Select Committee on Defence First Report

REPORT

Introduction

1. The Winter Supplementary Estimates for the Financial Year 2008-09 were laid before the House on 25 November 2008.[1] The Ministry of Defence (MoD) is seeking a net increase in resources and capital expenditure of £3,739.112 million—in cash terms a net increase of £3,389.112 million.[2] Table 1 provides a breakdown of the requested increase in expenditure.Table 1: Changes in Resource and Capital Expenditure in the Winter Supplementary Estimate

Resource Expenditure	£ million
Provision of Defence Capability (RfR1)	989.692
Operations and Peacekeeping (RfR2)	2,636.430
Total Net Request for Resources	3,626.122
Capital Expenditure
Net Provision of Defence Capability (RfR1)	(950,000)
Operations and Peacekeeping (RfR2)	1,063.000
Total Net Request for Capital	113.000
Total Change in Capital and Resource	3,739.122

Source: Ministry of Defence[3]

2. In the past we have criticised the MoD for the ambiguity of the ambit for Request for Resources 2 (RfR2) within the Supplementary Estimates which simply referred to "Conflict Prevention".[4] In the Winter Supplementary Estimates in the last Financial Year, the MoD took the opportunity to redefine RfR2 as being for "Operations and Peacekeeping", a move which we welcomed.[5] Nonetheless, there was still no explicit reference within the Estimates to current operations in Iraq and Afghanistan. In our Report on the MoD's Main Estimate for 2008-09, published on 7 July this year, we made the point that we were still dissatisfied with this omission.[6] The Government in its response (issued in early October and which we published as a Special Report on 27 October)[7] explained that it was considering a change to the wording for the ambit of RfR2 for the Winter Supplementary Estimates for 2008-09. We are pleased that the Government, retaining the general title of "Operations and Peacekeeping" for Request for Resources 2, in its Estimates now includes direct reference to "current operations in Iraq, Afghanistan and the Balkans".

3. Most of the additional funds requested in the MoD's Winter Supplementary Estimates are to meet the additional cost of expenditure in Iraq and Afghanistan which the MoD estimates to be some £3,699.430 million—comprising £2,636.430 million in resources and £1,063 million in capital expenditure—in the current Financial Year (see Table 1). This represents a sum three times that requested from Parliament at this stage in the last Financial Year, and 25% higher than the outturn for 2007-08. Clearly, the expectation is that this Financial Year will represent the most expensive yet for these overseas operations. We commend the MoD for including in these figures indirect as well as direct resource costs which was not the case in last year's Winter Supplementary Estimates.

4. It is expected that the House of Commons will be asked to approve the Winter Supplementary Estimates on Tuesday 16 December, three weeks after they were laid—this is the current normal timetable for Supplementary Estimates. While we are aware that the Treasury-led Alignment project is looking at ways to simplify the Estimates and Supplementary Estimates process in order to assist parliamentary scrutiny, we remain concerned at the very short amount of time available to committees such as our own, between the laying of the Supplementary Estimates and the decision of the House to approve them, to carry out careful and thorough analysis of these Estimates and engage in a dialogue with Government Departments over any areas of uncertainty or concern. We remain hopeful that some mechanism will be introduced that will permit a better examination of departmental estimates in the future than what currently obtains: for the interim, while the timetable for analysis remains so tight, we have set out later in this Report some proposals that will assist us in our future scrutiny of the Supplementary Estimates.[8]

Minor issues: DARA, QinetiQ and The Royal Hospital Chelsea

5. We note the extra £260 million in funds available to the MoD for capital expenditure on account of extra receipts from the disposal of its interests in the Defence Aviation Repair Agency (DARA) and QinetiQ (£60 and £200 million respectively).[9] We further note that these funds, if not used this Financial Year, should be available to be drawn down, as End Year Flexibility (EYF), in a subsequent year. The MoD's position with regard to its access to EYF funds has however been unclear since the Department has for some time failed to include a table of EYF balances in the memoranda accompanying its Estimates, despite Treasury guidance recommending the inclusion of such tables. As a result, its memorandum accompanying the Main Estimates earlier this year provided no assistance in understanding why the Treasury's EYF statistics in its Provisional Outturn publication did not tally with the MoD's EYF draw-downs during 2007-08. [10] Only in response to our questions did the Department explain that the Treasury's Defence EYF statistics were incorrect, and that a component part of the MoD's EYF balance had been set to zero.[11] Again, there is no EYF table in the memorandum accompanying this latest Winter Supplementary Estimates. For the sake of clarity we call on the MoD in future to provide End Year Flexibility tables in its future Estimates memoranda, as recommended by the Treasury's guidance.

6. This year's Main Estimates presented a grant figure of £9.5 million to The Royal Hospital Chelsea.[12] The Winter Supplementary Estimates show that this grant has increased by £1 million to £10.5 million.[13] However, the Supplementary Estimates also reveal a £9.2m reallocation of Chelsea Hospital costs from Voted expenditure to Non-Voted expenditure.[14] It is not clear to us how this relates to the funds granted, and no explanation is given in the memorandum accompanying the Estimates for this reallocation. We would be grateful for the MoD to provide us with an explanation for the changes in the Estimates relating to the Royal Hospital Chelsea in its response to this Report.

Science Innovation and Technology

7. We note the reduction of £119.543 million in the Science Innovation and Technology Departmental Expenditure Limit (DEL) under Request for Resources 1. We understand that changes in DELs often amount to little more than reallocations between Top-Level Budget Holders which represent no real reductions in spending. Nonetheless, we would like an explanation from the Ministry of Defence for this significant reduction in the Departmental Expenditure Limit for Science Innovation and Technology and whether it signals a cut in spending, and—if so—what the consequences of this reduction will be.

Cost of military operations

8. The Winter Supplementary Estimates estimate the additional costs of operations in Iraq and Afghanistan in 2008-09 as £1,397 million and £2,318 million respectively.[15] The cost of current military operations is our principal focus in this Report, and will no doubt remain such in future Estimates Reports while such operations continue overseas. In the past we have expressed dissatisfaction that the MoD has not given any forecast of likely operational costs at the time of its laying of the Main Estimates each Financial Year.[16] While we understood the MoD's position that forecasting accurately the operational costs for Financial Years at their outset, even within generous parameters, was a difficult task, we felt that the House required more information earlier in each Financial Year than was then being made available. The MoD brought forward its first operational cost forecast each Financial Year from the Spring to the Winter Supplementary Estimates (in other words from February of each Financial Year to November of each such Year) to assist the House, a move which we welcomed.[17] Nonetheless we continued to seek from the MoD an earlier forecast of operational costs at the time of its Main Estimate each Financial Year. We were therefore very pleased when the MoD agreed to give an indication of the expected costs of Urgent Operational Requirements (UORs) and some sense of expected overall operational costs in the memorandum accompanying its Main Estimate each Financial Year.[18]

9. In that memorandum accompanying its Main Estimate laid on 21 April this year, the MoD signalled as an initial forecast "a net additional cost of at least £2 billion… split between Afghanistan and Iraq". Within that sum the MoD estimated UOR expenditure of £1,065 million.[19] Figures from this Winter Supplementary Estimate show that much higher expenditure than £2 billion is expected: current estimates of almost £3.7 billion not only go far beyond the figure signalled as a minimum in the Main Estimate memorandum but represent an increase of 25% over the outturn for the last Financial Year, 2007-08. (The scale of the increase in operational costs between 2006-07 and 2007-08 and between 2007-08 and the Winter Supplementary Estimates forecast for 2008-09 is set out in Table 2.) Indeed, with costs for Iraq and Afghanistan amounting to almost £3 billion in 2007-08, the statement that operational costs in 2008-09 would be "at least £2 billion" was perhaps over-cautious. While we are aware that in future memoranda accompanying its Main Estimate the MoD intends to give a more robust sense of expected operational costs over that Financial Year, we are disappointed that the figure given in its Main Estimate memorandum for this Financial Year appears so loose. Table 2: Comparison of outturn cost of 2006-07 and 2007-08 with each other and the latter with the 2008-09 WSE forecast % change

	Outturn 2006-07	Outturn 2007-08	% change	Outturn 2007-08	WSE forecast 2008-09	% change
Iraq	956	1457	+ 52.41 %	1457	1397	- 4.1 %
Afghanistan	738	1504	+ 103.8 %	1504	2318	+ 54.1 %
TOTAL	1694	2961	+ 74.8 %	2961	3715	+ 25.5 %

Note: Includes indirect resource costs

10. From work undertaken in the preparation of previous Reports on the MoD's Supplementary Estimates, we are aware that operational costs can increase significantly between the Winter and Spring Supplementary Estimates. In Financial Year 2006-7 the forecast of operational costs increased by 26.6% between Supplementary Estimates. In 2007-08 this increase was in the order of 49.7% (see Table 3). We commented upon this increase in our Report on the 2007-08 Spring Supplementary Estimates, where we stated that "the magnitude of increase in the cost estimate is surprising".[20] We added that explanation needs to be given in future Spring Supplementary Estimates' memoranda of any significant increase in expected costs—something which the Government agreed to in its response to that Report—and we also suggested that the acknowledged difficulty of providing a robust forecast of costs early in the Financial Year might encourage the Government not to attempt to put together as well-founded a forecast as otherwise it might, since it has a second chance to change the figures at the time of the Spring Supplementary Estimates.[21] We restate our hope that the MoD manifests no complacency with regard to its forecast of operational costs made early in each Financial Year.Table 3: Changes in forecasts for operational costs between WSE and SSE in 2006-07 and 2007-08

	WSE 2006-07	SSE 2006-07	% change	WSE 2007-08	SSE 2007-08	% change
Iraq	860	1002	+ 16.5 %	955	1449	+ 51.7 %
Afghanistan	540	770	+ 42.6 %	964	1424	+ 47.7 %
TOTAL	1400	1772	+ 26.6 %	1919	2873	+ 49.7 %

Note: Does not include indirect resource costs

11. Clearly, forecasts for operational costs in each Financial Year are subject to the possibility of considerable and sudden variations. The forecast for operational costs for Iraq in 2007-8, brought forward in the Winter Supplementary Estimates in November 2007, was just below the outturn costs for the previous Financial Year: by the time of the Spring Supplementary Estimates, just 4 months later, it had increased by 51%. For Afghanistan the story was similar: a 30.6% increase between the 2006-07 outturn and the first operational forecast for 2007-08, made in November 2007, yielded a further 47.7% increase four months later (see Table 3).[22] As we have said before, we understand the volatility that inevitably accompanies forecasts for operational costs. However we remain to be convinced that these forecasts are as robust as they ought to be.

12. One problem which compromises the robustness of these forecasts involves the timetable for their composition. In our Report on the 2008-09 Main Estimates we pointed out how each Supplementary Estimate was based upon a quite distant initial forecast. The Government response to our 2007-08 Spring Supplementary Estimate Report, made clear that the November-laid Winter Supplementary Estimates were based upon end-July forecasts, and the February-laid Spring Supplementary Estimates were based upon end-November forecasts.[23] In other words, the forecast that informs the Spring Supplementary Estimates is available to the MoD before the House has considered figures in the Winter Supplementary Estimate which are based upon a forecast made four-and-a-half months before. That position has been only slightly mitigated by the Department basing its latest Winter Supplementary Estimates on forecasts made at the end of August 2008, rather than the end of July in previous years.[24] We are aware that Treasury processes make the preparation of the Supplementary Estimates a longer process than is ideal for the presentation of up-to-date costs. Nonetheless we continue to believe it unsatisfactory that the House is asked to agree to Supplementary Estimates that represent such out-of-date forecasts of costs for operations overseas without it having sight of any more up-to-date assessments of those costs.

13. We have to expect that there will be changes in the Winter Supplementary Estimates forecasts which will become apparent when the Spring Supplementary Estimates are laid a couple of months later. As we noted above, it is likely that the Ministry of Defence has by December of each Financial Year a better forecast of costs on which it is beginning to work to base the Spring Supplementary Estimates. In its response to our Report on the Main Estimates, the Government indicated its willingness to provide the Committee with an interim forecast of operational costs between Supplementary Estimates.[25] We would be grateful if the MoD could provide us with the working forecast used to prepare the Spring Supplementary Estimates in whatever form it considers most appropriate early in the New Year. The MoD might also look to attach to its Winter Supplementary Estimates memorandum in future an indication of this forecast, if it is available by then, or make it available to us before the Estimates are considered in the House each Winter.

14. We hope that the interim forecast we have asked for from the MoD and the estimate of operational costs which will appear in a couple of months time in the Spring Supplementary Estimates will show less significant changes than has been the case in the last two Financial Years, reflecting the particular robustness of this Winter Supplementary Estimates figure this Financial Year. The particularly steep increase in expected Afghanistan costs in this Estimate perhaps reflects a more realistic assessment of costs over the year: if this is so—and only time will tell—then we commend the MoD for providing a better forecast of operational costs at this stage in the Financial Year than it has done before.

15. Looking in more detail at the Winter Supplementary Estimates forecast, there has, as anticipated, been a slight decline, of 4.1%, in operational costs for Iraq (see table 4). Direct resource costs remain higher than in the last Financial Year, principally on account of higher military personnel and equipment support costs; but there is a decline in capital additions costs which last year comprised 30% of operational costs for Iraq (not including indirect resource costs). It is not at all clear from the memorandum accompanying the Winter Supplementary Estimates why it is expected that some costs in Iraq will actually increase over the Financial Year and others remain broadly static where it might have been expected, given an anticipated drawdown in 2009, that some costs would fall. We call on the Ministry of Defence to provide us in its response to this Report with an explanation for the continuing high level of costs in Iraq, and in particular for the significant increases to military personnel and equipment support costs. The overall 4.1% decline in operational costs for Iraq is however set beside the significant and steep increase of 54.1% in operational costs expected for Afghanistan. Every category of cost, in that theatre, except for those relating to infrastructure, is expected to rise during 2008-09 as compared to the 2007-08 outturn. The two most significant increases, themselves amounting to £549 million, or half of the expected increase over the 2007-08 costs, are attributable to equipment support and capital additions costs, the former rising by 92.5% and the latter rising by 86.4%.

Table 4: The Direct costs of operations in Iraq and Afghanistan for 2006-07 and 2007-08 and their Winter Supplementary Estimates forecast Direct cost for 2008-09

Cost Type	Iraq outturn 2006-07	Iraq outturn 2007-08	Iraq WSE forecast 2008-09	Afghan outturn 2006-07	Afghan outturn 2007-08	Afghan WSE forecast 2008-09
Resource-Direct
Military personnel	100	98	116	50	85	106
Civilian personnel	15	14	17	4	9	10
Stock/other consumption	218	237	195	164	301	379
Infrastructure costs	83	130	119	101	149	147
Equipment support costs	206	278	332	112	200	385
Other costs and services	137	162	194	89	160	311
Income foregone / (generated)	5	4	(2)	(2)	(11)	(7)
Total	764	923	971	518	893	1331
Capital additions	169	403	256	178	433	807
Total Direct costs	933	1326	1227	696	1326	2138

Source: Ministry of Defence

16. One clear area of increase in costs expected this Financial Year compared to last is in Capital Additions and Equipment Support. It seems likely that these increases are connected to the announcement on 29 October of the purchase of 700 new armoured vehicles for use in theatre.[26] However, the memorandum from the MoD accompanying the Winter Supplementary Estimates is silent on any such connection, and indeed does not explain any of the significant changes in forecast costs compared to the costs in the previous year's outturn. We have before commended the MoD on its Estimates' and Supplementary Estimates' memoranda.[27] Information setting out changes between previous years' outturns and Estimates and between Estimates in-year is a very welcome feature of the MoD's Annual Report and Accounts which we have likewise commended the Department for in the past.[28] However, we believe that in future within each Supplementary Estimates memorandum there should be some explanation of significant changes in operational costs since the presentation of the last figures, whether from the previous year's outturn, from the memorandum accompanying the Main Estimate or from the Winter Supplementary Estimates. This information would clearly be of interest and use to us and to the House as a whole.

Urgent Operational Requirements

17. As we have noted, in the memorandum accompanying its Main Estimate for 2008-09, the MoD explained that it expects spending on UORs of £1,065 million for this Financial Year.[29] In its response to our Report on the Main Estimate, the MoD said that any overspend on UORs in 2008-09—expenditure beyond the agreed figure—will have no impact on the Department's core (RfR1) budget for 2008-09. Rather any excess will be split 50/50 and half fall onto the Department's budget for 2010-11, in line with the arrangements agreed in the last Comprehensive Spending Review.[30] The memorandum accompanying the Winter Supplementary Estimates notes that £1,063 million of the RfR2 capital request is for UORs in Iraq and Afghanistan.[31] In other words, already the UOR limit for the Financial Year has almost been reached, notwithstanding possible volatilities and further urgent requirements during the months that remain. We would be grateful for an indication from the MoD in the response to this Report of whether spending on Urgent Operational Requirements beyond £1,065 million is expected this Financial Year, and, if so, what the impact of that spending will be on the MoD's 2010-11 budget, including any current assessment of which equipment programmes could be affected in that year. We call on the MoD to provide in future with the Supplementary Estimates more detail of expected spending on Urgent Operational Requirements.

Summary

18. In summary, in order to provide us and the House with a clearer sense of the reasons for changes in operational cost forecasts and a better and more current assessment of the trajectory of such costs in each Financial Year, we would for future Financial Years like the MoD to provide us with:

• a more detailed account of operational costs expected in the Financial Year in the memorandum accompanying the Main Estimate, explaining any significant change between those costs and those in the previous Financial Year's outturn;
• a further forecast of operational costs before the summer, or as soon as possible thereafter;
• an explanation in the memorandum attached to the Winter Supplementary Estimates of any significant changes between its figures for operational costs and those in the memorandum accompanying the Main Estimate;
• a third forecast of operational costs shortly after the Winter Supplementary Estimates are laid, preferably before they are considered by the House;
• more detail where appropriate, in the documents between the Main Estimate and the subsequent Annual Report and Accounts for that year, of expected and final spending figures for Urgent Operational Requirements; and
• an explanation in the memorandum attached to the Spring Supplementary Estimates of any significant changes between its figures for operational costs and those in the memorandum accompanying the earlier Winter Supplementary Estimates.

We are aware that the MoD has already made clear its intention to provide the first of these from 2009-10 onwards and already provides the last. We hope the MoD will be able to take the other three proposals on board also which will enable better scrutiny of its Estimates by our Committee and by the House of Commons.

Conclusion

19. We recommend that the House of Commons approve the request for resources set out in the MoD's Winter Supplementary Estimates. The £3,739.112 million requested to meet the forecast cost of operations in Iraq and Afghanistan in 2009-09 is a very significant sum of public money, but it is vital that our Armed Forces are properly resourced to carry out those important tasks which they have been given.

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1   HM Treasury, Central Government Supply Estimates 2008-09 Winter Supplementary Estimates, HC 1163, November 2008 Back

2   HC (2008-09) 1163, pp 215-30 Back

3   Ev 1, Table 1 Back

4   See, for example, the Twelfth Report of the Defence Committee of Session 2006-07, Ministry of Defence Main Estimates 2006-07, HC 835, para 10 Back

5   Defence Committee, Second Report of Session 2007-08, Cost of Operations in Iraq and Afghanistan: Winter Supplementary Estimate 2007-08, HC 138, para 2 Back

6   Defence Committee, Eleventh Report of Session 2007-08, Ministry of Defence Main Estimates 2008-09, HC 885, para 8 Back

7   Defence Committee, Ninth Special Report of Session 2007-08, Ministry of Defence Main Estimates 2008-09: Government response to the Committee's Eleventh Report of Session 2007-08, HC 1072, response to recommendation 3 Back

8   See para 16 Back

9   Ev 2, para 2.4 Back

10   HM Treasury, Provisional Outturn 2007-08, Cm 7419, p 14 Back

11   Available on the Defence Committee website at http://www.publications.parliament.uk/pa/cm200708/cmselect/cmdfence/memo/ara/ucm0202.htm Back

12   HC (2007-08) 885, Ev 4, Table 6 and HM Treasury, Central Government Supply Estimates 2008-09 Main Supply Estimates, 21 April 2008, HC 479  Back

13   Ev 5, para 4.9 Back

14   HC (2007-08) 1163, p 216 Back

15   Ev 6, Table 5 Back

16   See, for example, HC (2007-08) 138, para 7 Back

17   HC (2007-08) 138, para 5 Back

18   HC (2007-08) 885, para 14 Back

19   ibid., Ev 3, para 4.4 Back

20   Defence Committee, Eighth Report of Session 2007-08, Operational costs in Afghanistan and Iraq; Spring Supplementary Estimate 2007-08, HC 400, para 12 Back

21   HC (2007-08) 400, paras 12 and 15 Back

22   See also HC (2007-08) 138, p 8, Table 3 Back

23   HC (2007-08) 885, paras 23-4 Back

24   HC (2007-08) 1072, response to recommendation 15 Back

25   HC (2007-08) 1072, response to recommendation 17 Back

26   HC Deb, 29 October 2008, col 28-30WS Back

27   See for example, HC (2007-08) 400, para 4 Back

28   HC (2007-08) 138, para 24 Back

29   HC (2007-08) 885, Ev 3, para 4.4 Back

30   HC (2007-08) 1072, response to recommendation 7 Back

31   Ev 5, para 5 Back

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Prepared 15 December 2008