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


Examination of Witnesses (Questions 20-39)

SIR BILL JEFFREY KCB AND MR TREVOR WOOLLEY CB

4 NOVEMBER 2008

  Q20  Chairman: Is it what you will say next year?

  Sir Bill Jeffrey: I hope not. I think we will have a better picture before then and we can certainly, if the Committee would welcome it, provide some analysis of this issue as we see it at present. It is certainly not one in which we are at all uninterested and, for the avoidance of doubt, it is one that we do play into our discussions with the Treasury because we do draw to their attention some of the cost pressures that we face that we have just been describing.

  Q21  Chairman: What is the timescale for the outcome of this work?

  Sir Bill Jeffrey: I think the detailed work will take a year.

  Q22  Chairman: It has already taken a year, has it not?

  Mr Woolley: It has but in terms of the information that we need to assemble through an analysis of all the different defence contracts this is a time-consuming process, and obviously we need to have an intellectually robust product at the end of it, and we expect that to take another year.

  Q23  Chairman: Another year?

  Mr Woolley: Yes.

  Sir Bill Jeffrey: I do think since the Committee is as interested in this topic as it obviously is, we should try to furnish you with a note with what we are able to say about this issue complex as it is.[4]

  Chairman: It would be helpful if you could because, as you say, it is very important in your negotiations with the Treasury. Brian Jenkins?

  Q24  Mr Jenkins: I am sitting here listening to the answers and in some part you have answered some of the questions. Going back a number of years, I remember going through the retail price indices with families and pensioners and why they are different. It is only recently (this was 30 years ago) we started re-establishing the differences in different groups and different purchasers. When you start talking about it is difficult to estimate the rate of inflation because of inputs and outputs, they seem quite simple calculations to do: an input analysis and a rate of inflation. What worries me is the widespread belief, and I do not know how you answer this, where everyone recognises out there that the MoD is a customer that buys last year's technology at next year's prices and you are tied into long contracts which do not appear to have taken any inference from the falling cost of technology whereas anyone around the table would know that the technological advances we have seen in society in consumer goods should be reflected back through the producers into the goods you are purchasing. Why is that not happening?

  Sir Bill Jeffrey: To some extent, Mr Jenkins, I think the argument in the defence area is about numbers of repeats. The huge savings in the civil sector tend to be in areas where there is a mass market and there can be massive economies of scale through production. We are in a different sort of business and we have to recognise that. I do not think it is fair to say that we get last year's technology at next year's prices. We certainly try to negotiate the best prices we can. As Mr Woolley said, there are variational price clauses in most contracts that are intended to address that. I am not saying to the Committee there is not an issue there. It clearly is the case that if you look at the basket of things that we acquire that there are significant variations in year-on-year costs within it. We understand a bit about that but the detailed exercise that we have been at for some time, and I fear will be at for a bit longer is intended to get much more under the surface.

  Q25  Chairman: Is the real risk that the best will be the enemy of the good? Moving on, your Report and Accounts were qualified this year. When were they last qualified?

  Sir Bill Jeffrey: They were qualified the previous year for an entirely technical reason, which I am sure the Committee will recall, to do with the expenditure in theatre.

  Mr Woolley: There was a small over-spend on "Requests for Resources 2", that is the cost of operations, in 2006-07 which led to a technical qualification by the National Audit Office because of that overspend, but in terms of the substance of the Accounts they were last qualified in, I believe, 2002-03.

  Q26  Chairman: The qualification this year was not what you would describe as a small technical qualification?

  Sir Bill Jeffrey: No it was not.

  Q27  Chairman: Is it serious? It sounds pretty serious to me.

  Sir Bill Jeffrey: It is. It is serious and troubling and we are working hard to make sure that it does not happen at the end of this year. As is I think clear from the Accounts, it reflects the fact that although the Joint Personnel Administration system is, we believe, now bedding down for the principal purposes for which it was introduced, it has had quite serious problems in terms of its ability to give us and give our auditors the information they need about expenditure on Service pay and allowances that would give them the confidence to test that aspect of our Accounts, so it is serious. I asked for an internal piece of work, which the Committee I think will be aware of, to be done which revealed that, looking back on it, the JPA project paid too little attention to the extent to which the system that was being produced would feed the Accounts and give us the confidence to have the Accounts properly audited. We are working very hard at the moment. I had a conversation with the recently appointed Chief Executive of the Service Personnel and Veterans Agency a week or so ago to address all the issues that the NAO drew to our attention and on which we were already working, with a view to sorting this out as quickly as we can.

  Q28  Chairman: So you have introduced new financial controls on JPA. Do you think that these controls will have the effect that the Accounts will not be qualified, or at least not for the same reason next year?

  Sir Bill Jeffrey: I would not care to make a confident prediction about that yet because as we have gone into it there is a lot to be done to correct the situation, but there is a good prospect, and we are working very closely with the NAO who have been extremely helpful over this, of getting to the point where they can give us unqualified Accounts in this respect at the end of the current financial year.

  Q29  Chairman: Why would you not be confident of that?

  Sir Bill Jeffrey: I think principally because of the technical complexity of this issue. It comes down to the means by which very, very large numbers of payments are made in a system, notwithstanding the extent to which the JPA is enabling us to make it simpler, which is extremely complicated. I do not know whether Trevor Woolley would like to add to that. It is proving a difficult task but there is a lot of effort being invested in it.

  Mr Woolley: I think the difficulty is that we have replaced a manual system with an automated system. In a manual system there are lots of opportunities for manual intervention if it looks as if a payment is being made at the wrong level or to the wrong person. The automated system we have in JPA does not have that same level of control and the same level of evidence that the right payments have been made to the right people. There is no suggestion that there is a significant amount of wrong payments being paid but there is no actual evidence to satisfy the NAO that the right payments are being made. The reason I think we cannot be absolutely confident is that although we are putting a lot of procedures into the system to give greater assurance, it will only be at the end of the financial year that the NAO tell us whether in their view there is sufficient assurance.

  Q30  Chairman: So the set of suggestions that the NAO have made about completing a systems map, having new processes to ensure that there are not input errors or output processing errors, an overall plan for prioritising issues, are those recommendations ones which you are following?

  Sir Bill Jeffrey: Yes exactly, and 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.

  Chairman: Still on JPA, Richard Younger-Ross?

  Q31  Richard Younger-Ross: In terms of self-service satisfaction you told us that the JPA Centre was currently running at 45.5%. How do you intend to improve that figure?

  Sir Bill Jeffrey: I thought the current figures (although I do not have them in front of me) were better than that. Certainly I know that the satisfaction surveys have been on an upward trend and some of the teething problems that we undoubtedly had as we initially rolled the system out have been addressed successfully so that people are now getting their basic pay without interruption, but I do not have an up-to-date satisfaction survey figure in front of me. My recollection is that it is a bit higher than you have just quoted.

  Q32  Richard Younger-Ross: You say it is going up?

  Sir Bill Jeffrey: Yes.

  Q33  Richard Younger-Ross: When is it going to get to the 90-95% level which is what I would expect from any pay roll system, if not higher?

  Sir Bill Jeffrey: As quickly as possible. I would find it hard to put a date on that but again this is something I discussed with the new SPVA Chief Executive when she took over and building up the satisfaction levels within the system is something that I have asked her to take as a pretty high priority.[5]


  Q34 Richard Younger-Ross: The contract you let out to do this ran at an addition of £2.3 million over budget. Only £516,000 of that was reclaimable from one of the contractors EDS. Why was so little reclaimable?

  Sir Bill Jeffrey: There is a provision in the contract for a failure charge which is essentially something that takes account of the nature of any failure in service delivery under the contract and also the extent to which it is reasonable to attribute responsibility either to EDS or to the Department, and there is an agreed procedure for settling between us what failure charges should be imposed on EDS. In 2007-08, as you say Mr Younger-Ross, that figure was £516,000.

  Q35  Richard Younger-Ross: So the other nearly £1.8 million is a failing by the Department?

  Sir Bill Jeffrey: I 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.[6]


  Q36 Richard Younger-Ross: It has been suggested that part of the problem was that the hardware was designed in one part of the country and the software in another part of the country; is that true?

  Sir Bill Jeffrey: It depends which problem you are talking about. If we are back at the problem of the issues which led to the qualification of the Accounts, the source of that was, as I have said, the project paid too little attention to the financial dimension of the issue. If your point is about the extent to which in its early days the system in all three Services suffered teething problems and there were issues that gave rise to complaints, I think I would argue that with big systems of this sort inevitably this is going to happen to some extent. I do not recall ever having been told that the particular way in which the hardware and software were put together contributed to that.

  Q37  Richard Younger-Ross: I think we would all accept that you can have some small teething problems in any system but this seems to have been a major failing and if the satisfaction figures, which I am told by the way are up to 77%, were down to 45% at one point, that strikes me as not a small teething problem but a systemic failing.

  Sir Bill Jeffrey: I am not going to sit here and defend 45% as a favourable rating but having seen one or two of these things across government there is a period when not only are some people affected by mistakes in the system but a lot of others who know them know about them and therefore there is a sense around that the system is not performing and that reflects itself in favourability ratings. The figure that I did not have but your Clerk has been able to provide you with suggests that we are on quite a rapid upward trend, as I believed we would be. These are big, complex systems and it is never at all satisfactory or defensible when people are paid the wrong amounts on encounter difficulties in the self-service element of it, but I think we are getting into a better position now.

  Q38  Richard Younger-Ross: That is what I mean, Sir Bill. You seem to accept that this level of failure is acceptable. The real question that we want as a Committee to know is how do you stop failures like this occurring at future dates?

  Sir Bill Jeffrey: It is principally, as the project is developed, by taking as much of the risk out as possible and delivering it carefully in stages so there are as few risks as possible of things going wrong. I do not remotely want to say that this was completely satisfactory, of course it was not, I am simply asking the Committee to consider the fact that this was replacing myriad manual systems, it was covering a very large population of employees, it was essentially automating a pay and allowances system which is extraordinarily complex and needs to be made less complex, and therefore it perhaps was not as surprising as all that that we encountered some of the problems that we did.

  Chairman: Moving on to the implementation of the efficiency programme, Robert Key.

  Q39  Robert Key: The achievement in cutting civilian staff numbers has been quite remarkable. Your target was to reduce the civilian staff by at least 10,000. The achievement to the end of year 2007-08 was actually to cut civilian staff by 17,500. That has however clearly been achieved at a substantial cost and I draw the Committee's attention, Chairman, to the Annual Report and Accounts, paragraph 213, on page 127 and if I may, I will quote two sentences: "We must address the limits on individual and organisational performance imposed by the variable quality of management and leadership and the limitations of our pay and reward structure. We must address the threat to future capability flowing from the skills gap associated with streamlining the Defence Equipment and Support Business Strategy, the lack of a deep understanding of our skills needs and our uncertainty over whether we will have an adequate supply of talented people sufficiently representative of the society we serve to fill key posts in the future." That is a very, very bleak assessment of how you have managed to cut 17,500 civilian jobs. Is this what has been contributing to the stretch currently experienced by the Armed Forces themselves—not just civilians? It has had an impact, surely, on the efficiency of the uniformed members of the Armed Forces?

  Sir Bill Jeffrey: I think, Mr Key, there are two different issues here. One is that we were committed to reduce the number of civilians and the Joint Personnel Administration Project, which we have been discussing, is an example of one of the means by which we did so, by automating processes that were labour-intensive. Another good example is the Defence Logistics Transformation Programme where we have reduced the number of civilian staff very significantly by doing things smarter, and I think the report brings out in many respects very successfully. Reducing civilian numbers is something we have been working on and ought to be working on and every other part of government is doing so. That we over-achieved to the extent that we did I think reflects the particular situation in one or two parts of the organisation, of which the Defence Equipment and Support organisation is a contributor in the sense that we lost people more rapidly than we had probably been expecting, but it also reflects the fact that some of these efficiency measures did deliver achievable reductions in civilian numbers. The second point is the one dealt with in this paragraph which may be on the self-critical side but it does bring out the fact that as a Department we have to look to our skills base in particular and we have been developing a strategy for doing that right across the board, in relation to financial accountancy skills in Trevor Woolley's area, commercial and project management skills and some of the high-tech skills as well so we very much need strategically to build the skills of the Department to face the challenges of the future.


4   See Ev 40 Back

5   See Ev 41 Back

6   See Ev 41 Back


 
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