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

Memorandum from the Ministry of Defence

1.  The Annual Report notes that the 2003 White Paper envisaged manning for a range of scenarios, including undertaking an "enduring medium scale peace-support" and an "enduring small scale peace-support" operation simultaneously (para 42). In noting that "the force structure... cannot sustain indefinitely the nature, scale and intensity of operations being conducted in Iraq and Afghanistan over the last two years" (para 43), is the Department signalling a need to review and revise the 2003 planning assumptions? What is the MoD's current view of the number and scale of generic types of operations that can be sustained by the armed forces as currently manned and resourced?

  As the 2003 White Paper noted, the planning assumptions guide the development of capability over the medium to long term and are not intended either to constrain or precisely describe the actual pattern of operational commitments at any one time. We judge that as currently manned and resourced, the Armed Forces can sustain a level of operations consistent with these assumptions, but not, indefinitely, the higher level which the Iraq and Afghanistan commitments have required over the last two years.

2.  The Annual Report notes that the MoD is investigating how readiness and deployability might be better measured (p 57). What is the Department's latest thinking on what changes might be forthcoming from that work? When will the work be completed?

  The work has been completed and the department's first Quarter report for 2008-09 reflects our latest thinking. The Defence Secretary will shortly send the Committee a copy of this and it will be published on the MoD web site at A main objective of the review was to ensure that the detailed methodology and targets underpinning our readiness assessment reflect current operational priorities, rather than those of four years ago. Accordingly, we have decided to relax some longer term readiness targets for forces not required for current operations in order to focus resources on operational priorities. We have also reviewed and modified the weightings attached to certain force elements. A consequence of these changes is that the calculation of the proportion of force elements which have no serious or critical weakness from 1 April 2008 is slightly different from that of previous years.

3.  The Annual Report notes that the Department is planning for how "full capability" might be restored once Iraq/Afghanistan operations are completed (para 43). What is emerging from that review? What might be the likely cost any programme to restore "full capability"?

  Work to examine how the Department might restore full contingent capability over the period 2008-09 to 2013-14, including any associated costs, is underway. An initial report is expected by the end of the year. This will encompass the training, equipment, platforms and munitions implications. It is too early to estimate the cost of restoring this level of capability.

4.  With the RAF manning requirement falling rapidly over the last two years (Annual Report p 171), why has the RAF not been able to manage the reduction in its in-post strength so as to avoid a manning deficit?

  The RAF planned to drawdown from a trained strength of 48,000 in 2005 to 41,000 in 2008. Two main factors will cause a deficit against the requirement in the period 2008-10:

    —  The RAF has recently faced a relatively small but significant increase in the historical exit rate (both "voluntary outflow" and "optional exit points").

    —  Earlier this year a number of increases to manpower liability (requirement) were agreed, particularly for areas facing increasing demands from operations, such as the RAF Regiment.

  The RAF is taking steps to address the deficit through its current recruitment campaign and by the pursuit of various retention initiatives at both Service and MoD level. Full manning balance is currently forecast for 2011.

5.  The failure of the Royal Navy to be in manning balance is attributed in the Annual Report to the requirement not reducing as quickly as had originally been planned (para 275, first bullet). Why did it not fall as intended?

  The requirement for manpower in the Naval Service has not reduced as quickly as originally envisaged for two reasons:

    —  The planned drawdown in liability (requirement) that was expected through the various initiatives in Fleet, and Defence Equipment & Support has not been as rapid as originally estimated.

    —  There has also been a small increase in liability (requirement) in discrete areas. These reflect the manpower changes designed to enhance RN support to Land operations and improve initial training capacity in order to increase Gains to Trained Strength.

  The overall result is that the requirement will still reduce, but at a slower rate, from 35,760 in 2009 to 35,480 in 2012.

6.  The Annual Report's data on manning outflows and separated service has missing or only provisional data for the Army, because of problems with the JPA system (Tables 12 and 13 and their footnotes; and para 308). What is the MoD's latest assessment of Voluntary Outflow rates for the Army? In the absence of usable JPA data, what alternatives means are being examined to get a reliable measure of Army outflow and separated service levels?

  Although JPA is not yet producing data on Army voluntary outflow it does provide data on the total Army outflow from the Trained Strength which is stable at 11.1% for the year to 1 August 2008 against a figure of 11.4% for the year to 1 August 2007; there has been no sudden outflow of Army personnel.

  Historically, the Army has monitored the voluntary outflow rate very carefully, seeking to identify trends and to reinforce the success of those measures which are effective in reducing outflow. The Army wish to retain more personnel, particularly battle-hardened soldiers and officers with recent operational expertise and skills in pinch point trades. A number of financial incentives have been put in place both to encourage retention, and those who have recently left to rejoin. These vary from Financial Retention Incentives for key trades to measures to extend and increase the rejoin bounty to encourage those with key skills and experience now out of the Army to return.

  Enhancing JPA is the best way to improve the data available on manning patterns and the Department is committed to this. In addition, last November, the Service Personnel and Veterans Agency (SPVA) introduced a process which should allow Defence Analytical Services and Advice (DASA) to publish greater detail on the reason for leaving, including Voluntary Outflow, in future. An assessment of the data quality will be conducted during February 2009. Once the data can be verified and proved to be accurate, Voluntary Outflow rates will be available for future DASA manning statistics reports.

  As regards separated service JPA remains the best source of information and we are still working through the issues of Army data integrity.

7.  In 2007-08 the MoD missed its equipment procurement targets for in-year cost slippage and in-year time slippage (Annual Report pp 136-7). Has the Department been able to quantify, or estimate, the extent to which the margin by which those targets were missed can be attributed to its focus being on supporting ongoing operations in Iraq and Afghanistan? Without those operations, would those procurement targets have been met in 2007-08?

  Supporting operations, not least through the procurement of equipment to meet Urgent Operational Requirements, has been the Department's highest priority. Resources within Defence Equipment and Support have been prioritised accordingly. It is not, however, possible to assess to what extent, if any, this effort has impacted on our performance against the procurement targets.

8.  Savings from the Defence Logistics Transformation Programme are put at £1.3 billion-£1.4 billion a year by March 2008 (Annual Report para 233). The Annual Report also notes, however, that logistics support to "force elements at readiness" missed target levels set down in DE&S's customer supplier agreement (para 231), and that readiness levels for force elements continued to fall (para 232). To what extent will such aggregate measures of the quality of the logistics service be taken into account when efficiency savings figures are computed for the CSR efficiency programme?

  The missed target on delivery of force elements at readiness in 2007-08 was not related to the Defence Logistics Transformation Programme (DLTP). The SR04 efficiency programme only permitted efficiency gains to be attributed to the DLTP where lower costs whilst maintaining the same level of output could be demonstrated (or, for output efficiencies, increased outputs for the same financial outlay). Value for Money savings in equipment support over the CSR 07 will be assessed on the same basis.

9.  In implementing changes following the 2007 Capability Review, the Annual Report notes that plans for "future structures, behaviours and working practices will be set out in July, with relevant aspects subject to formal consultation" (p 122). When will those plans be published?

  We published the plans on 29 July at the start of the third consultation period with the Trade Unions on the Streamlining Process. We sent the copies of the consultation document to the Committee on the 26 September. We announced the end of consultation and the next phase of implementation on 15 October.

10.  The Public Expenditure Provisional Outturn report for 2007-08 shows End Year Flexibility available at the start of 2008-09 as £3,121 million (Resource DEL) and £214 million (Capital DEL) (Cm 7419, p 14). The Committee would like to have detailed calculations showing how these figures were derived from EYF stocks reported in the previous year's Provisional Outturn report (Cm 7156, p 14), including details of EYF draw-downs during 2007-08 and any adjustments to DEL under/over-spends in previous years

  The table below sets out how the figures for End Year Flexibility for Near Cash Resource DEL and Capital DEL in CM 7419 were derived from those in CM 7156. For Non-Cash Resource DEL, the figure in CM 7156 was £2419 million. £1621 million was drawn down in Spring Supplementary Estimates, and the final underspend against the DEL was £1,046 million. This implies a notional EYF stock for Non-Cash Resource DEL at the end of 2007-08 of some £1.8 billion. The figure of £3.121 billion quoted in CM7419 is an error which is much regretted. However, the Department agreed with the Treasury in the CSR 07 settlement that its non-cash EYF stock would be set at zero at the start of 2008-09, and that any requirement for further non-cash provision would be considered with the Treasury when it arose.
£ millionNear Cash


2006-07 PEOWP (Cm 7156) EYF21 406
Less: RfR21(99)
Other Adjustments2(7)
2006-07 Stock Balance21 300
Drawn down at 2007-08 WSE(21) (65)
Drawn down at 2007-08 SSE0 (40)
2007-08 Stock Balance0 195
Underspend RfR112719
Balance 2007-08 PEOWP (Cm 7419)27 214

1  Underspend on RfR2 is not eligible for carry forward.

2  Roundings and other budgeting regime adjustments.

11.  MoD's PSA-4 under the 2004 Spending Review addressed progress in developing the ESDP and NATO capability. Where, if anywhere, does the new PSA/DSO regime of the CSR cover these endeavours?

  Under the Comprehensive Spending Review 2007 arrangements developing the ESDP and NATO capability are incorporated under PSA 30, Indicator 3—"More effective international institutions, better able to prevent, manage and resolve conflict and build peace". This indicator sets out HMG's vision for NATO and ESDP and the key actions we will take to achieve it. The FCO have the overall lead for PSA 30 but it will be delivered in partnership with MoD, DfID and the Stabilisation Unit. The PSA Delivery Board, chaired by the FCO's PUS, has also recently agreed a tri-departmental delivery plan to ensure we meet the ambition of the PSA. The MoD will not be covering these issues in its quarterly public reporting, but will provide a narrative description of the defence contribution in its Annual Reports at the end of each year.

12.  The Defence Plan sets out five `sub-objectives' for the new MoD DSO 1.1 (success on operations) on pages 15-16, and two sub-objectives for DSO 2.1 (readiness) on page 18. For those sub-objectives, how will performance be measured, what are the baselines, and what will the targets be?

  In considering the sub-objectives for Success on Operations and Readiness, it may be helpful to think in terms of current and contingent operations. The sub-objectives for Success on Operations, and the metrics that are used to measure success against them, all relate to current UK military operations, primarily in Iraq and Afghanistan, as well as standing military tasks. The sub-objectives for Readiness, on the other hand, relate to UK military preparedness for a broad range of contingent future operations, the requirements for which are laid down by the MoD's Studies & Assumptions Group.


  Sub Objective 1 is about achieving Success on Operations and is—"In conjunction with other Government Departments, to achieve substantial progress towards the objectives established by Ministers for operations and other Military Tasks, as set out in the Chief of Defence Staff Directive for each operation".

  Performance is measured by the relevant operation's Commander applying military judgment to assess progress in achieving the Military Strategic Objectives (MSOs) set out in the Chief of the Defence Staff's directive for each operation.

  Sub Objective 2 is about Activity Levels and is to—"Manage the activity levels of the Armed Forces over time".

  Activity levels are measured for each Service and Defence overall in three categories:

    —  Service Personnel Deployed on Contingent Operations;

    —  Service Personnel Deployed on Contingent Operations and undertaking Military Tasks; and

    —  Service Personnel Committed to Operations and undertaking Military Tasks.

  There are no baselines or targets. The information is used to monitor the proportion of the Armed Forces undertaking Operations and Military Tasks and gives senior management an overview of the total commitment of the Services.

  Sub Objective 3 is about Generating and Sustaining Capability and is—"Generate and sustain the necessary capability to conduct current and enduring operations and Military Tasks".

  Performance is measured by the Commander of each individual Force Element applying military judgment to assess that Force Element's ability to be generated and sustained based on a broad assessment of the state of the force Element's Manpower, Equipment, Training and Support. The baseline and targets are articulated in a classified document by Permanent Joint Headquarters' (PJHQ's) called the Combined Joint Statement of Requirement.

  Sub Objective 4 is about the Residual Capability of the Joint Rapid Reaction Force and is—"Monitor the capability to generate the Joint Rapid Reaction Force (JRRF) and assess JRRF capability against generic planning scenarios".

  Two pieces of analysis are used to measure performance:

    —  The Directorate of Joint Capability assesses the capability of uncommitted UK forces against a range of different types and scales of operation.

    —  The PJHQ Joint Operational Estimate of Capability and Readiness (JOECR) assesses the capability of those force elements that are nominated as part of the Joint Rapid Reaction Force (JRRF).

  The baseline is set against the generic planning scenarios created by the Studies and Assumptions Group. These scenarios form part of Defence Strategic Guidance. Targets are set against required levels for contingent forces articulated in Defence Strategic Guidance, or as modified by Defence Board recuperation targets.

  Sub Objective 5 is about Recuperation and is—"Recuperate the force structure to the capability to undertake the most demanding operations provided for in Defence Planning Assumptions". (This is defined as a Medium Scale enduring peacekeeping operation plus a Small Scale peacekeeping operation together with an occasional further limited duration Small Scale operation).

  Performance is measured by the Commanders of individual Force Elements applying military judgment based on a broad assessment of the state of the Force Element's Manpower, Equipment, Training and Support. The baseline is the current residual capability of the force structure. The target is to recuperate to the capability to undertake the most demanding operations provided for in Defence Planning Assumptions.


  Sub Objective 1 is about Readiness and is to—"Achieve target readiness states for Force Elements, against the requirements laid down in the Defence Programme and the standards set out by individual services for manpower, equipment, collective training and support, including logistics".

  Performance is measured as the proportion of Force Elements without Serious or Critical Weaknesses in achieving Funded Readiness. The baselines are the Force Elements at Readiness (FE@R) requirements laid down in the Defence Programme. The aim is to achieve the baseline set out in the Defence Programme and the target is to have 73% of the total FE@R requirement set out in the Defence Programme without serious or critical weakness.

  Sub Objective 2 is about Readiness to deploy on and sustain contingent operations and is—"Be able to generate, deploy, sustain and recover the Force Elements for contingent operations".

  Performance will be measured as a percentage of the assumed period of a double-Medium Scale concurrency commitment for which Force Elements will be sustainable. The baselines are the Force Elements at Sustainability (FE@S) requirements laid down in the Defence programme. Work to determine the full FE@S requirement is underway. However, FE@S is a new measure and, until the work to determine the full requirement completes, there will be no hard FE@S targets.

13.  Will the MoD's performance progress against its DSOs be published in the 2008 Autumn Performance Report?


14.  The Annual Report notes that the equipment programme planning assumptions for the next 10-year period will "shift the overall balance of Defence procurement towards support for current operations". What potential changes to specific programmes are likely to be made as a result of the review of equipment programme planning assumptions? When will the results be published?

  The examination of the equipment programme referred to in the Annual Report continues. It aims to bear down on cost increases to equipment programmes and to shift the overall balance of defence procurement to the support of operations, in line with our commitment in the National Security Strategy. We are looking at our planning assumptions for the equipment programme in the round, and at this stage it would not be sensible to speculate on potential changes to specific programmes. It is envisaged that the results of the examination will provide an important input to our 2009 planning round, which will be completed in Spring 2009. Ministers have undertaken to inform Parliament of significant decisions affecting projects as soon as they are able to do so.

15.  What are the performance indicators and targets under the PACE programme? Will performance against such targets be published?

  The PACE performance indicators and targets are being defined and agreed with internal owners. Monitoring of hard benefits—budgets and manpower—has started and other measures (including support to current and future operations; reducing acquisition cycle time; reducing Defence Equipment and Support (DE&S) accommodation footprint; up-skilling of DE&S and improved staff utilisation; more effective ways of working; better through life decision making; and improved stakeholder confidence) will be introduced from October 2008. Progress towards MOD's £2.7 billion Value For Money target, including the contribution from PACE, will be included in our published Autumn Performance Report and Annual Report and Accounts.

16.  What arrangements has the Department made for its efficiency savings under the CSR to be externally audited? Will the results of any such audits be published?

  The Department intends to conduct an internal audit of its VFM programme during the course of the current financial year in line with HM Treasury requirements for the CSR programme. This will be for internal use, to inform our assessment of progress made in delivering the Value for Money programme. HMT has asked the NAO to audit departments' CSR savings programmes to provide public assurance to Parliament, and MOD expects to be included in this process.

17.  What is the MoD's current best estimate of the income that could be realised from the release of a proportion of its electromagnetic spectrum holdings to the market during 2009 and 2010? To what extent does the MoD's CSR settlement already presuppose a certain level of receipts from such a sale? For any income that might be realised over and above any sum already built into the MoD's CSR budget, will that extra income be added to the MoD's budget or surrendered to the Treasury?

  The revenue generated from the release of spectrum will depend on a range of factors, including the commercial attractiveness of specific bands selected for release and market conditions at the timing of any sale. The Department is permitted to retain up to £500 million of spectrum receipts over the CSR period. The level of receipt assumed in our internal plans is commercially sensitive.

18.  In 2007-08, there was a £1.554 billion under-spend against the RfR-1 expenditure Estimate, attributed to an over-estimated Spring Supplementary Estimate for depreciation charges and movements on provisions that did not in the event materialise (Resource Accounts, p 291). What were the main depreciation charges and provision non-movements involved, why were these charges over-estimated, and which TLBs were primarily responsible for the miscalculations?

  The Department bases its requests for any increased non-cash resource provision on Top Level Budget (TLB) forecasts available two thirds of the way through the financial year, which are then centrally adjusted. The Department strives to present robust Supplementary Estimates to Parliament, but errs on the side of prudence to avoid the risk of an overspend. Non-cash spend is difficult to forecast, and is sensitive to accounting judgements made by the auditors after the end of the year.

  At the time of the 2007-08 Spring Supplementary Estimate (SSE), the full impact of the fixed asset revaluation exercise (the Quinquennial review) was not known, and a contingency of £500 million to cover this was added to the Defence Equipment & Support (DE&S) TLB forecasts. This contingency proved to be over prudent. In addition, the Accounting Period 8 (AP08) DE&S forecast was further enhanced by £200 million to reflect emerging fixed asset write off costs arising from the Department's fixed asset verification exercise. In the event the contingency was not required. Central and DE & S TLB AP08 forecasts included some £164 million for redundancy provisions. At the year end, and after lengthy discussions, the National Audit Office audit concluded that the provisions did not fully meet the Financial Reporting Standard (FRS) 12 for provisions, contingent liabilities and Contingent Assets criteria. The provisions were, therefore, excluded from our final accounts. The balance of the underspend arose from a large number of other factors, distributed across TLBs.

19.  The table on page 292 of the Annual Report shows that the cost of Iraq operations was £190 million (12%) less than that the estimate provided with the Spring Supplementary Estimate, and Afghanistan £145 million (9%) less. For Iraq, the main differences were equipment support costs (£79 million less) and UOR costs and capital additions/write-offs (£93 million less). For Afghanistan, the main differences were UOR costs and capital additions/write-offs (£168 million less) and stock consumption (£64 million more). The Committee would like to have further detail on these areas of variation in the cost estimates, including what UORs, stocks and other costs were involved

  As stated in our 2007-08 Annual Report and Accounts, the Department works hard to ensure that the figures presented to Parliament are reliable, but there is always likely to be a variation between the forecasts used to inform the Spring Supplementary Estimate (SSE) and the final end of year outturn. The SSE request must be robust enough to accommodate any new requirements agreed after the request is submitted. In particular, the Department needs to avoid an excess vote and accounts qualification, which would result from an overspend against the SSE request approved by Parliament. (Our 2006-07 accounts were qualified because we under estimated the costs for depreciation and cost of capital).

  The Capital resource request in the Spring Supplementary round for Iraq and Afghanistan was based on details of UORs that had received financial approval at that time. The request, therefore, represented the maximum level of expenditure the Department could expect. Not all the UORs were delivered prior to the end of the financial year resulting in the underspend against capital. Associated equipment support costs, non-cash costs for depreciation and costs of capital were therefore also lower than expected.

20.  The Accounts included a sum of £687 million of income that was surrenderable to the Consolidated Fund, rather than made available to support Defence expenditure through the Appropriations-in-Aid facility (Note 5 on p 295). What was the reason for and source of this income?

  The £687 million of income relates to the Typhoon Aircraft Diversion and Replacement Agreement between the MOD and BAE Systems (Operations) Ltd.

  The receipt arrived in March 2008, and was included in our final accounts for that year. In resource terms the Department was able to utilise the benefit of the CDEL receipt in 2007-08 by netting—off the gross assets in the course of construction expenditure by the total value of the receipt. The net cash benefit of the Typhoon receipt was not required since the Department already had sufficient net cash resources to meet all its planned payments at year-end. Accordingly, the cash was passed to the Consolidated Fund.

21.  The Annual Report envisages that the JPA will, once running smoothly, save £100 million a year (para 206). What level of JPA efficiency savings have been, or will be, claimed against the MoD's efficiency programmes? What additional costs have been incurred as a result of the problems in implementing JPA, and to what extent are such costs offset against the efficiency savings claimed?

  Gross JPA efficiency savings to date of £63 million will be claimed against the MOD's efficiency programme for the period ending 31 March 2008.

  £2.3 million of additional costs has been incurred by the Service Personnel and Veterans Agency (SPVA) as a result of problems in implementing JPA. For example extra staff were necessary to address unforeseen issues in relation to the Department's financial accounting requirements, and it was necessary to establish the Service Requests Management Group, to provide a one-stop-shop query service for customers. Also additional Enquiry Centre Staff were required to support the new self service environment. Taking implementation costs into account (including the above £2.3 million) JPA savings during the period ending 31 March 2008 were some £40 million.

22.  In the aftermath of the problems with the Joint Personnel Administration (JPA) system, what plans does the Department have to identify and check whether any forces personnel have been under- or over-paid?

  The SPVA has set in place a number of assurance checks to minimise inaccuracy. On a monthly basis, before the payroll starts and at each stage of the process, a number of reports are run which alert the Payroll team to anomalies, issues and exceptions within the database. These include a high (over £10K) and low (£0K) balance check for all personnel on the Regular payroll; whilst those on the reservist payroll are subject to a high balance check (of £3K). These reports have proved to be very effective in assisting the Payroll Operations and Payroll Support teams successfully to investigate and resolve issues and anomalies before payment is made to individuals' bank accounts. On occasion they have also detected trends and this has permitted the identification and fixing of system errors.

  In a similar vein, before any major change to the system programming is released, rigorous acceptance testing is conducted to alert SPVA to any programming anomalies or unintended consequences of change that might adversely impact pay accuracy.

  Before the main pay run is credited to bank accounts, the forthcoming (draft) Statements of Earnings are visible to Unit HR personnel. This provides a window of opportunity for Unit HR staff to raise problems through the JPA Enquiry Centre or single Service JPA Focal Points. This is proving to be a very efficient way of scrutinising pay, allowances and charges at a crucial stage in the pay process. This allows SPVA the opportunity to take action prior to the crediting of pay to bank accounts.

  Over and above this routine monthly activity, SPVA conducts periodic process reviews to identify areas for system improvement. A review completed in May 2008, focused on payroll. This showed the payroll process to be fundamentally sound, but further recommendations are now being taken forward and include, inter alia: a review of some of the instructions used by unit HR staff and improvements to the training and education of self service users and HR Professionals, both intended to reduce further incorrect data input, and the imposition of various limits on data fields to eliminate the possibility of significant overpayments through error.

  Notwithstanding these measures, the reliance on correct data entry by end users, HR staff, career managers and SPVA's own staff, inevitably means that errors may still occur.

  Where an overpayment has occurred the MOD will seek to recover the monies in accordance with HM Treasury Managing Public Money (formerly Government Accounting) regulations. Armed Forces personnel who have been underpaid can request cash supplements equivalent to the underpayments from their Units. All pay errors are rectified as soon as possible.

23.  What compensation, if any, does the MoD expect to secure from the JPA prime contractor—EDS—for any failure on its part to deliver a system able to support the Resource Accounts satisfactorily?

  There is no specific provision within the contract for EDS to compensate the MoD for failures associated with the production of the Resource Accounts, but charges are raised for Service Delivery Failures, some of which are likely to have contributed to the NAO forming the view that the accounts should be qualified. Charges vary according to the nature of each failure and also take into account the share of responsibility for the failure between MoD and EDS, the extent of the impact of the failure on customers and any other mitigating factors. The total failure charge raised in 2007-08 was £516,000.

24.  Pages 318-321 of the Departmental Resource Accounts list the MoD's PFI commitments. How is the "credit crunch" affecting, or expected to affect, the PFI projects currently underway? How is the "credit crunch" expected to affect future PFI projects which the MoD is considering?

  The current economic situation has had a number of impacts on the Defence Public Private Partnership (PPP) and Private Finance Initiative (PFI) programme. Firstly, there has been a significant downturn in the availability of private finance in the last 12 months during the "credit crunch". In particular, the Bond market has all but disappeared largely due to the lack of monoline insurance. The bank finance that has been available during this period has largely been at cost. Nevertheless, five PPP/PFI deals have been closed in the past 10 months (Future Provision Marine Services, Future Strategic Transport Aircraft, Military Flying Training Service, Corsham Development Project and the Royal School of Military Engineering). Each was judged to be both value for money and affordable. Both the Future Strategic Transport Aircraft and the Corsham Development Project included provisions in the contract to ensure the Department benefits from a greater share of the gains (over and above the normal HM Treasury mandated 50%) from refinancing these PFI deals in future when the markets have stabilised and borrowing rates reduce.

  Looking ahead, the lack of finance or its increased cost is not an immediate issue in the Defence PFI programme as no PFI projects are expected to close within the next 18 months. However, beyond that, the two PFI projects that are in procurement (Defence Training Review and Search & Rescue Helicopters (a joint project with Dept of Transport)) may have to address these issues.

25.  On 9 September 2008, the MoD sold its remaining shares in QinetiQ Group plc for £257.3 million. What proportion of the proceeds from this sale will be retained by the MoD and how will the proceeds be used ie have they been earmarked for any specific defence activities/purposes?

  Net proceeds from the sale were £254.7 million, of which £200 million will be retained by the Department. These receipts have not been hypothecated but will be available indirectly to offset a variety of cost pressures which have emerged in the defence programme in 2008-09.

26.  How much more (in value and percentage terms) does the MoD expect to spend on fuel (for ships, vehicles, aircraft) in 2008-09 compared to what is was originally forecasting to spend? How is the MoD seeking to absorb the higher cost of fuel? Has the higher cost of fuel impacted upon the amount of training that was planned for 2008-09? If so, in what ways and in what specific areas?

  The cost of fuel in 2008-09 is around 70% higher than our assumptions at the time of the CSR settlement. This amounts to some £250M. Much of the increased cost of fuel was factored into decisions taken on the overall defence programme in the 2008 planning round. No training exercises funded in the 2008 planning round have been cancelled due to increased fuel costs.

27.  Is the current inflation level higher than the level assumed in the 2007 Comprehensive Spending Review settlement for defence? If so, by how much? How is the MoD seeking to absorb the increased costs resulting from higher than expected inflation? What specific action is the MoD taking to ensure that it remains within budget for 2008-09?

  The CSR reflected a forecast GDP inflation of 2.7%. The current published forecast for 2008-09 is slightly higher at 3.0%.

  In estimating the future cost of the defence programme, including equipment acquisition, we seek to use the most realistic forecasts available. Nonetheless, since the CSR costs have risen more rapidly than expected in a number of areas, especially fuel and utilities. The majority of these pressures were taken in to account in Planning Round 08, which implemented the CSR outcome. The remaining pressures will be addressed as part of our normal in-year management. The Defence Board regularly reviews the in-year position and, if necessary, will agree changes to programmes to remain within the overall resources available.

15 October 2008

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2009
Prepared 30 March 2009