House of Commons - Ministry of Defence Annual Report and Accounts 2007-08

Ministry of Defence Annual Report and Accounts 2007-08 - Defence Committee Contents

2 The MoD's resources

The Joint Personnel Administration programme: the Qualified Audit Opinion

6. The MoD's total expenditure during 2007-08 was some £44.2 billion,[10] including Armed Forces personnel payroll costs of £8.6 billion which was administered through the Joint Personnel Administration (JPA) programme. This year the Comptroller and Auditor General (C&AG), head of the National Audit Office (NAO), qualified the MoD's Resource Accounts because of a limitation of scope on personnel payments. In particular the C&AG was unable to verify:

whether the allowances paid to Service personnel were correctly stated;
the level of error within the Joint Personnel Administration (JPA) payroll system; and
whether selected allowances and expenses paid through JPA were valid due to the lack of supporting documentation.

The C&AG also noted that there were no other methods to carry out an audit of this expenditure.[11]

7. The C&AG further identified the following weaknesses in the MoD's financial control and management information:

insufficient controls to prevent errors leading to significant over or under payments;
limited ability to trace and correct high levels of mis-postings between cost centres;
incorrect personal data held for between 5-10% of all military staff;
an inability to reconcile payroll control accounts;
inadequate budget monitoring because of inadequate up-to-date information on pay expenditure, debt and liabilities; and
difficulties in recovering the £28.9 million owed by Service personnel because of uncertainties about over or under payments.[12]

These failings and weaknesses are all directly or indirectly attributable to the JPA programme.

8. The Joint Personnel Administration programme is a major change programme, intended to modernise the administrative support given to all members of the Armed Forces. JPA was introduced across each Service because the "cost, risk and hindrance to business change from continuing with antiquated IT platforms had become unsustainable".[13] It replaced separate, single-Service systems of payroll delivery; separate career management systems—including the management of postings, promotions, recruitment and training; separate central policy and unit staff,[14] achieving up to an estimated £100 million per year in financial savings and the reduction of 1,400 jobs.[15] The MoD says that the "Armed Forces are benefiting from more harmonised and simplified business processes and policies and, for individuals, greater visibility of their personal information and the benefits of self-service use".[16] It also provided the MoD with a single authoritative source of personnel data (other than medical data) producing information to support decision making across defence.[17] This would include the capacity to monitor adherence to harmony guidelines on an individual as well as a unit basis. The budget for the JPA programme was approved at £244.94 million (excluding VAT).[18]

9. The JPA programme was delivered through an existing contract between the Armed Forces Personnel Administration Agency (AFPAA)—which became the Service Personnel and Veterans Agency (SPVA) in April 2007—and the company EDS, rather than through a new and separate commercial arrangement. The MoD notes that "the decision to follow this route was subject to Defence Investment Approvals Board (IAB) endorsement and was taken on a combination of value for money and risk to successful and timely implementation grounds".[19]

10. Although there have been serious difficulties with the implementation of JPA, the most significant problem seems to have been the fundamental one of its formulation. The NAO concluded that, in developing JPA, the MoD placed insufficient emphasis on financial reporting requirements or the need for management information data.[20] As Sir Bill Jeffrey explained:

It is difficult to exaggerate the magnitude of the failure of the Joint Personnel Administration programme. At a time when the Department is seeking, in many cases successfully, to deal with areas of dissatisfaction in service personnel life, this failure, which affects pay, entitlements and service records, is unacceptable.

11. In response to the NAO's criticisms and qualification of the Accounts, the Permanent Under Secretary commissioned a specific internal review, into the financial reporting shortcomings of JPA. The review, reported in May 2008, found that the MoD had monitored project timescales and costs carefully but had given insufficient priority to ensuring that basic financial control and reporting requirements were delivered; that the MoD saw JPA primarily as an HR project and did not sufficiently involve finance staff in its development; and that the MoD relied on EDS to advise it of the controls needed, although EDS did not have a clear understanding of what the MoD required.[22]

12. This whole programme has been far from satisfactorily implemented. Last year, in our Report on the MoD's Annual Report and Accounts 2006-07, we noted that JPA had "experienced problems and that substantial number of Armed Forces personnel…had incorrect deductions from their salaries".[23] We followed up the issue of JPA in our Report Recruiting and retaining Armed Forces personnel. In its response to that Report, the MOD told us that self-service satisfaction with the JPA Centre had been as low as 31.5%, although it had recently risen to 45.5%.[24]

13. We raised the matter of the qualification of the MoD's Resource Accounts and JPA in our first evidence session with Sir Bill Jeffrey and Trevor Woolley. Sir Bill Jeffrey admitted that the qualification was "serious and troubling".[25] Mr Woolley elaborated on the nature of the problem which had caused the qualified audit opinion:

Sir Bill Jeffrey admitted that the project as a whole, and its implications for the MoD's Accounts, had not been properly thought through:

14. We asked the Secretary of State whether he had been surprised to learn that no one in the MoD had realised that the introduction of a universal automated payroll system might have implications for the departmental accounts. He told us that he was surprised, and assured us that "the department [was] looking to address these issues".[28]

15. We express our serious concern that the MoD's Resource Accounts for 2007-08 were qualified by the Comptroller and Auditor General, as a result of their lacking financial controls, arising from the recently introduced Joint Personnel Administration system. We are also concerned by the number of weaknesses in financial control identified by the NAO. We look to the MoD to address these weaknesses as a matter of urgency.

16. In developing JPA, the MoD placed insufficient emphasis on financial reporting requirements or the requirements for management information. A system was put in place, presumably with the approval of the Department's Finance Officer, that provided insufficient evidence of payments and which could have such adverse impacts upon Departmental Accounts. We consider this to be a basic and fundamental error which is unacceptable on a project of this scale and importance.

17. In addition, the MoD lists cases being passed between SPVA Enquiry Centre staff and unit staff without resolution as well as difficulties with the process to terminate employment as problems arising from the implementation the JPA programme. Shortcomings in JPA were also identified in our last Report on the Ministry of Defence Annual Report and Accounts 2006-07,[29] and in our Report Recruiting and retaining Armed Forces personnel,[30] where we noted that there were difficulties using the system, problems in the level of errors in payments, and the insufficient training provided to Armed Forces personnel. JPA has incurred additional costs of £2.3 million to date.

18. We asked the MoD what compensation it expected to secure from the contractor, EDS, for any failure by that company to deliver a system able to support the Resource Accounts satisfactorily. The MoD told us that there was:

We asked Sir Bill Jeffrey whether the remaining £1.8 million of additional costs was the result of a failure by the MoD to extract proper and due payments for errors in the programme from the contractor. He said that he "would not be absolutely certain that is the sole explanation but it is certainly the case that the half million or so was as much, consistent with the contract, as we thought it reasonable to impose as penalties on EDS".[32] The contractual cost paid to EDS in FY2007-08 by the SPVA was £68.9 million; of this, the cost for delivering the JPA system was £55.5 million.[33]

19. It remains unclear whether the ability of the MoD to recover such a small proportion of the monies it paid out to EDS for JPA reflects the nature of the contract, a just assessment of the proportion of responsibility for JPA's weaknesses or both. The decision to implement the JPA programme through an existing contract, which was clearly insufficient to deal with problems that might arise, was short sighted. The lack of clarity in the design in the system at the outset has led significant costs being incurred by the Department which ought to have been entirely avoidable.

Resolving problems with JPA

20. The NAO notes that the MoD has devoted significant resources to improving JPA, although in its opinion, further action is required.[34] The table below sets out steps taken so far by the MoD in relation to the NAO's recommendations:Table 1: Steps taken by the MoD and NAO's Recommendations for further action

Steps taken by the MoD NAO further recommendations

Development of a detailed systems map to assess whether all necessary controls exist. The detailed systems map should be completed urgently to allow the Department to instigate the necessary mitigating controls.

Establishment of a working group of stakeholders to ensure that issues at Top Level Budget Holder and lower accountability levels can be escalated and resolved. The Department should produce an overall plan which prioritises the significant issues, with timescales set by which actions should be completed and adequate resources allocated to achieved the plans. The costs involved should be weighted against the risks associated with not introducing a system of input controls

Formation of a targeted team of accountants to identify the financial implication of known weaknesses, such as the need for reconciliation of control accounts. More will need to be done to prevent and detect input and processing errors.

The RAF are planning to introduce JPA specialists in each of their Units to assist staff and be a local repository of expertise Payroll account reconciliations need to concentrate on making corrections in sufficient time for departmental processing timetables.

Training in the production of regular and ad-hoc reports and been improved and on-line access has been widened to help with solving problems

Data source: National Audit Office, Performance of the Ministry of Defence 2007-08, Briefing for the Defence Committee, October 2008

21. We asked the Permanent Under Secretary whether the MoD was confident that its accounts for 2008-09 would not be qualified for the same reason next year. He told us that he:

We also asked him whether the NAO's recommendations were being taken forward. He told us that "we are doing so as quickly as we can because I can assure the Committee that this is something that as Accounting Officer I take extremely seriously".[36]

22. We recognise that considerable work has been undertaken recently to enable JPA to support the MoD's financial performance. We note that more work will need to be done. We will return to this subject in our next inquiry on the MoD's Annual Report and Accounts. In its response to this Report the MoD should set out what the current state of JPA is, what current satisfaction levels within the service community are with regard to JPA, and what progress has been made in implementing the NAO's recommendations.

Efficiency savings

23. The efficiency programme was introduced across Government at the time of the 2004 Spending Review, following the publication of the Gershon Report.[37] It included targets for monetary savings and headcount reductions. It also incorporated targets for the relocation of civil servants from London and the South East arising from the Lyons Review.[38]

24. In addition to its six PSA targets, during the SR2004 period the Ministry of Defence agreed:

— to realise efficiency gains of at least £2.8 billion by 31 March 2008, of which 75% would be cash-releasing;

— to reduce its civilian staff by 10,000;

— to reduce the number of military staff in administrative and support functions by at least 5,000; and

— to be on course to relocate 3,900 posts out of London and the South East by 2010.[39]

Table 2 sets out the MoD's performance against these efficiency targets:Table 2: Performance against efficiency targets

Target Achievement

£2.8 billion efficiency gains (of which ¾ are cash releasing) Between £3.05 to £3.14 billion

Reduce civilian staff by 10,000 Reduction of some 17,500 staff

Reduce military staff in administrative and support functions by 5,000 Reduction of nearly 5,500 military administration and support posts

Relocate 3,900 out of London and the South East by 2010 Relocation of 2,700 posts out of London and the South east by 2008

Data source: MoD Annual Report and Accounts 2007-08, p 219-221, paras 365-67

25. The Annual Report and Accounts notes that "efficiencies in process and back-office functions are being reinvested in the core programme…The Treasury has agreed that up to £270 million of the final over-achievement can be counted against the value for money target of £2.7 billion".[40]

26. We asked the MoD for information relating to the location of the 17,500 civilian jobs which had been cut, and where 5,500 military administrative and support posts had also been lost. Tables 3 and 4 below set out this information detailing these reductions: Land, DE&S, Air Command, DSG and non-operational locally employed civilians account for the greatest civilian losses while the Defence Logistics Transformation Programme accounts for over 60% of cuts in military and administrative support posts.[41]Table 3: Civilian Manpower Reductions

—  Land (including AG and NI) —  -3100

—  Chief of Joint Operations —  -110

—  Central and Defence Estates ^(a) —  +770

—  Science, Innovation and Technology —  +200

—  Defence Equipment and Support —  -6720

—  Air Command —  -3000

—  Fleet —  -1340

—  Unallocated ^(b) —  +230

—  Royal Fleet Auxiliary —  -40

—  DSTL —  +210

—  Met Office —  -120

—  Hydrographic Office —  + 90

—  Defence Support Group —  -2390

—  Non Operational Locally Employed Civilians —  -3260

—  NET TOTAL REDUCTION —  -18620

a. Defence Estates was part of the Central TLB in April 2004

b. staff who cannot be allocated to a particular TLBTable 4: Military and Admin Support Posts

—  Closure of RAF Coltishall —  738

—  Merger of Royal Navy TLBs —  121

—  Merger of RAF TLBs —  229

—  Joint Personnel Administration —  588

—  Defence Logistics Transformation Programme —  3418

—  Closure of Army Technical Foundation College Arborfield —  147

—  Fleet delivery training —  246

—  TOTAL REDUCTION —  5487

27. As we noted in our last Report, the MoD has exceeded its efficiency targets by a wide margin. We commend the MoD for its focus in maintaining its core programme. We must however express some concern that these cuts come at a time of considerable change in the MoD, and of continuing high operational commitments. Inevitably, such reductions in staff have placed greater burdens upon personnel and hindered performance.

28. The MoD's memorandum on JPA notes that "in order to release the resultant financial benefits of JPA back to the rest of Defence at the earliest opportunity, it was decided at the time of Defence Management Board endorsement that implementation time-scales and remaining within the approved funding framework would be the key drivers for the project".[42] The Comptroller and Auditor General notes that, as a result of this, "under pressure to achieve its efficiency targets, the Department sought to achieve the planned savings in HR personnel at too early a stage in the implementation of the JPA. Around 300 HR staff posts were cut at a time when the difficulties associated with the implementation were, in fact, creating a need for more experienced HR staff support".[43]

29. We are concerned that there has been a significant cost to the achievement of the MoD's efficiency programme. We consider that the difficulties Service personnel experienced using the JPA system were in part due to the MoD's pursuit of its efficiency targets. The fact that the MoD has exceeded its efficiency targets while the JPA system has performed so badly raises questions about the management of the MoD's extensive change programme and about a possible conflict of priorities.

30. During our inquiry into Recruiting and retaining Armed Forces personnel we heard from the Army and RAF Families Federations and from Service personnel, via the web forum we established, that cuts in MoD personnel had had a negative effect on the service they received.[44] We are concerned that MoD's headcount reductions, office closures and consequent move towards contact centres have together proved a source of frustration to Service personnel. We note that the MoD has no method of measuring whether the quality of the service it provides to Armed Forces personnel has deteriorated as a result of the efficiency programme. We recommend that the MoD develop a system to monitor the effect of its efficiency programme so as better to enable it to manage its impacts on Service personnel.

Capability Review

31. In March 2007 the Cabinet Office led the "Capability Review of the Ministry of Defence" which examined how senior leaders within the MoD, both military and civilian, collectively and individually lead, set strategy and deliver. The review concluded that the MoD had one of the most challenging briefs in Whitehall—preparing for unpredictable challenges from across the globe, and in exceptional circumstances, at home. The review also found that there was "a lack of clarity around roles, accountability and authority". The key areas for action were identified as:

reviewing leadership behaviours, governance and accountability to ensure that its governance structures and levels of accountability are fit to form the basis of its ambitious programme of change and development, to find ways for that Defence Management Board to communicate with one voice and to simplify business models and processes.

promoting the defence agenda more effectively across Whitehall, addressing the insularity of the MoD and refreshing strategy;

building on human capability, by properly funding early departure schemes, increasing skill levels, reinforcing line management and improve succession planning.

32. The Capability Review also found that "the current level of sustained operational commitments puts at risk the Department's ability to prepare for potential future missions. Striking a balance between short-term operational activity and long-term capability development will become increasingly challenging and will require the MoD leadership team to unite in taking tough prioritisation and resource allocation decisions".[45]

33. In its review of the MoD's performance, the NAO notes that the Department has embarked on a two-year programme to improve these areas of weakness. An important part of the programme is the Head Office Streamlining Programme which will reduce Head Office staff by 25 per cent, a loss of about 1,000 civilian jobs and 300 military posts.[46] The MoD Annual Report and Accounts 2007-08 notes that streamlining aims to achieve "swifter decision making, based on clearer roles and responsibilities, clearer accountability and elimination of over briefing and unnecessary or duplicated staff work. Senior staff are expected to set the example".[47] From January 2008, as part of the Streamlining Programme, the Defence Management Board was replaced by the Defence Board, placing greater emphasis on strategic oversight and the direction of defence and managers' performance.[48] A new Defence Operating Board was established as the means by which the decisions of the Defence Board and Chiefs of Staff Committee are fully implemented.[49]

34. We asked the Permanent Under Secretary of State for examples of how these changes had improved leadership within the MoD. He told us: "I feel—and you will have to take my word for it I am afraid—that the Defence Board is cohering and has a common view on what we are trying to achieve".[50]It is probably too early to determine the success of these changes. We hope that the MoD will, in its next Annual Report and Accounts, describe in some detail the positive impact of the programme stemming from the Capability Review. We do remain concerned, however, that the Streamlining Programme, coming on top of the efficiency programme and accompanied by changes to processes and structures, may inadvertently affect the quality of performance within the MoD.

Data security

35. This year the Cabinet Office introduced a requirement for all Departmental Annual Reports to list all data losses during the year. The MoD Annual Report and Accounts 2007-08 listed two breaches in data security:Table 5: Summary of protected personal data related incidents formally reported to the Information Commissioner's office in 2007-08

—  Date —  Nature of incident —  Nature of data involved —  Number of people potentially affected —  Notification steps

—  Jan —  Loss of a non-encrypted laptop from a hire car outside secured Govt premises. —  Name, date of birth, address, passport number, next of kin, bank account details, National Insurance number. —  Estimated at 620,000
—  personal records which also contain limited details of approx 450,000 referees and next of kin.
—  Individuals notified by post. Police notified. Media releases and a statement to
—  Parliament on 21 Jan 2008.

—  Feb —  Loss of a non-encrypted laptop from outside secured Gvt premises. —  Name, date of birth, address, next of kin.
—
—  Estimated at 250. —  Individuals notified by post. Police notified. Media releases.

Data source: MoD Annual Report and Accounts 2007-08, Vol II, p 247

In its briefing, the NAO further told us that since 2004 the MoD has lost 121 memory sticks (including 81 with restricted information and 5 with Secret information); and 747 laptops (32 of which have been recovered).[51]

36. In response to these losses, the Department commissioned Sir Edmund Burton to conduct a review of its data handling procedures. He found that "generally, there is little awareness of the current, real, threat to information, and hence to the Department's ability to deliver and support operational capability. Consequently, there can be little assurance that information is being effectively protected",[52] and that "a serious security event of this nature was inevitable".[53]

37. The MoD has accepted Sir Edmund Burton's findings and has published an action plan to implement changes,[54] including:

embedding awareness of the importance of and the procedures for correctly handling personal data across the Department;
complying with the Data Protection Act as soon as possible;
establishing a rigorous regime of Audit, Assurance and Compliance for Data Protection; and
ensuring that Top Level Budget areas and Trading Funds develop, resource and maintain adequate Data Protection.[55]

38. In September 2008 (after the period covered by this year's Annual Report and Accounts), three hard drives (two containing sensitive personal information) were stolen from a secure facility at Innsworth, Gloucestershire. On 10 October, the MoD announced that EDS could not account for a hard drive containing the details of 100,000 members of the Armed Forces and 600,000 potential recruits. It is not clear from the press notice whether this constitutes a new data loss or an earlier incident which has only come to light recently. Data held on the hard drive included bank details, passport numbers, addresses, driving licence details, addresses and telephone numbers.

39. We asked the Permanent Under Secretary why further losses occurred after the recommendations of the Burton Review. He told us: "I do not think we are ever going to eradicate in the modern world the loss of a laptop, for example, or systems of that kind. What we need to do is to reduce it and very definitely make its impact less damaging. The most recent case involving the loss of the hard disks actually resulted from a census by our suppliers of their removable media, which was being undertaken because of all the effort we have instigated from the centre to get more on top of this, so it is work in progress, but it is exceptionally important work".[56]

40. We asked how the MoD was ensuring that its policies and practices were put into practice, and specifically about what system of censure and punishment the MoD applied to those who lost, or compromised, personal data. Sir Bill Jeffrey told us that already 20,000 laptops had received new encryption; but he also stressed that the most challenging area of data protection was not equipment but the "behavioural aspect".[57] This point was also stressed by the Secretary of State who said: "we have to change the culture".[58] We were sent a draft of a revised table of security breach levels and resulting sanctions, drawn up following the Burton Review, which is included in the evidence of this Report.[59]

41. We are concerned to learn that the MoD has been involved in separate incidents where significant amounts of personal data have been lost. We are pleased that the MoD has since then put in place firm measures markedly to reduce if not prevent similar incidents happening the future. While we agree with Sir Bill Jeffrey that preventing any reoccurrence of data loss is impossible, we emphasise that the MoD must show no complacency in this area. We are pleased to see that the matter is being overseen by the Defence Board, at the very highest level within the Department, and we expect clear and full information on progress to date in limiting or preventing such incidents in the next Annual Report and Accounts.

10 Ministry of Defence, Annual Report and Accounts 2007-08, HC 850-I, p 12 Back

11 Ministry of Defence, Annual Report and Accounts 2007-08, HC 850-II, p 270 Back

12 ibid, p 47, para 4.6-4.7 Back

13 Ministry of Defence, Annual Report and Accounts 2006-07, HC 697, p 108 Back

14 Defence Committee, Ministry of Defence Annual Report and Accounts 2006-07: Government Response to the Committee's Fifth Report of Session 2007-08, Fifth Special Report of Session 2007-08, HC 468, p 24 Back

15 Ministry of Defence, Annual Report and Accounts 2006-07, HC 697, p 125, para 206 Back

16 Defence Committee, Recruiting and retaining Armed Forces personnel: Government response to the Committee's Fourteenth Report of Session 2007-08, Eleventh Special Report of Session 2007-08, HC 1074, p 40 Back

17 HC (2007-08) 468, p 30 Back

18 ibid, p 25 Back

19 ibid, p 30 Back

20 Ministry of Defence, Annual Report and Accounts 2007-08, HC 850-II, p 272 Back

21 Q 27 Back