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 www.mod.uk.
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.
| |
| £ million | Near Cash
Resource
|
Capital |
|
| 2006-07 PEOWP (Cm 7156) EYF | 21
| 406 |
| Less: RfR21 | | (99)
|
| Other Adjustments2 | | (7)
|
| 2006-07 Stock Balance | 21 |
300 |
| Drawn down at 2007-08 WSE | (21)
| (65) |
| Drawn down at 2007-08 SSE | 0
| (40) |
| 2007-08 Stock Balance | 0 |
195 |
| Underspend RfR1 | 127 | 19
|
| 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.
DEPARTMENTAL STRATEGIC
OBJECTIVE 1.1
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.
DEPARTMENTAL STRATEGIC
OBJECTIVE 2.1
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?
Yes.
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
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