Ministry of Defence Spring Supplementary Estimates 2010–11

ESTIMATES MEMORANDUM

MINISTRY OF DEFENCE

SPRING SUPPLEMENTARY ESTIMATES 2010/11

1. Introduction:

1.1 This Memorandum covers the Spring Supplementary Estimate (SSE) for the Ministry of Defence (MoD) and should be read in conjunction with the Department’s SSE 2010/11. The Introduction to the Estimate lists the changes being made since the 2010/11 Winter 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 Resource DEL of £599M from £36,727M at Winter Supplementary Estimates (WSE) to £37,326M for SSE. The main elements to this are:

a) An increase of £700M Resource DEL, which is additional funding agreed as part of the Spending Review (RfR1).

b) Additional resource provision of £2.3Bn non-cash Resource DEL that relates to anticipated write-offs and impairments resulting from the Defence Equipment and Support (DE&S) stock accounting and verification project (RfR1).

c) Switches of £250M and £105M from Capital DEL to Resource DEL relating to Single Use Military Equipment (SUME) flexibility within RfR1 and RfR2 respectively with no overall impact on DEL.

d) A request for £14.7Bn of non cash Annually Managed Expenditure (AME) to recognise the estimated Statement of Financial Position adjustments arising from the implementation of accounting policy changes; and those arising from the potential increase in provisions, impairments, accelerated depreciation, write-off of some assets, inventory, and assets under construction, associated with the decisions published in the Strategic Defence and Security Review (SDSR) and other planned changes.

e) A request for £43M of non-cash AME that reflects the latest forecast of provisions for RfR2.

f) A reduction in Capital of £98M for an Urgent Defence Requirement to reflect the latest forecast of Capital expenditure.

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

Table 1: Changes in Net Resource and Capital Expenditure

2.3 The total DEL (Resource) change (Voted and Non-Voted) in the Estimate is £603M, which generates an additional net cash requirement of £602M. Table 2 sets out the current net cash requirement starting with the requirement at WSE. 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 SSE also comprise a net increase in Non Budget of £0.948M for transfers of funds between DEL and Non Budget for National Army Museum and the Council of Reserve Forces and Cadets Association additional funding. Further details are set out in Para 4.3. There is no overall impact on resource. There is also a technical adjustment of £1.3M to Non-Voted correcting a grant funding re-allocation request made at WSE.

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 (SSE). Again this is set out by RfR. The other changes outlined in the Introduction to the Estimate are analysed in this section of the Memorandum.

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

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

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

4.1 Spending Review – Additional Funding:

The additional funding of £700M at SSE was agreed as part of the MoD spending review settlement and relates to a number of in-year resource pressures as well as some possible contractual liabilities. The Department is currently in negotiation with affected parties so details remain commercial in confidence. Further details will become available when the 2010/11 Annual Report and Accounts are compiled later this year. The Department will disclose these issues to the Committee in confidence if they ask.

4.2 DE&S Asset Verification Project:

The MoD has been subject to a Limitation of Scope Qualification for several years on our Inventory holdings. The DE&S TLB is responding proactively to the NAO’s recommendation of which a natural by-product is the impairment and writing off of obsolete balances. The project also aims to deliver improved processes, standardisation, and better management information. The DE&S project is already delivering better visibility of balances, and more prompt write-off actions. This work is on-going and may result in further impairments and write-offs for future years. Table 4 sets out the content of the £2.3Bn non-cash DEL request.

Table 4 DE&S Fixed Asset Verification Excercise

Note: (1) The MoD has raised its capitalisation threshold to £25,000. Assets that now fall below this threshold have been written off the balance sheet.

4.3 SUME CDEL to RDEL Switch:

Spending on SUME is currently classified in the National Accounts as resource rather than capital expenditure. The MoD has been permitted to transfer elements of its budget from SUME to Resource DEL. The transfer will enable the Department to meet the anticipated in year Resource spend profile.

4.4 AME Request for Funds:

The major categories making up the request of £14.7Bn AME are in Table 5.

Table 5 Estimated AME Requirement at SSE

4.4.1 Accounting Policy Change

A revision to International Accounting Standard 17 relating to leases, means that the MoD must now recognise circa £3Bn of Land relating to Annington Homes on its Statement of Financial Position (Balance Sheet). This has resulted in an estimated AME charge of £1,923M for land impairments (market value of land devaluation), which is subject to change. This is made up of:

· £240M for 2010/11

· £700M for 2009/10

· £983M for 2008/09

4.4.2 SDSR Provisions and Liabilities

The provisions relating to contractors are commercially sensitive and will be advised to the Committee in confidence if they request further detail.

4.4.3 Statement of Financial Position adjustments associated with decisions taken as part of the SDSR process

The SDSR made clear that we would continue to review our equipment and other holdings as we conducted the more detailed implementation activity including though our annual Planning Round processes. The Department’s approach to the level of write-offs for the decisions associated with the SDSR takes account of discussions with the NAO, The amounts involved do not represent cash rather they are the accounting consequence of the decisions taken and announced in the SDSR and any associated changes. The final outcome is subject to further refinement, and adjustment during the 2010/11 audit of the MoD’s Annual Report and Accounts. As we continue the SDSR implementation process, there may also be further write-offs next year.

4.5 Notional End Year Flexibility (EYF):

The Department’s current Notional End Year stock position is set out in Table 6 below as published in the Public Expenditure 2009/10 Provisional Outturn (CM7911).

Table 6 – Notional End Year Flexibility Stock

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

4.6 Non Budget Grants:

4.6.1 The net re-allocation of funds from Resource DEL to Non Budget of £0.948M has been made to reflect the latest Non Budget forecast of outturn changes since WSE.

4.6.2 £0.143M relates to an increased Grant in Aid for the National Army Museum to refurbish all Audio Visual (AV) Suites. This will provide AV technology better suited to the Museum’s future demands and minimise the risk of facilities becoming unusable. The re-introduction of the Templar Study Centre as a fourth AV Suite will increase the Museum’s ability to cope with high demand and will provide a fresh revenue stream as a technologically capable hiring space. A further £0.1M has been requested to reflect the latest forecast of costs for the move of the historic stored collections from Camberley to Stevenage.

4.6.3 The remaining £0.705M relates to Grant in Aid funding for the Council of Reserve Forces and Cadets within Land TLB. This covers increased IT costs (£0.420M); increased Non Domestic Rates (£0.161M); further security funding in Northern Ireland (£0.070M); and increased vehicle maintenance costs (£0.054M) that were not included in the original budget issued by Land Forces.

4.6.4 There is no overall impact on RfR 1 (Defence Capability).

4.7 Urgent Defence Requirement Reduction:

There is a reduced CDEL requirement of £98M, which reflects the latest forecast of outturn.

4.8 Increases in Operating Appropriations-in-Aid:

The increased Operating Appropriations-in-Aid of £36M reflect the latest income forecast of outturn. There is no overall impact on RDEL.

4.9 TLB Re-allocations

Neutral changes have been 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. The Science Innovation and Technology TLB merged with the Central TLB on April 1, and the new consolidated TLB appears 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 7.

Table 7: Summary Cost of Operations and Peacekeeping at 2010/11 SSE

5.2 Operations in Iraq and Afghanistan:

The MoD is requesting no additional DEL funding from the Reserve but recognises 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. AME provisions captured within the in-year forecast have increased due to an increase in the number of legal claims against the Department. The request is set out in Table 8 below.

5.3 Iraq:

We continue to forecast costs for the small number of UK forces stationed in the region, mainly providing naval and training support. The increase in AME is due to legal cases being brought against the Department by Iraqi civilians. This is a difficult area to forecast due to the uncertainty of the value of claims likely to be realised.

5.4 Afghanistan:

The current forecast reflects the costs of an enduring force level of 9500 including operating the Embedded Partnering concept. There have also been increases in costs associated with stock consumption along with fluctuations in exchange rates, fuel prices, and actual costs incurred with contractors. However, these have been offset by reductions in other categories of expenditure along with a reduced forecast in Iraq.

Table 8: Estimated Cost of Operations in Afghanistan and Iraq at SSE 2010/11

5.7 Conflict Pool :

The Conflict Pool is a wider Government initiative that funds conflict prevention, stabilization, and peacekeeping activities. Overall responsibility for the Conflict Pool rests with the Department for International Development 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 received an additional £16M via PES transfer at WSE.

6. RfR3 War Pension Benefit:

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

7. Departmental Expenditure Limit (DEL):

7.1 Table 9 shows the D EL from 2007/08 to 2010/11 for RfR1. The Total D EL is calculated by adding Resource D EL and 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-V oted D EL.

Table 9 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 The impact of the SDSR on provisions is set out in the Estimates Memorandum Tables. We are currently assessing the impact on future contingent liabilities, and will provide further detail on this in our 2011/12 Main Estimates and 2010/11 Annual Report and Accounts.

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 In November 2010 the Prime Minister launched business plans for each Department setting out the priorities and milestones for the next four years. The milestones and performance indicators included in the business plans supersede the performance regime of strategic objectives established as part of CSR 07. Consequently, the MoD in common with other Departments will no longer report against PSAs/DSOs within the Annual Report.

12. Net Additional Cash Requirement:

12.1 The Net Cash impact for the SSE is an increased net cash requirement of £602M.

13. Votes A:

13.1 We will be laying the 2010/11 Votes A Supplementary Estimate and the 2011/12 Main Votes A on 17 February 2011.

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

UDR Urgent Defence Requirement

UOR Urgent Operational Requirement

WSE Winter Supplementary Estimates

14 February 2011

Ministry of Defence
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.

Voted and Non-Voted Expenditure:

The introduction to the Supply Estimate covers only Voted items upon which Parliament votes. The Estimate also includes Non Voted items which may fall in the Department’s Accounts or Budgets e.g. Cash release of provisions and NDPB expenditure, which will become Voted items under CLoS in 2011/12.