House of Commons - Defence - Eleventh Report

Select Committee on Defence Eleventh Report

1 Report

1. The Main Supply Estimates 2008-09—by which the Government requests resources from Parliament to meet its expenditure plans for the financial year ahead—were laid before the House on 21 April 2008.[1] The House of Commons will be asked to agree them on 7 July.

2. The Treasury's Main Supply Estimates contain an Estimate for each department and, separately, for each public service pension scheme. Like last year, our focus is on the Ministry of Defence (MoD) departmental Main Estimate. Through our Reports on the Main Estimates, and then on the Winter and Spring Supplementary Estimates which follow them each year, we have pressed for the more timely presentation of fuller financial information from the MoD, if not in the body of the Estimates themselves then in the memoranda which the MoD sends to us at the same time as the Estimates.

3. The two memoranda supplied by the MoD when it laid its 2008-09 Main Estimates, for the Department and for the Armed Forces Pension Scheme, are attached to this Report.[2] We have also attached to this Report the Government's response to our Report on the 2007-08 Spring Supplementary Estimate.[3] We asked MoD a number of questions concerning the Main Estimates memoranda and the Government response: the MoD's replies are likewise attached to this Report.

4. 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.[4] 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. Our continuing financial scrutiny of the MoD is not undertaken on account of the MoD's performance in this area: rather we continue to undertake this scrutiny because the funds sought by the MoD through this mechanism of the Estimates are for activities and operations of very considerable importance for the security of this country and for those people who are engaged in military operations abroad.

Ministry of Defence Requests for Resources

5. The MoD's Main Estimate requests resources of £34.5 billion, with a net cash requirement of £32.5 billion. The MoD's Estimate is split between three Requests for Resources (RfR):

RfR1: Provision of defence capability

RfR2: Operations and peace-keeping

RfR3: War Pensions and Allowances, etc

The headline figures are set out in the table below.

Table: The Ministry of Defence's Request for Resources

£million

2008-09 2007-08 2006-07

Provision Final Provision Forecast Outturn Outturn

RfR1: Provision of defence capability 33,421.295 33,901.860 34,383.890 31,386.645

RfR2: Operations and peace-keeping 89.566 2,381.803 2,380.779 1,448.420

RfR3: War Pension and Allowances, etc. 1,015.090 1,030.007 1,028.779 1,038.073

Net resource requirement 34,525.951 37,313.670 37,793.448 33,873.138

Net cash requirement 32,536.048 34,147.714 34,023.202 31,616.135

Source: HM Treasury: Main Supply Estimates 2008-09, p16

Provision of defence capability

6. RfR1 covers by far the largest proportion of requested resources: it includes personnel, equipment and support costs for the Armed Forces (including, for example, the nuclear warhead programme). The Main Estimate breaks this down by Top Level Budget Holder (TLB).[5] There have been a number of changes to the TLBs over recent years, which sometimes makes comparisons over the period difficult. Changes this year include:

the amalgamation in 2008-09 of the two RAF TLBs—Commander in Chief Strike and Personnel and Training Command—into a single TLB, Air Command;
the amalgamation in 2008-09 of two Army TLBs—Adjutant General and Commander in Chief Land—into a single TLB, Land Command; and
other smaller adjustments reflecting changes in the machinery of government: these include a transfer of responsibility and funding for the Defence Export Services Organisation (DESO) to the Department for Business, Enterprise and Regulatory Reform (DBERR), UK Trade and Investment (UKTI) and the Foreign and Commonwealth Office (FCO).[6]

RfR1 also shows that spending by the Land Command TLB is expected to increase significantly in 2008-09 compared with last year, while the Defence Equipment and Support (DS&S) TLB's expenditure is expected to reduce significantly.[7] We call on the MoD to explain the reasons for these changes.

Operations and peace-keeping

7. According to the Estimate, the ambit of RfR2 covers "conflict prevention, early warning, crisis management, conflict resolution/peacemaking, peacekeeping and peacebuilding activity and … associated strengthening of international and regional systems and capacity …".[8] It is under RfR2 that the net additional costs of undertaking military operations in Iraq and Afghanistan fall, although provision for this is not made in the Main Estimates (an issue to which we will turn later on in this Report). In previous Reports on the Spring Supplementary Estimates 2006-07 and the Main Estimates 2007-08,[9] we expressed our concern that use of the term "conflict prevention", which had been used previously for this Request for Resources, was misleading, as it appeared to cover military operations of all kinds, from war-fighting to peacekeeping operations. The Government's response at first stated that "conflict prevention" was a generic term used to describe RfR2, but it noted our comments and was reviewing the layout of the Estimate with a view to providing greater clarity in future Estimates: this latter element, that the Estimates' layout was under review, was repeated in the second response.[10]

8. In its November 2007 Winter Supplementary Estimate for 2007-08, the MoD renamed RfR2 more accurately as "Operations and peace-keeping", which we welcomed in our Report on the Supplementary Estimate. Clearly this is an improvement: puzzlingly, the MoD memorandum on the Main Estimate[11] still refers to RfR2 as "Conflict prevention" and the Vote on Account 2008-09 RfR2 was entitled "Conflict Prevention and Net Additional Cost of Military Operations".[12] Moreover, the list of the activities covered by RfR2 in Part I of the Main Estimate is identical to that used before the title of the RfR was changed, and makes no reference to military operations in Iraq and Afghanistan. This is unhelpful. The nearest the ambit comes to recognising the reality of current operations is "peacemaking". 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 "warfighting and other military operations" to the list.

Balkan operations

9. RfR2 covers the cost of operations in the Balkans. In the past, no provision was made in the MoD Main Estimate for the cost of these operations: rather it was presented as part of a global peace-keeping sum within the FCO Main Estimate before being transferred to the MoD late in the year and appearing within the MoD's Spring Supplementary Estimate. We urged the MoD to include provision for Balkan operations in its Main Estimate, seeing no good reason why it should not, and were pleased when the Government announced in its response to our Report on last November's Winter Supplementary Estimate that it would indeed do so.[13] 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.[14] Unlike Iraq and Afghanistan operations, where the costs included in Supplementary Estimates are funded by calls on the Treasury's Reserve, provision for the costs of Balkan operations come from a budget held initially by the FCO. With this 2008-09 Main Estimate, the Balkans budget is still held initially by the FCO but £16.875m has been transferred at the start of the year. The MoD memorandum makes clear, however, that this figure represents 75% of forecast costs and that this sum may have to be supplemented later in the financial year at either or both Supplementary Estimates.[15]

10. In the last financial year, while we were considering the Winter Supplementary Estimate, we requested a forecast for Balkan costs in advance of the Spring Supplementary Estimate. That forecast cost—£20m—was significantly exceeded by the eventual sum of £31 million requested in the Spring Supplementary Estimate.[16] Clearly, in this current financial year, the MoD expects costs for Balkan operations to amount to some £22.5 million (75% of which being £16.875m). 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.

11. While we seek to aid transparency and accountability by publishing the MoD's estimates memoranda, other 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.

Cost of military operations

12. The cost of current military operations remains the principal focus of our attention in the various Estimates we consider over the course of the financial year. As in previous years, the RfR2 allocation in the Main Estimate does not cover the costs of operations in Iraq and Afghanistan. Indeed, the figure currently set down in RfR2, some £89.6 million, is very small beside the forecast outturn for the last financial year (£2.38 billion) and the actual outturn for the previous financial year (£1.45 billion), and does not include any Iraq or Afghanistan expenditure.[17] We have commented in the past about how unhelpful it is for the House to be presented with such a limited request for funds at the beginning of the financial year The Department knows already that it expects a considerably greater sum to be spent during the financial year which will have to be requested by means of the Supplementary Estimates procedure.

13. The MoD consistently argues that it is inappropriate to request at the outset of the financial year sums the magnitude of which it is still uncertain about. Initially, the MoD presented the costs for military operations in Iraq and Afghanistan in the Spring Supplementary Estimates, laid usually some ten months into the financial year, arguing that it was not possible to come before the House with robust enough assessments of costs to be incurred before the end of the financial year, at any earlier point. Funds for military operations came from the Treasury Reserve until the House approved the request from the MoD for funds at the Spring Supplementary Estimate. In response to our own concerns that this was an unsatisfactory position, as the MoD ought to have sufficiently robust estimates for these costs to be presented earlier to the House, the MoD began in financial year 2006-07 to make a request for funds to cover the cost of these operations earlier, in its Winter Supplementary Estimate, laid some seven months into the financial year. The MoD now comes back to the House to seek any additional funds required for military operations at the time of the Spring Supplementary Estimate.[18]

14. Clearly, this is a more satisfactory position than that which obtained before. 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.[19] 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.[20] We call on the MoD to explain the implications of such UOR expenditure on its future capital and resource budgets. This follows our request that the MoD present a forecast for these costs earlier in each Financial Year. These UOR costs have been presented in the past in some detail after the end of each financial year in the MoD's Annual Report and Accounts. The Accounts for 2007-08 have yet to be produced, but the MoD gave an indication of the proportion of costs allocated for UORs in the 2007-08 Spring Supplementary Estimate. These are both very welcome developments for which the MoD must be commended.

15. However, it would be helpful to have these figures in more detail. We do not imagine that the £2Bn figure is undifferentiated: there must exist a simple breakdown of this figure between theatres and for various costs in each theatre which the House could and should see. 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.[21] The information provided by the MoD this year with the Main Estimates, however welcome, fails to achieve this.

16. It is also worth bringing the attention of the House to the explanation given to us by the MoD for the very significant increase in indirect resource cost (expenses that do not involve cash outlays) of operations in the last financial year. In our Report on the Spring Supplementary Estimate we drew attention to the fact that indirect resource costs for Afghanistan in 2007-08 were five times greater than they were in the previous year, and for Iraq eight times greater.[22] Overall, indirect resource costs rose from a £69 million outturn for 2006-07 to a projected cost of £424 million for 2007-08. The MoD in its response to that Report admitted that this was down to a failure to report fully the indirect costs of operations in 2006-07: the increase for 2007-08 represented a more thorough and robust forecast, based upon a methodology discussed with the National Audit Office. Much of the indirect cost represents the firing of Hellfire missiles and the damage or destruction of equipment used in operations, both of which vary according to operational tempo.[23] 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.

Timetable for forecasts and Estimates

17. 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.

18. The position of the MoD with regard to these figures is that all forecasts and estimates of costs in this area of military operations in Iraq and Afghanistan (and, to a lesser extent, the Balkans) are inevitably subject to potentially considerable change. The sooner any forecast is requested, the more likely it is to suffer possibly significant variation by the end of the financial year. Earlier forecasts will always mean less accurate forecasts. The size of UK Armed Forces deployed may change, operational tempo may increase, with a consequent increase in ammunition use and the depreciation of equipment. Even the best assessed forecast may need to be supplemented in Spring and Winter by means of the Supplementary Estimates. Equally, a decision to scale back operations in a theatre might reduce full-year costs, and the MoD would not want to be caught out with an approved Estimate which then over-states the cost. We have some sympathy for this position: it is, after all, obviously the case that the MoD cannot know at the time of the Main Estimates everything that might happen to affect costs over the course of the financial year.

19. However, 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.

20. Clearly, as far as military operations are concerned, budgets should not drive operational tempo, and it is right that the MoD is not expected to cover such costs within its Spending Review defence budgets. Costs for operations will inevitably be difficult to control, and therefore to estimate, with precision. Nevertheless, in our last Report on the 2007-08 Spring Supplementary Estimate,[24] we made clear our uncertainty about the level of robustness that the MoD was bringing to its forecasts and estimates of costs.

21. We agree with the MoD that forecasts may change significantly over the twelve months of the financial year; however, as we pointed out in our recent Spring Supplementary Estimate Report, these forecasts even vary from Supplementary Estimate to Supplementary Estimate, over the course of three months. 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%.[25] 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.

22. In its response to our Report on the 2007-08 Spring Supplementary Estimates the MoD helpfully set out in two tables the variation in costs between the 2006-07 outturn and the 2007-08 Spring Supplementary Estimates request for various Direct Resource cost categories and for overall Capital Additions within RfR2. It also adds a brief explanation for the change or variation in each instance.[26] The MoD, following its setting out of these tables, does give some attention to our concerns about how forecasts changed so much between November 2007 and February 2008: it highlights the importance both of the time-table of forecasts and the availability of up-to-date information for the accuracy of the Estimates.

23. We therefore probed this issue of timetable in some follow-up questions to the Government response: the answers are printed in an appendix to this Report.[27] It appears that the Winter Supplementary Estimate (laid in November 2007) was based upon figures and forecasts which predated the additional manpower deployment to Afghanistan required to increase operational tempo there towards the end of July 2007. In other words, 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.

24. 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 W[inter] S[upplementary ] E[stimate] represented the best estimate of the likely costs of Iraq and Afghanistan when the Estimate was submitted".[28] 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.

25. We are also puzzled as to why the Winter Supplementary Estimate process took almost four months, and the Spring Supplementary Estimate process just over two months. Compounding our bafflement is a degree of uncertainty about the timing of decisions relating to the drawdown of UK Armed Forces in Iraq and the consequent decision to abandon this planned drawdown. 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 of the military situation in Iraq made in the first quarter of 2008 that led to the decision to postpone the drawdown.[29]

26. What is unsettling about these timetables, setting aside the still puzzling difference in lead times for the Winter and Spring Supplementary Estimates, is the out-of-date nature of the information on which the Estimates are based, and the lack of relation between decisions, announcements of decisions and forecasts of costs. Forecasts were made months before the Estimates upon which they were based were placed before the House; and announcements were made months after decisions were made which affected forecasts. 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.

27. In replying to the Government response to our Report on the 2007-08 Spring Supplementary Estimate, we asked whether the MoD had give any thought to providing interim data between Estimates, to Parliament or to ourselves, setting out an outline of likely changes in forecast costs. The MoD said that a further forecast could be provided to us between the Supplementary Estimates. 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.

Conclusion

28. 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.

1 HM Treasury, Central Government Supply Estimates 2008-09, Main Supply Estimates, 21 April 2008, HC 479 Back

2 Ev 1-9 Back

3 Ev 10-15 Back

4 Liaison Committee, Second Report of Session 2007-08, Parliament and Government Finance: Recreating Financial Scrutiny, HC 426, para 89 Back

5 HC (2007-08) 479, pp 309-11 Back

6 Ev 2, para 3.2 Back

7 HC (2007-08) 479, pp 309-10 Back

8 Ibid, p 307 Back

9 Defence Committee, Tenth Report of Session 2006-07, Cost of military operations: Spring Supplementary Estimate 2006-07, HC 379, para 3; and Twelfth Report of Session 2006-07, Ministry of Defence Main Estimates 2007-08, HC 835, para 10 Back

10 Defence Committee, Twelfth Special Report of Session 2006-07, Cost of military operations: Spring Supplementary Estimates 2006-07: Government response to the Committee's Tenth Report of Session 2006-07, HC 558, Appendix, response to recommendation one; and Fifteenth Special Report of Session 2006-07, Ministry of Defence Main Estimates 2007-08: Government response to the Committee's Twelfth Report of Session 2006-07, HC 1026, Appendix, response to recommendation two Back