House of Commons - Defence Committee

Spring Supplementary Estimate 2008-09 - Defence Committee Contents

Further memorandum from the Ministry of Defence

SPRING SUPPLEMENTARY ESTIMATES 2008-09

1. INTRODUCTION

1.1 This Memorandum covers the Spring Supplementary Estimate for the Ministry of Defence (MoD) and should be read in conjunction with the Department's Spring Supplementary Estimate (2008-09). The Introduction to the Estimate lists the changes being made since the Winter Supplementary Estimate. This is shown by Request for Resources (RfR), and the section number shown in brackets after the detail for each change is a reference to the line(s) that are affected by the change in Part II of the Estimate.

1.2 There is a separate Estimates Memorandum for the Armed Forces Retired Pay and Pensions Vote.

2. SUMMARY OF RESOURCES SOUGHT IN THE ESTIMATE

2.1 The Introduction to the Estimate shows a net increase in Voted DEL (Resource and Capital) of £1,093.301 million from £45,110.347 million at Winter Supplementary Estimates to £46,203.648 million for Spring Supplementary Estimates. There are two principal elements to this:

a) The draw down of our total Capital DEL End Year Flexibility (EYF) of £214.000 million, partial draw down of our Resource Near Cash EYF £45.000 million, and £50.000 million additional fiscal Capital DEL provision in anticipation of the MoD's sale of its "Spectrum" holding. Further details are set out at paragraph 4.3.

2.2 The Voted Resource and Capital changes are summarised in the following tables:

Table 1

CHANGES IN RESOURCE AND CAPITAL EXPENDITURE


Resource Expenditure	£ M

Provision of Defence Capability (RfR1)	226.313
Operations and Peace Keeping (RfR2)	741.766
Total Net Request for Resources	968.079


Capital Expenditure	£ M

Net Provision of Defence Capability (RfR1)	264.000
Operations and Peace Keeping (RfR2)	65.000
Total Net Request for Capital	329.000
	£ M
Total Change in Capital and Resource	1,297.079

2.3 The total change in the Estimate is £1,297.079 million, which generates an additional net cash requirement of £626.555 million. The cash requirement is analysed in the following table, and reconciliation between the changes in the Estimate and the net cash requirement is shown in Part II of the Estimate, "Resource to Cash Reconciliation".

Table 2

CHANGE IN VOTED CASH REQUIREMENT

	£ M
Near Cash (Voted) in Resource DEL	264.301
Near Cash Non Budget	33.254
Near Cash in Capital DEL	329.000
Net Cash Requirement	626.555

2.4 In addition to the changes outlined in paragraphs 2.1 above, the changes to the Spring Supplementary Estimate comprise:

— Net budgetary transfers in of £6.331 million to Other Government Departments under RfR1 and RfR2 (Table 4). The largest transfers are to the FCO for the Stabilisation Fund, and from the FCO for helicopter pilot training for counter-narcotics.

— Small increases arising from various technical changes relating to Non Departmental Public Bodies (NDPBs).

— Re-alignment of Resource and Capital Sub Head provisions to reflect changes in budgetary responsibility, with no overall impact on DEL.

— Updates to Operating and Non Operating Appropriations-in-Aid request to reflect Top Level Budget Holders' current forecast of outturn.

3. DETAILED EXPLANATION OF CHANGES

3.1 Part I of the Estimate summarises the changes described above and provides detail about the costs included in each RfR.

3.2 Part II of the Estimate shows the changes proposed in the Estimate, by Top Level Budget Holder (TLB). This shows the present net position (the position at Winter Supplementary Estimates), the changes in the position, and the new net provision (Spring Supplementary Estimates). Again this is set out by Request for Resources. The transfers and other changes outlined in the Introduction to the Estimate are analysed in this section of the Memorandum.

3.3 The table overleaf shows how the Spring Supplementary Estimate is compiled, identifying changes since the 2008-09 Winter Supplementary Estimates.

Table 3

SHOWING CHANGES TO VOTED RESOURCES AND CAPITAL AT SPRING SUPPLEMENTARY ESTIMATES

£M	Direct R DEL	Indirect R DEL	Total R DEL	AME	Non budget Near & Non cash	Total Net Resources	Net Capital DEL	Capital Non Budget/AME	Total Net Capital
[1]	1	2	3	4	5	6	7	8	9
RfR1 Provision at Winter Supplementary Estimates	23,460.8	10,940.5	34,401.3	-84.8	94.5	34,411.0	6,920.1	2.0	6,922.1
EYF	45.0		45.0			45.0	214.0		214.0
Additional C DEL Provision							50.0		50.0
Impairments scored in AME				170.0		170.0
Transfers In	1.8		1.8			1.8
Transfers Out	-0.2		-0.2			-0.2
Reallocation of NDPBs	-33.3		-33.3		33.3
PFI Cost of Capital					0.5	0.5
Royal Hospital Chelsea claim	9.2		9.2			9.2
RFR1 at Spring Supplementary Estimates	23,483.3	10,940.5	34,423.8	85.2	128.3	34,637.3	7,184.1	2.0	7,186.1
RfR2 Provision at Winter Supplementary Estimates	2,376.0	350.0	2,726.0			2,726.0	1,063.0		1,063.0
Additional Provision at Spring Supplementary Estimates	237.0	500.0	737.0			737.0	65.0		65.0
Transfers In	20.1		20.1			20.1
Transfers Out	-15.4		-15.4			-15.4
RFR2 at Spring Supplementary Estimates	2,617.7	850.0	3,467.7			3,467.7	1,128.0		1,128.0
RfR3 Provision at Winter Supplementary Estimates				1,015.1		1,105.1
RFR3 at Spring Supplementary Estimates				1.015.1		1.015.1
Spring Supplementary Estimates Total*	26,101.0	11,790.5	37,891.5	1,100.3	128.3	39,120.1	8,312.1	2	8,314.1

[2] Minimal differences may occur due to roundings.

[1] Definitions of the column headings are shown at Annex 1.

4. RFR1 PROVISION OF DEFENCE CAPABILITY—EXPLANATION OF CHANGES

Transfers In/Out

4.1 The Estimate includes four transfers in from Other Government Departments and two transfers out, which are detailed in Table 4.

Table 4

SHOWING TRANSFERS BETWEEN MOD AND OTHER GOVERNMENT DEPARTMENTS

Transfers Out	RfR	£M	Purpose
Department of Innovation, Universities & Skills	1	(0.235)	Contribution to the new Skills Strategy
Foreign & Commonwealth Office	2	(15.350)	Contribution to the Stabilisation Aid Fund in Iraq and Afghanistan
Transfers In
Foreign & Commonwealth Office	1	1.800	Contribution for Helicopter pilot training costs.
Department for International Development	2	0.300	Contribution in respect of locally employed contractors in Iraq
Department for International Development	2	18.899	Contribution to the Global Conflict Prevention Fund
Department for International Development	2	0.917	Contribution to the Stabilisation Aid Fund
Total Net Transfers In		6.331

End Year Flexibility

4.2 The Department has drawn down its full year end year flexibility for capital of £214.000 million and its resource near cash requirement of £45.000 million in the Spring Supplementary round. The capital resource EYF has been principally used to compensate Defence Estates for loss of non operating receipts, which are lower than forecasted. The Resource EYF has been allocated to Defence Equipment & Support (DE&S) to alleviate resource pressures. Table 5 sets out the position.

Table 5

END YEAR FLEXIBILITY

End Year Flexibility (EYF)	Direct Resource DEL £M	Indirect Resource DEL £M	Capital DEL £M
EYF Stock available 2008-09	105	0	214
EYF Drawn Down WSE	0	0	0
EYF Drawn Down SSE	45	0	214
Balance	60	0	0

Additional Fiscal Capital Request of £50 million

4.3 The Spring Supplementary Estimate includes a request for an additional £50.000 million fiscal Capital. This was agreed as part of the CSR settlement in anticipation of the sale of our holding in electro-magnetic wavelength bandwidth, or "Spectrum".

RHC re-alignment

4.4 The WSE request erroneously deducted £9.224 million from the MoD's DEL entitlement. The request for an additional £9.224 million in DEL in the Spring Supplementary request rectifies that error.

Other Changes

AME (Non Cash) Items

4.5 The Spring Supplementary Estimates request a net additional non cash provision of £170.000 million, which principally reflects the downturn in market prices for fixed assets held by Defence Estates, and a revised lower forecast for DE &S. Further deterioration may occur before the year end.

Non Budget Items

4.6 The changes to Non Budget at the Spring Supplementary Estimate reflect a further re-classification of the Armed Forces' museums from Voted DEL to Non Budget. There is also a small provision for the Cost of Capital Charge on PFI deals.

Neutral Sub Head Budget Transfers

4.7 The changes under these sub-headings reflect alterations to TLB allocations of Resource and Capital funding to bring the allocations into line with responsibility transfers between TLBs, and other funding adjustments to align TLB provision with current forecasts. The capital transfers between sub heads are principally for further transfers of budgetary provision from "customer" budgets to Defence Estates, which is responsible for most estate expenditure. There are related IRDEL cost re-allocations associated with the Capital budget re-allocations.

Operating and Non Operating Appropriations in Aid

4.8 The Operating and Non-Operating Appropriations in Aid changes to the Spring Supplementary Estimate reflect the latest forecast of receipts from TLBs.

Grants in Aid

4.9 There are three Grants in Aid increases recognised in the Spring Supplementary Estimates. The Grant in Aid of £0.773 million to the Royal Naval Museum (to correct a misstatement in the 2008-09 Main Estimates); £3 million for the Council of Reserve Forces & Cadet Association (gas and electricity utility price increases); and £0.400 million for the Royal Air Force Museum (additional roof repairs to the Battle of Britain Memorial Hall at RAF Hendon). The Grants in Aid have been allocated within the existing provision of the TLBs' current DEL.

Implementation of stage 2 of the International Financial Reporting Standards

4.10 The Department implemented part of the IFRS requirements at Winter Supplementary Estimates. The first stage of the IFRS implementation related to discounting of long-term debtors/liabilities and the movement on financial derivatives on forward purchase contracts under FRS 26. The second trigger point—the impact of FRS 23—relates to valuing all foreign currency transactions at the average monthly Spot Rate rather than using the General Accounting Rate (which was aligned to the buy forward rate) has been implemented in the Spring Supplementary Estimates. The year 2-5 impact of FRS 26 scores to AME. The in-year impact for FRS 23 has been offset by the year 1 FRS 26 valuation gain on the forward purchase contract. The Department has taken a prudent stance, and has estimated a neutral impact overall at Spring Supplementary Estimates. The volatility of exchange rates may further impact on our 2008-09 final outturn.

5. REQUEST FOR RESOURCES 2: OPERATIONS AND PEACE KEEPING

5.1 The Spring Supplementary Estimate requests an additional £561 million for peace keeping operations in Iraq and £241 million for peace keeping operations in Afghanistan. This is summarised in Table 5 below, with a more detailed analysis shown in Table 6. The request for additional operational funding in Spring Supplementary Estimates is mainly due to increased stock consumption—most notably ammunition and fuel in Afghanistan. In addition, higher than expected equipment repair costs, the inclusion of some recently approved urgent operational requirements and sterling's adverse exchange rate variation have had an effect.

5.2 As set out in the Government WSE response, UORs by their very nature reveal a capability gap and are therefore sensitive. Nevertheless, examples of UORs which we have recently ordered are: for force protection (eg tactical support vehicles and protection for engineering plant); and specific modifications to military equipment so that they can operate in the operational environment (eg adaptations to Merlin and Lynx helicopters, and Tornado aircraft).

5.3 The major non cash increase is for non cash costs in anticipation of the draw down in Iraq. Although our original IRDEL forecast for Iraq had fallen, reflecting lower than anticipated equipment depreciation, the Department has prudently set aside some £500 million for this purpose, an increase of £455 million over the provision at WSE. This contingency covers potential non cash costs of depreciation, write-offs, and gifting of equipment and other capital assets, which will be scored in our 2008-09 Annual report and Accounts, in accordance with Accounting Standards. There is a transfer of funding out to FCO of £15.350 million, being the MoD's contribution to the Government's Stabilisation Fund in Iraq and Afghanistan. There are also transfers in from DIFD of £0.300 being their contribution to costs paid out by MOD to locally employed contractors in Iraq; £18.899 million for DIFD's contribution to the Global Conflict Prevention Fund; and £0.917 million for their contribution to the Stabilisation Aid Fund.

Table 6

SUMMARY COST OF OPERATIONS AND PEACE KEEPING CLAIM AT 2008-09 SSE

Operation	Direct Resource DEL £M	Indirect Resource DEL £M	Capital DEL £M	Total SSE request 2008-09 £M	Total ME/WSE request 2008-09
Iraq	1,054	625	279	1,958	1,397
Afghanistan	1,485	225	849	2,559	2,318
Balkans (1)	19	0	0	19	19
Total	2,558	850	1,128	4,536	3,734

Note: (1): FCO fund the cost of the Balkans operations. £17 million was requested at Main Estimates and £2 million at Winter Supplementary Estimates, which equates to our current forecast.

5.4 The current detailed cost estimate for operations in Iraq, Afghanistan and the Balkans for the 2008-09 Spring Supplementary Estimates is shown in Table 6.

5.5 The Department has requested £45.000 million Indirect Resource DEL from the Treasury Reserve to cover cost of capital, depreciation and impairment charges associated with fixed assets purchased under Urgent Operational Requirement arrangements. These are continuing non-cash charges associated with holding these assets and are charged to RfR2 for as long as they are deployed on operations.

Table 7

THE ESTIMATED COST OF OPERATIONS IN AFGHANISTAN, IRAQ AND THE BALKANS AT SSE 2008-09

Cost Type	Iraq £M	Afghanistan £M	Balkans £M
Direct Resource DEL
Civilian Personnel	18	12	1
Military Personnel	116	73	1
Stock/Other Consumption	240	521	6
Infrastructure Costs	150	167	5
Equipment Support Costs	356	422	6
Other Costs and Services	175	305	2
Income Foregone/ Generated (-)	-1	-15	-2
Total Direct Resource DEL	1,054	1,485	19
Indirect Resource DEL	625	225	0
Total Resource DEL	1,679	1,710	19
Capital DEL
Capital Additions	279	849	0
Total Capital DEL	279	849	0
Total Estimated Costs	1,958	2,559	19

6. RFR3 WAR PENSION BENEFIT (WPB)

6.1 There are no changes to the RfR3 War Pension Benefit at Winter Supplementary Estimates.

7. THE DEPARTMENTAL EXPENDITURE LIMIT (DEL)

7.1 Table 8 shows the DEL from 2006-07 to 2008-09 for all RfRs. The Total DEL is calculated by adding Resource DEL, Capital DEL and deducting depreciation, which forms part of Resource DEL. Depreciation is excluded from Total DEL; including this as well as Capital DEL would be double counting. The figures are for Voted and Non-voted DEL; the Non voted DEL figure for 2008-09 is £170.815 million net of depreciation, and this is shown in more detail in the Notes to the Spring Supplementary Estimate.

Table 8

CHANGES TO MOD DEPARTMENTAL EXPENDITURE LIMITS

	2006-07 SSE £M	2007-08 SSE £M	2008-09 ME £M	2008-09 WSE £M	2008-09 SSE £M
Resource DEL	34,104	36,940	33,623	37,273	38,071
Capital DEL	7,448	8,120	7,871	7,984	8,313
Depreciation	-7,401	-8,218	-7,418	-7,747	-8,247
Total DEL	34,151	36,842	34,076	37,510	38,137

8. ADMINISTRATION COSTS LIMIT

8.1 The Department introduced an Administration Costs Limit in its 2008-09 Main Estimates for the first time. The Non Voted Administration budget shows a reduction of £64.153 million because these costs have been re-allocated into the Non Voted Programme (as a result of NDPB costs now being regarded as Programme).

9. PROVISIONS AND CONTINGENT LIABILITIES

9.1 No changes have been made at SSE.

10. MACHINERY OF GOVERNMENT CHANGES

10.1 There are no Machinery of Government Changes.

11. IMPACT ON PSA AND DSO TARGETS

11.1 The changes in provision sought are not directly linked to the achievement of the PSA targets to which the Department contributes our Departmental Strategic Objectives (DSO) but rather enables delivery across the range of outputs in accordance with our plans. However, a failure to grant the additional RfR2 allocation would undermine the prosecution of military operations in Iraq and Afghanistan (PSA 30 and DSO 1).

12. NET ADDITIONAL CASH REQUIREMENT

12.1 The Net Cash impact for the Spring Supplementary Estimate is an increased requirement of £626.555 million. This is broken down in Table 2.

13. VOTES A

The Department will be laying the 2009-10 Votes A Annual Estimate alongside this 2008-09 Spring Supplementary Estimate. This will be published as HC117.

APPENDIX 1

A. DEFINITION OF TERMS

1. Direct Resource Departmental Expenditure Limits (RDEL)

This is a control aggregate within the resource budget. It excludes the non-cash items such as depreciation, cost of capital and movement in provisions. Direct Resource DEL is also known as "near cash in the resource budget".

2. Indirect Resource DEL (IRDEL)

This covers items such as depreciation, cost of capital charges, movement in provisions, and the notional auditors' fees for the National Audit Office (NAO). This is also known as non-cash.

3. Total Resource DEL

This is the sum of Direct and Indirect Resource DEL.

4. Annually Managed Expenditure (AME)

Annually Managed Expenditure (AME) includes Programmes that are demand-led, such as War Pensions (RfR3) and exceptionally volatile items that cannot be controlled by the Department. AME also includes Programmes that are so large that the Department could not be expected to absorb the effects of volatility within them, such as cash release of nuclear provisions.

5. Non-Budget

Items of expenditure which are included in the Estimate, but are outside of DEL and AME eg Grants in Aid, Royal Hospital Chelsea. This is a Parliamentary control but not a Treasury control.

6. Total Net Resources

This is the net of items 1 to 5.

7. Capital Departmental Expenditure Limit (CDEL)

This is for new investment, including Capital additions, disposals, and the capital repayment of loans.

8. Capital AME

Includes the capital element of the loan repayments for self- financing public corporations, such as QinetiQ.

9. Total Net Capital

This is the sum of the above capital items.

10. Total Near Cash

This is the total accrued expenditure spend and is the sum of Direct RDEL and Capital DEL.

11. Request for Resources 1

Provision of Defence Capability, provides for expenditure primarily to meet the Ministry of Defence's operational support and logistics services costs and the costs of providing the equipment capability required by defence policy.

12. Request for Resources 2

Request for Resources 2 provides primarily for the additional costs of peace keeping and operations. These are the net additional costs incurred: the costs that the Department would have incurred regardless of the operation taking place, such as wages and salaries are recorded against RfR1.

13. Request for Resources 3

War Pensions and Allowances, etc, provides primarily for the payments of pensions and allowances for disablement or death arising out of war or service in the Armed Forces after 2 September 1939, and associated non-cash items.

B. LIST OF ABBREVIATIONS USED IN THE ESTIMATE

AME Annually Managed Expenditure

CSR Comprehensive Spending review

DE & S Defence Equipment and Support

DSO Departmental Strategic Objective

EYF End Year Flexibility

FCO Foreign and Commonwealth Office

GAR General Accounting Rate

HCDC House of Commons Defence Committee

MoD Ministry of Defence

NAO National Audit Office

NDPB Non Departmental Public Body

PSA Public Service Agreement

RfR Request for Resources

SSE Spring Supplementary Estimates

SUME Single Use Military Equipment

UOR Urgent Operational Requirement

WSE Winter Supplementary Estimates

Annex A

ARMED FORCES RETIRED PAY, PENSIONS, ETC 2008-09 SPRING SUPPLEMENTARY ESTIMATES MEMORANDUM

REQUEST FOR RESOURCES 1—ARMED FORCES RETIRED PAY, PENSIONS, ETC

1. Summary of Changes sought in the Spring Supplementary Estimate

The main reasons for the Armed Forces Retired Pay and Pensions Spring Supplementary Estimate is to request an additional resource of £1k, and to request an increased net cash requirement of £25 million.

2. Detailed Explanation of the Change and Allocation

The increase of £1k resource is a nominal sum required to justify the additional cash requirement.

The increase in the net cash requirement of £25 million arises from forecast commitments for payments of pensions and lump sum benefits to Service personnel and dependants, back dated pay awards in relation to changes in tariff levels within the Armed Forces Compensation Scheme and back dated pension payments following legislation to change the pension rights of Gurkha pensioners.

3. Changes to Cash Requirement Allocation

There is an increase in the net cash requirement of £25 million as a result of these changes.

Annex B

STATEMENT OF DEPARTMENTAL EXPENDITURE LIMITS CHANGES ARISING FROM SPRING SUPPLEMENTARY ESTIMATES 2008-09

Subject to Parliamentary approval of the necessary Supplementary Estimate, the Ministry of Defence Departmental Expenditure Limits (DEL) will be increased by £626,555,000 (Voted and Non Voted) from £37,510,083,000 to £38,136,638,000. Within the DEL change, the impact on Resources and Capital are as set out in the following table:

£000s

Change New DEL

Voted Non-Voted Voted Non-voted Total

Resource 764,301 33,254 37,891,603 179,450 38,071,053

Of which: Administration Budget - -64,153 2,294,096 - 2,294,096

Near-cash in RDEL 271,362 33,254 26,101,150 409,964 26,511,114

Capital 329,000 - 8,312,045 851 8,312,896

Depreciation* -500,000 - -8,237,825 -9,486 -8,247,311

Total 593,301 33,254 37,965,823 170,815 38,136,638

*Depreciation, which forms part of Resource DEL, is excluded from the total DEL since capital DEL includes capital spending and to include depreciation of those assets would lead to double counting

The changes to the resource and capital elements of the DEL arise from:

— a net increase in the RfR2 of near Cash Resource of £237,000,000 and near Cash Capital DEL of £65,000,000 ; and a further Indirect (non Cash) Resource DEL request of £500,000,000 to reflect the forecast costs of peace keeping operations in Iraq, Afghanistan and Balkans;

— the take up of Resource End Year Flexibility (EYF) of £45,000,000 and Capital End Year Flexibility of £214,000,000;

— transfers in from the Foreign & Commonwealth Office of £1,800,000 for helicopter pilot training for counter narcotics operations (RfR1); transfers in from the Department for International Development of £300,000 being reimbursement for locally employed contractors in Iraq (RfR2), £18,899,000 as a contribution to the Global Conflict Prevention Costs Pool (RfR2), and £917,000 as a contribution to the Iraq Stabilisation Aid Fund (RfR2);

— transfers out to the Department for Innovation, Universities and Skills being the MoD's contribution to the new Government Skills Strategy initiative of £235,000 (RfR1); and a transfer out to the FCO of £15,350,000 being the MoD's contribution to the Stabilisation Aid Fund (RfR2);

— additional fiscal Capital DEL provision of £50,000,000 relating to the MoD's planned sale of its Spectrum holding;

— to re-allocate Royal Hospital Chelsea (RHC) costs of £9,224,000 from Non-Voted expenditure to other current Voted expenditure to correct a misalignment in the Winter Supplementary Estimates;

— to re-allocate DEL Grants in Aid from DEL to Non Budget Grants in Aid (Non Voted) to reflect a further classification changes for the Council of Reserve Forces & Cadets Association of £29,081,000;

— to increase Grants in Aid funding for the Royal Naval Museum of £773,000; the Council of Reserve Forces and Cadet Association (CRFCA) of £3,000,000; and the RAF Museum of £400,000; by reducing Resource DEL current costs and increasing Non Budget Grants in Aid with no overall impact on resource;

— to increase operating Appropriations in Aid by £180,700,000 and Non Operating Appropriations in Aid by £25,879,000 to reflect current forecasts of outturn offset by corresponding changes to Resource and Capital spending with no overall effect on Resource or Capital DEL; and

— to revise sub-head provisions to reflect Resource and Capital revisions in allocations between Top Level Budget Holders to match required defence outputs, with no overall impact on DEL.

The changes to Resource DEL and Capital DEL will lead to an increased net cash requirement of £626,555,000.

12 February 2009

1 Now re-named from Conflict Prevention to Operations and Peace Keeping. Back



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