Examination of Witnesses (Questions 20-39)
MINISTRY OF
DEFENCE
17 MARCH 2008
Q20 Mr Touhig: Sir Bill, I am slightly
confused about how your department operates the budget reallocation
process. The Report tells us that the MoD uses budget reallocations
so that it can measure the performance of individual project teams
in controlling their costs. Is that correct?
Sir Bill Jeffrey: That is part
of what is going on when costs are moved in the way that is described
in this Report, yes.
Q21 Mr Touhig: So you reallocate
budgets and expenditure to see whether they can be managed better
in a new budget line; but the new budget line is often managed
by the same people, the same project team, as it shows us on Figure
5.
Sir Bill Jeffrey: Yes, it is.
Q22 Mr Touhig: So why?
Sir Bill Jeffrey: It is about
more than the person who manages the budget. If you take the most
obvious example, which is the movement of Astute costs of £227
million associated with maintaining the submarine build capability
issue that the Chairman has just referred to, and the Type 45
costs incurred in the move from Barrow to Clyde—in both
of these cases the judgment that was made was that these were
essentially the costs that fall to us by virtue of the fact that
we are supporting a maritime defence industry and that they were
better managed in a separate budget. As it happens, in our present
structure that involves the same people, but it still makes quite
good accounting sense, and although I note what the Chairman said
at the beginning about there being more to this than accounting,
that is what has been driving us in this case.
General Sir Kevin O'Donoghue:
There are two points, if I may. A particularly good example is
the SUV transfer of costs. Before we formed DE&S the DPA would
have had the money both to procure the equipment and for through
life support. That would then have moved to the DLO. This is just
moving the warranty costs, which should be in the in-service budget,
into the right place. Because we formed DE&S, we now have
one project team.
Q23 Mr Touhig: Right, but the Report
tells us that an objective I—and Sir Bill corrected me slightly
and said it is just one of the objectives—is to measure
the performance of individual project teams, but you have the
same project team handling the same amount of money.
General Sir Kevin O'Donoghue:
Yes, we have, but it is easier to separate out in-service costs
and procurement costs into two different budget lines.
Q24 Mr Touhig: And because you have
got this new budget line, and that is outside the scope of the
Major Projects Report, the reallocation then appears as a cost
reduction, which is outside the Report then.
Sir Bill Jeffrey: It does for
the purposes of this Report. As I said to the Chairman at the
beginning, there is no sense in which we are coming to this Committee
and saying these costs just disappear; of course they do not;
we need to find them somewhere.
Q25 Mr Touhig: I note, Sir Bill,
from your CV that you are not a member of the Magic Circle so
it is not a conjuring trick, but it does seem a con trick!
Sir Bill Jeffrey: Well, it may
seem that way, Mr Touhig. I simply come back to the fact that
in the preparation of this Report there was a discussion with
the NAO about where it would be sensible to allocate these costs,
and the conclusion was that it would be better to do it in the
way we have done. I also agree with the NAO's assessment in the
Report that it is unlikely that there will be significant movements
of this sort—to that extent anyway—in the future.
Q26 Mr Touhig: I just find this is
misleading Parliament. You have got a budget head; you are moving
it between different groups and you have the same people managing
it; and it is presented as if it is a cost reduction, but it is
not!
Sir Bill Jeffrey: It is not being
presented as a cost reduction. We certainly do not see it that
way in the cases I have quoted, which are about the costs essentially
of sustaining the maritime industrial base. We have never for
a moment suggested that it is a reduction in costs.
Q27 Mr Touhig: The Report certainly
indicates that you consider there are sizeable cost reductions
on specific projects and a modest overall overspend.
Sir Bill Jeffrey: It is not—I
certainly do not see it as—
Q28 Mr Touhig: In the two years 2005-07
there was a £1 billion expenditure on major projects which
you simply took out and re-designated. If you had not done that,
what would have been the financial state of these major projects—severely
in trouble, yes?
Sir Bill Jeffrey: The actual headline
figures in the Major Projects Report would have been different.
The Committee may want to come on to this, but one of the suggestions
that (I hope with NAO support) we have made, is that we might
in the future change the coverage of this Report to capture more
than it does at the moment. The other point I would like to make
is that some of these are cost increases that of course arose,
and the view taken was that it was sensible to attribute them
to—
Q29 Mr Touhig: But £1 billion
over two years, Sir Bill!
Sir Bill Jeffrey: By no means
all of the billion. The examples we touched on earlier such as
the Guided Multiple Launch Rocket System took costs out of one
programme and put them into another.
Q30 Mr Touhig: Page 13, figure 5,
shows £1 billion over two years that you have reallocated.
The Report, Sir Bill, accuses your department of masking the impact
of other costs increases on projects. The Oxford English Dictionary
says "mask" is: "to disguise something under an
assumed outward show". Why do you think the NAO laid that
charge against your department?
Sir Bill Jeffrey: The NAO can
speak for themselves, but it was on their advice that we classified
this—
Q31 Mr Touhig: You agreed the Report,
Sir Bill!
Sir Bill Jeffrey: Yes.[2]
Q32 Mr Touhig: I am sure they will speak
for themselves, but you agreed the Report.
Sir Bill Jeffrey: I took the use
of the word "mask" in its conventional sense to mean—
Q33 Mr Touhig: What is not conventional
about the Oxford English Dictionary interpretation of the verb
"mask"—"to disguise something under an assumed
outward show"?
Sir Bill Jeffrey: All I can say,
Mr Touhig, is that there was no intention on the department's
part to give a misleading impression.
Q34 Mr Touhig: What you have done,
Sir Bill, is re-classify hundreds of millions of pounds of expenditure
so that it falls outside the Major Projects Report, have you not?
Sir Bill Jeffrey: Not if you imply
that we were doing it in order for it to fall outside the Major
Projects Report. It has been re-classified but, as I said, in
most cases we perfectly acknowledge that it is still expenditure
that has to be managed.
Q35 Mr Touhig: The Report also tells
us that your department's poor performance and financial management
has necessitated an amount of—this exercise of annual—this
exercise of "juggling budgets" as they described it.
Again, the Oxford English Dictionary says that the verb "juggle"
is to: "practise magic, practise trickery, a juggling, tossing
and catching a number of objects continuously or entertainment."
It is not terribly entertaining just reallocating a large sum
of money from the Major Projects Report as if to disguise it!
Sir Bill Jeffrey: In some ways
I wish the management of the defence budget was as easy as the
word "juggling" would imply. We have to make choices
about priorities within it. These choices do involve sometimes
the movement of money from one budget head to another. What I
would resist very strongly is the suggestion that in some sense
the figures have been fiddled by moving these amounts from one
budget to the other; it has been done because, in consultation
with the NAO, it seemed the correct accountancy attribution.[3]
Q36 Mr Touhig: Can you show us, Sir Bill,
evidence that the department is genuinely controlling costs better
and not simply shifting money between budget heads?
Sir Bill Jeffrey: If you look
elsewhere in the Report, the NAO comments that there are signs
that the impact of technical problems is reducing. They comment
that we are choosing acquisition strategies for projects that
are most appropriate to fit their individual circumstances and
have a better understanding of the risks involved. They describe
us as becoming a more intelligent customer. In the end, managing
the cost of these large defence projects was always going to be
difficult, but our sense is that over time we are getting better
at it.
Q37 Mr Touhig: At page 10, paragraph
1.2 they tell us that the budget reallocation may not result in
any real cost reductions at all.
Sir Bill Jeffrey: That is true
in the terms in which it is expressed, but that was not its purpose;
its purpose was to get the expenditure in the right parts of the
budget.
Q38 Mr Touhig: The overall impression
I have, Sir Bill, is that a very large amount of money, £1
billion over two years, has simply been reallocated under another
budget head; it takes it out of the Major Projects group, and
therefore it gives the impression that you are not in any financial
difficulties, which you are in the Major Projects, and if you
had not reallocated that £1 billion, what would have been
the state of the Major Projects?
Lieutenant General Andrew Figgures:
If I may help here, Mr Touhig, part of my job is the planning
of capability. I did give that example of the Guided Multi Launch
Rocket System, but the same could be taken, say, of the Precision
Guided Bomb or perhaps the Beyond Visual Range Air-to-Air Missile,
in that it is appropriate to allocate money to a particular capability
and therefore a particular solution to meet that capability. In
balancing the budget as I produce it, it therefore is appropriate
to shift money from one place to another, not as some financial
engineering exercise but as a means of delivering the appropriate
capability at the right time, and as far as we are able to, to
best value so that we get the best bang for the buck. If you were
to say to me, "you cannot move any money out of the Major
Project Report projects" you would hobble me and prevent
me doing my job in terms of serving our people in the field.
Q39 Mr Touhig: I would not want to
do that at all, because I do commend your commitment and that
of the whole department in that respect, but I come back to the
point I made to Sir Bill earlier. The Report says that what you
are doing is masking the impact of other cost increases on projects.
If that is not playing around with mirrors, conjuring tricks or
con tricks, I do not know what it is! It could not be more specific.
I have never seen a Report that accused a department of masking—
Sir Bill Jeffrey: I do not take
the NAO to be using the word "masking" in the derogatory
way that you do; and if they had done, I think I would probably
have objected to it. As this is put—it is transparently
obvious what we were doing. It is not just playing with the figures
in order to produce a result.
2 Ev 16 Back
3
Ev 16 Back
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