-07 resource accounts because of an excess vote on Request for Resources 2 (net additional cost of Operations) and that the MoD has identified improvements in both the forecasting and accounting for Request for Resources 2. We look to the MoD to ensure that the improvements identified are implemented. We acknowledge that it can be difficult to predict exactly how much ammunition is to be fired during operations and we accept that a reasonable contingency is needed in the MoD's estimate of its forecast expenditure.

Losses

97. Last year, we noted that the losses reported in the MoD's 2005-06 Resource Accounts had reduced compared with the previous year and we looked to the MoD to continue to take action to minimise losses in the future.[120] The Resource Accounts for 2006-07 provide details of losses and special payments as follows:

the total value of new and potential losses and special payments arising in year (both closed cases and advance notifications) was £417 million in 2006-07. Of this, "£68 million was ex-gratia redundancy payments to members of the Royal Irish Regiment and £17 million for civilian redundancy payments following normalisation in Northern Ireland, and £112 million from the decision to withdraw M26 bomblets for the Multiple Launch Rocket System (MLRS) as not meeting the Government's stricter criteria for use of cluster munitions". Without these, new and potential losses and special payments arising in year would have fallen to £237 million.
Excluding gifts and payments made by the Veterans Agency, the value of closed cases during the year amounted to £384 million; 73% was from final closure of cases previously notified, including "£195 million from the 1995 decision not to proceed with the long range anti-tank guided weapons system (LR TRIGAT)".
The losses statement also identifies potential losses that have not yet been brought to completion and have therefore been identified for formal incorporation in a future year's accounts (known as advance notifications). "The costs identified are estimates, so the final loss declared may therefore be either larger or smaller". The estimated value of the MoD's advance notifications of losses and special payments continued to fall, reducing from about £607 million in 2005-06 to about £486 million in 2006-07. Of this, £205 million (42%) "is for writing-down of the value of Chinook Mark 3 helicopters" and £167 million (34%) from the "Northern Ireland normalisation and MLRS decisions".[121]

98. In its briefing to the Committee, the NAO states that the total losses and special payments are a "small proportion of the total annual expenditure" of the MoD, just over 1% of total expenditure for 2006-07.[122] The NAO's analysis of losses and special payments between 2004-2007 showed that the number of closed cases had remained steady over the last three years. The NAO considered that the "slight increase in 2006-07 is compensated by the equivalent decrease in the advance notifications, as a result of the Department's efforts to close these cases during the year".[123]

99. We note that the total value of losses and special payments in 2006-07 are just over 1% of the MoD's total expenditure and that the advance notifications of losses and special payments have continued to fall. We welcome the continued reduction in advance notifications of losses and special payments and look to the MoD to build on the action it has taken to date to minimise losses in the future.

Joint Personnel Administration system

100. The aim of the new Joint Personnel Administration (JPA) system is to provide a single on-line management system, through which Service personnel can electronically access their own records and apply for leave, expenses and allowances, and undertake other basic personnel tasks, whether they are land or ship-based in the UK or deployed overseas.[124] The latest Annual Report and Accounts states that "JPA has now been successfully implemented for all three services…. to the Royal Air Force in April 2006, the Royal Navy in October 2006 and the Army from March 2007…. and all reports indicate that it is working well".[125] In addition to providing improvements for individual Service personnel, JPA is expected to provide the following benefits for the MoD:

126

101. There have been problems with the roll-out of the JPA system. The Annual Report and Accounts 2006-07 refers to "significant temporary accounting problems during the year".[127] In the Statement on Internal Control in the Departmental Resource Accounts, JPA is highlighted as a 'Significant Internal Control Issue' as:

128

102. Problems with the JPA system have impacted on the work of the Defence Analytical Services Agency (DASA) and there were some difficulties in the provision of Service manpower data. As a result, some DASA outputs had to be suspended. The latest Annual Report and Accounts state that DASA is working towards resolving the JPA manpower data problems.[129]

103. A press article in early December 2007 reported that Armed Forces personnel had been underpaid because of problems with the JPA system.[130] Details of the number of overpayments and underpayments to Armed Forces personnel between January and October 2007 were provided in a Parliamentary Written Answer of 18 December 2007. There were 13,908 overpayments in April 2007. The Written Answer states that "Following migration of Army data onto the JPA system, a decision was taken not to recover some elements until the migration process has been validated". The overpayments were recovered in May 2007. In August 2007, there were 46,305 underpayments, which included "35,553 incorrect deductions of £3.00 in respect of contributions to the discontinued Royal Navy and Royal Marines Dependants' Fund". The deductions were re-credited in October. In September 2007, "4,249 additional cases occurred where the incorrect rank on the Joint Personnel Administration system would have generated an incorrect payment. Corrective action was taken in time for the October pay run". The Written Answer also states that:

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During our visits to Afghanistan in April 2007 and Iraq in July 2007, we also heard concerns from Service Personnel about payment problems caused by the JPA system and about access to the system while on operations.

104. We are concerned to learn that the Joint Personnel Administration (JPA) system, which was rolled-out to all three Services during 2006-07, has experienced problems and that a substantial number of Armed Forces personnel have had incorrect deductions from their salaries. We have written to the MoD separately about the problems experienced and the progress in resolving them. We look to the MoD to ensure that the remaining problems are resolved as quickly as possible and that the training for the users of the system is improved. This is a matter which we plan to monitor closely.

112 HC (2005-06) 57, para 101 Back

113 National Audit Office, Performance of the Ministry of Defence 2006-07, Briefing for the Defence Committee, November 2007, para 5.1. Back

114 Ibid, paras 5.3-5.4 Back

115 MoD, HC 697, pp 219-222 Back

116 Ibid, p 221 Back

117 MoD, HC 697, p 221 Back

118 Ibid, p 222 Back

119 HC (2005-06) 57, para 106 Back

120 Ibid, para 105 Back

121 MoD, HC 697, paras 292-293 Back

122 National Audit Office, Performance of the Ministry of Defence 2006-07, Briefing for the Defence Committee, November 2007, para 6.14 Back

123 Ibid, para 6.13 Back