MoD Winter Supplementary Estimate 2009-10 - Defence Committee Contents


Report


Introduction

1. The Winter Supplementary Estimate (WSE) for the Ministry of Defence (MoD) for Financial Year 2009-10 was laid before the House, alongside those for other government departments, on 24 November 2009.[1] The MoD is seeking in this Estimate a net increase in Capital and Resource expenditure of £954.501 million—in cash terms a net increase of £38.501 million. Table 1 provides a breakdown of the overall requested increase in expenditure.

Table 1: Changes in Resource and Capital Expenditure in the Winter Supplementary Estimate
Resource Expenditure £ M
Provision of Defence Capability (RfR1) 1,025.500
Operations and Peace Keeping (RfR2) 000.001
Total Net Request for Resources 1,025.501
Capital Expenditure £ M
Net Provision of Defence Capability (RfR1) -71.000
Operations and Peace Keeping (RfR2) 000.000
Total Net Request for Capital -71.000
Total Change in Capital and Resource 954.501

Source: Ministry of Defence[2]

Context

2. In some respects, the MoD Winter Supplementary Estimate this year is unusual. For the first time since UK operations began in Afghanistan and Iraq, funds for these operations in this Financial Year were formally sought at the time of the Main Estimates.[3] In previous years, forecasts of operational costs were delivered at the time of the Winter Supplementary Estimate or, more recently, at the time of the Main Estimate, while the formal request for funds from Parliament occurred at the time of the Spring Supplementary Estimate or more recently, at the time of the Winter Supplementary Estimate.

3. We have for long argued that the MoD ought to provide more detailed information on the cost of operations earlier in each Financial Year, and seek formal Parliamentary approval for those funds towards the beginning rather than towards the end of the Financial Year. Our dialogue with the MoD on this matter during this Parliament has been very fruitful. At the beginning of Financial Year 2008-09, the MoD provided a forecast for operational costs earlier than it had done before. It also signalled its intention to seek formal approval for funds for operations in the Main Estimates at the beginning of this Financial Year.[4] This was the culmination of the MoD responding positively to many of the recommendations and conclusions of our various Reports on the Estimates. We are grateful to the MoD for developing with us a new timetable for forecasts and formal approval of monies for operations over the course of this Parliament.

4. The MoD had frequently commented in response to our Reports that because of the volatile nature of operations it was not possible to provide an accurate forecast of costs early each Financial Year, and without such a forecast it would be rash to seek formal Parliamentary approval for operational costs.[5] However, the capacity for the MoD to provide robust forecasts of costs has clearly grown. This is apparent from this Financial Year's Winter Supplementary Estimate. Last Financial Year, the MoD sought approval for funds amounting to over £3.5 billion at the time of the Winter Supplementary Estimate, the vast majority of which was for operations.[6] This Financial Year, the MoD formally requested nearly £4.5 billion for operations within its Main Estimate.[7] The fact that only a token request for £1,000 is included within the Winter Supplementary Estimate (required for technical reasons)[8] makes clear that, broadly speaking, the MoD's assessment of likely costs for 2009-10 was robust and well-founded.

Timetable for scrutiny

5. The House will be asked to approve this Estimate, along with those from other government departments, on Thursday 10 December, just sixteen calendar days after they were laid. As we have maintained throughout this Parliament in our Supplementary Estimates Reports,[9] there is too little time properly to consider the Estimates and their accompanying financial documents between their laying and their being formally approved in the House. This is as much an issue for the House as it is for the Government. We hope that the House's scrutiny of the Supplementary Estimates will be taken up in the new Parliament: increasing the capacity of select committees to conduct more detailed financial scrutiny in a more reasonable time table must be a key component of reviving the role of Parliament.

6. We would like to record our thanks to the Committee Office Scrutiny Unit for helping us report successfully on the Supplementary Estimates during this Parliament in an absurdly compressed timescale. We would also like to thank the MoD for the speed with which it responds to our queries while these Reports are being prepared.

Cost of military operations

7. The cost of operations in Iraq and Afghanistan is covered by Request for Resources 2 (RfR2) within the Estimate. The amount requested for these operations at the time of the Main Estimate in June 2009, in terms of direct and indirect resource and capital costs was £4.372 billion.[10] The forecast cost of these operations included in the memorandum with the Winter Supplementary Estimate is £4.142 billion, a reduction of 5.3%.[11] Consequently, unlike in most years since operations began, there is no call upon Parliament to approve further funds for operations within this Supplementary Estimate. However, there is a token £1,000 request required by HM Treasury rules to allow Parliament to transfer some monies to the Department for International Development (DFID) and to re-allocate funds to the Stabilisation Aid Fund provision to the Global Pool.[12]

8. The principal cause for this 5.3% reduction is a re-assessment of forecasts for operational costs in Iraq for the current Financial Year. The MoD memorandum accompanying the Estimate notes that this is principally "due to the accelerated drawdown process" in that country.[13] Forecast Iraq costs within the Main Estimate were £877 million. Current forecast costs are £388 million. Table 2 below, which shows a breakdown for the estimated cost of operations in Iraq and Afghanistan at the time of the Main and Winter Supplementary Estimates, makes clear that the most significant elements in this reduction relate to stock/other consumption and equipment support costs.

Table 2: Main and Winter Supplementary Estimates 2009-10 forecasts for operations in Iraq and Afghanistan
Cost Type
Iraq ME £M
Iraq WSE Forecast £M
Afghanistan ME £M
Afghanistan WSE Forecast £M
Direct Resource DEL
Civilian Personnel 96 1624
Military Personnel 3739 148171
Stock/Other Consumption 18928 480492
Infrastructure Costs 6968 216276
Equipment Support Costs 23189 485535
Other Costs and Services 9352 423445
Income Foregone/ Generated (-) 1-26 -12-29
Total Direct Resource DEL 629 256 1,756 1,914
Indirect Resource DEL 16576 258295
Total Resource DEL 794 332 2,014 2,209
Capital DEL
Capital Additions 8356 1,4811,545
Total Capital DEL 83 56 1,481 1,545
TOTAL ESTIMATED COSTS 877 388 3,495 3,754

Source: Ministry of Defence[14]

9. Set against this significant reduction for operational costs relating to Iraq, there is a slight increase in forecast costs for operations in Afghanistan. The MoD memorandum accompanying the Estimate notes that this increase is principally on account of the Main Estimate being predicated on a force level of 8,300 while the Winter Supplementary Estimate is predicated on current force levels of 9,000.[15] Forecast Afghanistan costs within the Main Estimate were £3.495 billion. Current forecast costs are £3.754 billion. While military personnel costs within these sums have risen from £148 to £171 million, associated infrastructure costs have also risen from £216 to £276 million. In addition, equipment support costs have risen from £485 to £535 million. The MoD notes that in addition to the cost implications of the increase in force levels "to support national elections, and enable the deployment of the counter improvised explosive device task force" there have been increases in other costs, namely "personnel costs, additional sustainment costs, the corresponding additional equipment, essential Urgent Operational Requirements and associated costs of providing counter improvised explosive device capability and expertise."[16]

10. As the costs for both theatres are now forecast to be lower than anticipated at the time of the Main Estimates, there is no need to request further sums to fund operations. There is also some room within the funds obtained at Main Estimates to cover further increases in current forecast costs should they occur. While we were considering the Winter Supplementary Estimate, the Prime Minister made a statement to the House confirming that, his three pre-conditions having been met, 500 extra British troops are to be sent to Afghanistan.[17] The MoD memorandum, written before this statement, refers to the possibility of this further deployment and makes clear that the forecast in the memorandum does not include expenditure relating to this increase in military personnel. However, in response to a further query, the MoD notified us on the day of the statement that deploying an extra 500 troops would cost "in the region of £45 million for additional personnel and sustainment" in this Financial Year.[18] It also added that because "the exact role of the 500 has yet to be determined, [it]… cannot assess what, if any, additional equipment requirements there will be above the standard protection equipment that all personnel deploy with", adding that costs associated with this additional equipment would however be unlikely to fall in this Financial Year.[19]

11. The MoD has always stressed that forecasts for operational costs are subject to many variations and changes:

The costs of Operations are driven significantly by the tempo of operations, which particularly effect equipment support costs, attrition, fuel and ammunition consumption. Exchange rates, fuel prices and costs incurred with contractors can also vary.[20]

New strategies or military tasks can arise that require significant increases in spending or which might result in a major drop in expenditure. Consequently, even setting aside the issue of the extra 500 troops, the MoD memorandum points out that the Department "may have to increase … [its] request for resources at Spring Supplementary Estimates."[21] The Spring Supplementary Estimates are expected to be placed before the House in February: the figures that will inform that Estimate will be agreed with HM Treasury in January. The MoD has said that it will let us have sight of the figures which will inform that Estimate once they have been agreed.[22] We are grateful for the MoD's co-operation in this matter.

12. Tables 3 and 4 below show for both Iraq and Afghanistan the recent trajectory of operational costs, from the outturn for 2006-07, through the outturns for 2007-08 and 2008-09, to the latest assessment for the costs for 2009-10 (not including the around £45million base cost for the deployment of an extra 500 UK troops to Afghanistan). The residual cost for maintaining the very small UK presence in Iraq will not become clear until around the time of the 2010-11 Main Estimates. Similarly, the proportion of costs in this Financial Year that can be ascribed to drawdown is uncertain. The massive drop in costs makes apparent the extent of the scaling down that has taken place in that theatre recently. While the current forecast for both theatres is less than expected at the time of the Main Estimates, this is the case solely on account of Iraq costs being much less than expected. Operational costs for Afghanistan are still rising and with the deployment of extra troops, plus the equipment that is currently or in the near future being re/deployed to theatre there—Merlin helicopters, Mastiff and Ridgeback armoured vehicles—costs will only continue to rise during this Financial Year should the current strategy and burden sharing arrangements endure.

Table 3: Iraq: cost of operations, 2006-07 to 2009-10 (£million)
Cost type
Iraq outturn 2006-07
Iraq outturn 2007-08
Iraq outturn 2008-09
Iraq forecast 2009-10 (Winter)
Resource (Direct)
Military personnel 10098 11539
Civil personnel 1514 216
Stock/other consumption 218237 20728
Infrastructure costs 83130 13368
Equipment support costs 206278 30689
Other costs/services 137162 15352
Income foregone/(generated) 54 (26)
Indirect Resource 23131 18976
Total (Resource) 787 1054 1124 332
Capital Additions 169403 25756
TOTAL 956 14571381 388

Source: previous Defence Committee Reports and Ev 5, Table 8

Table 4: Afghanistan: cost of operations, 2006-09 to 2009-10 (£million)
Cost type
Afghanistan outturn 2006-07
Afghanistan outturn 2007-08
Afghanistan outturn 2008-09
Afghanistan forecast 2009-10 (Winter)
Resource (Direct)
Military personnel 5085 73171
Civil personnel 49 1524
Stock/other consumption 164301 527492
Infrastructure costs 101149 162276
Equipment support costs 112200 384535
Other costs/services 89160 312445
Income foregone/(generated) (2)(11) (24)(29)
Indirect Resource 42156 205295
Total (Resource) 560 1049 1655 2209
Capital Additions 178433 9681545
TOTAL 738 14822623 3754

Source: previous Defence Committee Reports and Ev 5, Table 8

Urgent Operational Requirements

13. In our Report on the 2009-10 Main Estimates, we expressed some anxiety about the proposed division and burden of costs of Urgent Operational Requirements (UORs) between the MoD and HM Treasury. We also expressed some concern about how stable the forecast costs of the very welcome Protected Mobility Package (PMP) might be.[23] In its response to our Report, the MoD reiterated the change made in burden of UOR costs between the dates of the statements to the House of November 2007 and December 2008: UOR costs in excess of the figure agreed by the MoD and HM Treasury will fall in full on the MoD, rather than in part as before—a 50:50 split, MoD/HM Treasury—two Financial Years later.[24] Although we understand that HM Treasury cannot write a blank cheque for the MoD even in the current circumstances that obtain in Afghanistan, we would like further information from the MoD as to the circumstances in which this change of practice might impact on the MoD's core budget in future.

14. No additional information on UORs was provided in the MoD memorandum accompanying the Winter Supplementary Estimate. We therefore sought a supplementary memorandum setting out what changes there might have been to forecast UOR costs and related arrangements since the receipt of the Government response to our Report on the Main Estimates. This explained that the current figure of £736 million for UORs for 2009-10—beyond which sum the expenditure will fall on the MoD core budget in 2 years time—was an estimate and not a limit: "military operations drive the estimate, not vice versa". It also said that the MoD is still "assessing … likely actual expenditure [on UORs] against the existing forecast."[25]

15. With regard to the Protected Mobility Package (PMP), the supplementary memorandum stated that the "current MoD assessment of the PMP overall cost is that it remains between £600-£700 million … The final outturn will depend on exchange rate variations and essential changes to vehicles to reflect operational requirements in Afghanistan. Of this we continue to estimate that the bulk will fall in 2009-10."[26] In October 2008 when the then Secretary of State for Defence, the Rt Hon John Hutton MP, issued his statement on protected mobility, the cost for the PMP was said to be over £600 million: in addition there was a £96 million cost for Talisman, a route proving and clearing capability, which uses specialist vehicles such as the Buffalo mine-protected vehicle.[27] In the Government response to our Defence Equipment 2009 Report, the cost of this package was said to be £680 million.[28] By the time of the Main Estimates eight months later this had become a cost of more than £650 million.[29]

16. Unlike the UOR figure of £736 million, all of which will be paid by HM Treasury out of Reserve, the cost of the PMP, which is essentially a discrete area of urgent operational requirement, are falling in part on the MoD now. In its response to this Report, the MoD should confirm that this is because the assets obtained or improved under this process are more likely than other UORs to have a potential use in theatres other than Afghanistan. In our Report on the Main Estimates we stated that approximately £180 million of the then £680 million estimated cost would over the whole programme fall to be paid by the MoD. We likewise stated that the then agreed £500 million contribution by HM Treasury to the PMP did not appear to be subject to change.[30] In its response to this Report the MoD should set out to what extent and under what conditions the HM Treasury contribution to the Protected Mobility Package might change should its cost rise significantly, leaving the MoD otherwise to bear a greater proportion of the costs than previously anticipated.

Other issues

17. The most significant increases within the Winter Supplementary Estimate relate principally, for the first time since operations began in earnest Afghanistan, to technical accounting changes within Request for Resources 1 (Provision of Defence Capability—RfR1). This covers the UK's general defence capability. Here the House is asked to grant an additional £1.0255 billion for resource expenditure set against a reduction in £71 million for capital expenditure,[31] creating a total change within the Estimate from the sum agreed by the House in early July 2009 of £954.501 million (which includes the token £1,000 under RFR2 mentioned above).

18. However, there are a few substantive expenditure changes within this sum. The bulk of the changes in fact relate to revaluations and restatements of spending under new accounting standards. These include

  • £650 million resulting from estimated impairments (reductions in the estimated value on the balance sheet) of derivatives (a particular form of asset) relating to forward purchase contracts. The way these are valued has already altered with the implementation of International Financial Reporting Standards (IFRS) and these latest changes reflect further revaluations under the new standards. The valuations are affected by exchange rate fluctuation. Such impairments are difficult to control or forecast and are therefore treated as Annual Managed Expenditure, meaning that the changes are funded by the Treasury rather than having to be managed within the MoD's Departmental Expenditure Limit. Further such changes can be expected in the future.[32]
  • £259 million relating to the next stage of implementation of IFRS, requiring several further changes in the way items are recorded, notably finance leases and liabilities to staff such as untaken leave. In the case of the MoD, the most significant of these is a finance lease relating to Annington Homes. While the restatement of accounting items against the new standard requires Parliamentary approval it does not in itself indicate higher expenditure, simply the restatement of existing spending in a new way.[33]

19. There are, however, some noteworthy if significantly smaller sums within the increase in RfR1 in the Winter Supplementary Estimate. These include an increase in Grant in Aid of £1.1 million to the Royal Hospital Chelsea, an increase in Grant in Aid of £31.7 million for the Council of Reserve Forces and Cadets Association, and an increase in Grant in Aid of £180,000 for the National Army Museum.[34] In addition, the MoD has, with Treasury approval, been able to draw down £20 million from its Resource End Year Flexibility (EYF) to reflect the Government's decision to reverse the impact of the planned MoD training costs budget reduction for the Territorial Army.[35] (The Main Estimate, prepared between February 2009 and the April 2009 Budget, made provision for this reduction—now revised.)

20. Included in the Winter Supplementary Estimate is £15 million fiscal relief to compensate for lower Northern Ireland receipts than expected.[36] In a Written Answer in the House on 1 December 2009, the Secretary of State for Defence, the Rt Hon Bob Ainsworth MP, explained that this relief is accounted for by the fact that the MoD has decided to gift to the Northern Ireland Executive, subject to Parliamentary approval, a number of sites in Northern Ireland which are no longer required for defence purposes.[37]

Science Innovation Technology

21. Within the actual Estimate, as opposed to the MoD's accompanying memorandum, a reduction of £55.647 million in the Net Provision for Science Innovation Technology is recorded: the provision of £517.844 million at the time of the Main Estimates is being reduced to £462.197 million. In the last Financial Year, we queried a change in the Departmental Expenditure Limit for this sub-head within RfR1. The MoD told us the adjustment was to take account of the final outcome of the planning round and that no cuts to any research programme had been made as a consequence of this adjustment.[38] However, in response to questions posed to the MoD as part of our current Defence Equipment 2010 inquiry, the MoD has acknowledged cuts in this Financial Year in some areas of research which has led to certain specific activities being reduced or stopped as a result of strategic reprioritisation (in the areas of Maritime, Land and Air domains, Weapons, C4ISTAR[39], ballistic missile defence and climate research). However, it is not clear from the memorandum whether or not the overall budget has been cut. [40] In a Written Answer to the House on 11 November, the MoD also announced that the expected figure for 2010-11 is approximately £439 million.[41] In evidence to us on 8 December, during our inquiry into Defence Equipment, Mr Ian Godden of the Defence Industries Council told us that the MoD's Research and Development budget had been cut by 24% between 2007 and 2010.[42]

22. While there will always be need for reprioritisation and redistribution of funds between programmes, it seems unwise to cut the research budget, especially in such an area as C4ISTAR which is so very crucial not only to the MoD's future capability but also to the success of current operations. We call on the MoD to provide enough information for us to understand the reasons for the strategic reprioritisation of research, the exact state of funding for its research programmes, and the extent of any cuts to those programmes.

Conclusion

23. We recommend that the House of Commons approve the request for resources set out in the MoD's Winter Supplementary Estimates. The sums requested serve to maintain the capability of the MoD to sustain operations in theatre and to meet other future challenges.


1   HM Treasury, Central Government Supply Estimates 2009-10 Winter Supplementary Estimates, HC 24, November 2009  Back

2   Ev 1, Table 1 Back

3   Defence Committee, Ninth Report of Session 2008-09, Ministry of Defence Main Estimates 2009-10, HC 773, para 10 Back

4   HC (2008-09) 773, Ev 11-14 Back

5   See for example Defence Committee, Tenth Report of Session 2006-07, Cost of military operations: Spring Supplementary Estimate 2006-07, HC 379, para 4  Back

6   Defence Committee, First Report of Session 2008-09, Winter Supplementary Estimates 2008-09, HC 52, para 8 Back

7   HC (2008-09) 773, para 13 Back

8   Ev 4, para 5.1.1 Back

9   See for example, HC (2008-09) 52, para 4 Back

10   HC (2008-09) 773, para 13 Back

11   Ev 4, Table 7 Back

12   ibid., para 5.1 Back

13   Ev 5, para 5.3.1 Back

14   Ev 5, Table 8 Back

15   Ev 4, para 5.2.1 Back

16   Ev 4-5, para 5.2.1 Back

17   HC Deb, 30 November 2009, col 835 Back

18   Ev 9, response to question 3 Back

19   ibid. Back

20   Ev 5, para 5.2.2 Back

21   ibidBack

22   Ev 9, response to question 2 Back

23   HC (2008-09) 773, para 26 Back

24   Defence Committee, Fifth Special Report of Session 2008-09, Ministry of Defence Main Estimates 2009-10: Government response to the Committee's Ninth Report of Session 2008-09, HC 986, response to Recommendation 9 Back

25   Ev 9, response to question 4 Back

26   ibid., response to question 5 Back

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

28   Defence Committee, First Special Report of Session 2008-09, Defence Equipment 2009: Government response to the Committee's Third Report of Session 2008-09, HC 491, response to Recommendation 7 Back

29   HC (2008-09) 773, para 26 Back

30   ibid. Back

31   See Table 1 above Back

32   Ev 3, para 4.5 Back

33   Ev 1, para 2.1(c) Back

34   Ev 4, para 4.8 Back

35   Ev 3, para 4.2 Back

36   ibid., para 4.3 Back

37   HC Deb, 1 December 2009, col 611W Back

38   Defence Committee, Fourth Report of Session 2008-09, Spring Supplementary Estimate 2008-09, Ev 12, para 5 Back

39   C4ISTAR refers to command, control, communications, computers, intelligence, surveillance, target acquisition and reconnaissance. Back

40   The MoD memorandum to the Committee on Defence Equipment 2010 is available on the Committee's website: it will be published early in the New Year with the Committee's Report on Defence Equipment 2010. Back

41   HC Deb, 11 November 2009, col 404W Back

42   The oral evidence will be available on the Committee's website: www.parliament.uk/parliamentary_committees/defence_committee.cfm Back


 
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 10 December 2009