Winter Supplementary Estimates 2010/11

Written evidence from the Ministry of Defence on the

Winter Supplementary Estimates 2010/11

1. Introduction:

1.1 This Memorandum covers the Winter Supplementary Estimate (WSE) for the Ministry of Defence (MoD) and should be read in conjunction with the Department’s WSE 2010/11. The Introduction to the Estimate lists the changes being made since the 2010/11 Main 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.

2. Summary of Resources sought in the Estimate:

2.1 The Introduction to the Estimate shows a net increase in Voted Resource DEL of £102.744M from £36,624.755M at Main Estimates to £36,727.499M for WSE. The main elements to this are:

a) An increase of £88M Resource DEL to bring it in to line with the audited outturn for 2009-10, updating the provisional adjustment made at Main Estimate, as agreed with Treasury from the Reserve.

b) A budgetary transfer of £16M from the Department for International Development (DFID) being their contribution to the Global Pool funding.

c) £600M of additional Annually Managed Expenditure, to reflect the forecast level of impairments arising from the latest review of the MoD Defence Estate of £400M, and £200M which relates to the latest forecast of the impact of foreign exchange impairments on the Department’s forward purchase contract derivatives.

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

Table 1: Changes in Net Resource Expenditure

2.3 The total DEL (Resource) change (Voted and Non Voted) in the Estimate is £102.744M, which generates an additional net cash requirement of £104M. Table 2 below sets out the current net cash requirement starting with the requirement at Main Estimates. The 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: Summary of Net Cash Requirement.

2.4 In addition to the changes outlined in paragraphs 2.1 above, the changes to the WSE also comprise a net increase in Non Budget of £1.289M for the Council of Reserve Forces & Cadets Association, the National Army Museum, Royal Hospital Chelsea, the National Museum of the Royal Navy, and the Cadet Force and Sea Scouts. Further details are set out in Para 4.3. There is no overall impact on resource.

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 Main Estimates), the changes in the position, and the new net provision (WSE). Again this is set out by RfR. The transfers and other changes outlined in the Introduction to the Estimate are analysed in this section of the Memorandum.

3.3 Table 3 shows how the WSE is compiled, identifying changes since the 2010/11 Main Estimates.

Table 3 showing changes to Voted Resources and Capital at 2010/11 WSE (Rounded)

4. RfR1 Provision of Defence Capability - Explanation of Changes:

Transfers In from Other Government Departments:

4.1 The Estimate includes one transfer in from the Department for International Development, which relates to funding of the Global Pool for RfR2

Notional End Year Flexibility (EYF):

4.2 The Department’s current Notional End Year stock position is set out in table 4 below, as published in the Public Expenditure 2009/10 Provisional Outturn (CM7911). The 2010/11 Spring Supplementary Estimates (SSE) EYF stock table will be adjusted to reflect the final 2009/10 audited outturn.

Table 4 – Notional End Year Flexibility Stock

[(1) The adjustments include post CLoS classification items e.g. the removal of cost of capital, which is no longer required for Resource Accounting under CLoS].

Non Budget Grants:

4.3 The net re-allocation of funds from Resource DEL to Non Budget of £1.289M has been made to reflect the latest non budget forecast of outturn changes since Main Estimates. Of this £0.028M relates to the Reserves and Cadet Forces (Land Forces) latest forecast; £0.6M relates to the National Army Museum (Land Forces) move of historic stored collections from Camberley to a new location in Stevenage; £0.871M relates to the Royal Hospital Chelsea (Land Forces) which had been scored in RDEL rather than Non Budget at Main Estimates; (£0.525M) relates to the National Museum of the Royal Navy (Fleet) to reflect increased responsibilities within RDEL rather than Non Budget; and £0.315M relates to the Cadet Force and Sea Scouts (Fleet) to reflect funding that was omitted in the planning round. There is no overall impact on RfR 1 (Defence Capability).

AME:

4.4 The Department has requested a further £600M in AME. This reflects the latest forecast level of Defence Estates impairments arising from the application of Modified Historical Cost Accounting indices to non dwelling building assets including Assets under Construction of £300M; and impairments arising from the Quinquennial Review of non dwelling building assets of £100M. The remaining £200M relates to the latest forecast of the impact of FRS26 (Financial Instruments) on the forward Purchase Contract Derivative for foreign exchange impairments of £200M.

Further Resource Requests at SSE:

4.5 The Department is currently in negotiation with the Treasury to identify the additional resource needs resulting from the recent Strategic Defence and Security Review (SDSR). This additional resource requirement relates to the settlement of various contractual liabilities and the accounting impact of writing off military assets that are no longer required. The latest forecast of outturn indicates that the Department may need to switch (flex) from Capital DEL to Resource DEL to meet in year requirements. Further IFRS-related adjustments are also being reviewed.

4.6 Further neutral changes will be made to the sub headings to reflect alterations to TLB allocations of Resource and Capital funding to bring the allocations into line with responsibility transfers between TLBs, and other adjustments to reflect the defence outputs planned since the start of the year, but which require funding adjustments to deliver as the year progresses. SIT TLB merged with the Central TLB on April 1, and the new consolidated TLB will appear in our revised SSE Sub Heads table.

5. RfR 2: Operations and Peace Keeping:

5.1 The MoD’s total request for the costs of operations and peace-keeping is set out in Table 5.

Table 5: Summary Cost of Operations and Peacekeeping at 2010/11 WSE

(* the forecast indicates an extra £1M AME, which has not been requested at WSE).

5.2 Operations in Iraq and Afghanistan:

The MoD is requesting no additional funding for operations in Iraq and Afghanistan at WSE. However, the division of funds between the two operations has changed due to the inclusion of Embedded Partnering costs in Afghanistan (which were agreed separately from the Main Estimate); and further drawdown in Iraq. The breakdown of the request is set out in Table 6 below. As usual the request is funded from the Reserve. Further requests for funds may be required in the SSE. We will inform the Committee of any significant changes prior to this point if necessary.

5.3 Iraq:

We continue to forecast costs for the small number of UK forces stationed in the region providing primarily naval and air support.

5.4 Afghanistan:

The Main Estimate supported an enduring force level across the entire financial year of 9,500 and includes the agreed estimate of £850M for Urgent Operational Requirements.

The costs are affected by the changing tempo of operations along with possible fluctuations in exchange rates, fuel prices and actual costs incurred with contractors. We have involved HM Treasury in formulating the estimate to assure them of the rigour applied and to inform forecasts of wider government spending.

These figures include reduced costs associated with Embedded Partnering in Afghanistan but, as agreed with the Treasury, do not include any additional costs for the Ocelot Light Protected Patrol Vehicle (LPPV).

Table 6: The Estimated Cost of Operations in Afghanistan and Iraq at WSE 2010/11

5.5 Conflict Pool :

The Conflict Pool is a wider Government initiative that funds conflict prevention, stabilisation and peacekeeping activities. Overall responsibility for the Conflict Pool rests with DFID and funding rests on that baseline. For financial year 2010/11, the Conflict Pool allocation is £229M, of which £45M was allocated to MoD programmes at Main Estimates. We are requesting an additional £16M for WSE, which has been funded by a budgetary transfer from DFID.

6. RfR3 War Pension Benefit (WPB):

6.1 There are no changes to the RfR3 War Pension Benefit at WSE.

7. The Departmental Expenditure Limit (DEL):

7.1 Table 7 shows the D EL from 2007/08 to 2010/11 for RfR1. The Total D EL is calculated by adding Resource D EL, Capital D EL and deducting depreciation, which forms part of Resource D EL. D epreciation is excluded from Total D EL; including this as well as Capital D EL would be double counting. The figures are for Voted and Non-voted D EL. There were no changes to Non Voted DEL at WSE.

Table 7 Changes to MoD DEL (Voted & Non Voted) for RfR1

8. Administration Costs Limit:

8.1 There are no changes to the Administration Costs Limit.

9. Provisions and Contingent Liabilities:

9.1 No changes have been made at WSE. However, once the impact of the SDSR and CSR has been fully worked through, changes are likely at SSE.

10. Machinery of Government Changes:

10.1 There are no Machinery of Government Changes.

11. The Department’s Public Service Agreements & Strategic Objectives:

11.1     As set out in the 2007 Pre-Budget Report and Comprehensive Spending Review (Cm 7227), the MoD will contribute over the CSR 07 period to the delivery of the cross-Governmental Public Service Agreements to reduce the impact of global and regional conflict and to reduce the risk to the UK and its interests overseas from international terrorism. These are underpinned by the three Departmental Strategic Objectives to achieve success in the military tasks we undertake at home and abroad; be ready to respond to the tasks that might arise; and build for the future. The Department formally reports performance against its targets to Parliament in the Autumn and in its Annual Report.

12. Net Additional Cash Requirement:

12.1 The Net Cash impact for the WSE is an increased net cash requirement of £104M.

List of Abbreviations

AME Annually Managed Expenditure

CSR Comprehensive Spending Review

DE & S Defence Equipment and Support

DSO Departmental Strategic Objective

EYF End Year Flexibility

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

UOR Urgent Operational Requirement

WSE Winter Supplementary Estimates

23 November 2010

APPENDIX 1

A. Definition of terms

Direct Resource Departmental Expenditure Limits is a control aggregate within the resource budget. It excludes the non-cash items such as depreciation and movement in provisions. Direct Resource DEL was also known as ‘near cash in the resource budget’.

Indirect Resource DEL covers items such as depreciation, movement in provisions, and the notional auditors’ fees for the National Audit Office. This is also known as non-cash.

Total Resource DEL is the sum of Direct and Indirect Resource DEL.

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, foreign exchange fluctuations and certain asset value impairments.

Non-Budget is items of expenditure which are included in the Estimate but are outside of DEL and AME e.g. Grants in Aid, Royal Hospital Chelsea. This is a Parliamentary control but not a Treasury control.

Total Net Resources is the net of items 1 to 5.

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

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

Total Net Capital is the sum of the above capital items.

Request for Resources 1 provides for expenditure primarily to meet the MoD’s operational support and logistics services costs and the costs of providing the equipment capability required by defence policy.

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.

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.