Ministry of Defence Main Estimates - Defence Committee Contents


Summary

The Ministry of Defence's (MoD) Main Estimates, together with the accompanying memorandum, together with the Estimates Memorandum reveal how much the MoD will be spending this year and on what. This year's Estimates appeared in a new format, broken down by category rather than by individual Service and including some information under new categories, for instance about the cost of MoD-funded non-departmental public bodies. The Memorandum also provides some welcome information about the additional costs of operations in Afghanistan (just over £4 billion in the current year), borne by the Treasury, though not about the core costs borne by the MoD: the total cost of operations in Afghanistan is not known. The timescale for publication of the Estimates did not allow the inclusion of an assessment of the costs of the operations in Libya, though these have subsequently been provided by Ministerial statement and are estimated to amount to some £260 million over a six-month period. There are other areas where insufficient information was provided. In response to our request for a breakdown of write-offs and write-downs resulting from the Strategic Defence and Security Review we received a reply which left us little the wiser. We expect the Department to provide more information and will monitor this.


Introduction

1. The Treasury's Main Supply Estimates, through which the Government requests resources from Parliament to meet its expenditure plans for the Financial Year ahead, were laid before the House on 26 April 2011.

2. The Main Supply Estimates comprise an Estimate for each Government Department and, separately, for each public service pension scheme. The Committee's focus is on the Ministry of Defence (MoD) departmental Main Estimate.[1] The MoD has, as usual, provided us with a memorandum which explains key elements of the Estimate. This is published with this Report.[2]

3. We sought further information from the MoD, and its supplementary memorandum responding to our request is published with this Report.[3] We are grateful for the prompt response. Also published with this Report is a Memorandum on the Spring Supplementary Estimates 2010-11[4] and the supplementary information we received in response to our earlier request for further information about these.[5] As usual, we have not attempted a comprehensive review of the Estimates, but only to draw attention to some features of interest.

4. These Main Estimates are the first to be prepared since the publication of the Spending Review 2010 and the Strategic Defence and Security Review and reflect the changes foreseen in these documents.

Format of the Estimates

5. 2011-12 saw a change in the format and content of Estimates. For many years, parliamentarians, commentators (such as the Hansard Society)[6] and many inside Government itself have complained that the format and undue complexity of Supply Estimates, and their lack of consistency with other public expenditure documents and announcements, has been an obstacle to understanding and proper public and Parliamentary scrutiny.

6. The then Government proposed its plans for reform (known as "Alignment" or "Clear Line of Sight") in 2009.[7] The Liaison Committee responded positively to these in July 2009,[8] and the House endorsed them, following debate, in July 2010.[9]

7. As a consequence of the Clear Line of Sight and of alterations in the way spending is managed in the Department, and following consultation, MoD has made some structural changes to the Estimate for 2011-12. For instance, spending is now broken down functionally by category such as "provision of defence capability inventory consumption" rather than by Service. In MoD's view this breakdown, based on what are internally known as "commodity costs", "provides a more meaningful description of the Department's planned spend, which will enable a clearer understanding of MoD plans and expenditure over the Spending Review period."[10]

8. We welcome the new simplified and consistent presentation of Estimates, including the breaking down of expenditure plans into "commodity costs" such as "Service personnel costs". This means, however, that the individual overall costs of the Navy, Land Forces and Air Command, are no longer identified on the face of the Estimate. We recommend that the MoD ensure that information on the individual spending on the three Armed Services is still publicly provided elsewhere, whether in the Estimates Memorandum or in the Annual Report and Accounts.

The Memorandum

9. Departments are required to prepare Estimates Memoranda to accompany each Estimate presented to the House. These Memoranda are intended to provide useful explanation and additional information for Committees on the spending proposals being put before the House in the Estimates. Following the changes in format and content of Estimates, the guidance on the preparation and content of the accompanying Memoranda have also been altered. Discussions with the Treasury took place and revised guidance was published in the Treasury's Estimates manual in March 2011.[11]

10. As a result, MoD has made some improvements to its Memorandum, compared to previous versions. The detail it was already providing, for instance on operations, in response to previous requests, is maintained. The latest Memorandum contains for the first time:

  • An overview of new projects funded during the Spending Review period and of areas being scaled back;
  • A comparison of this year's budgets with last year's, including explanation of some of the major variations;
  • Detail of transfers from other government departments;
  • Information about non-departmental public bodies sponsored by the MoD

11. In addition, inconsistencies which have in the past sometimes existed between different documents using different conventions, such as Estimates, the Memorandum and the published Departmental Expenditure Limit (DEL) have not arisen, possibly because of the simplification arising from "alignment".

Cost of operations

12. The Memorandum provides a breakdown of information on the additional cost (over and above that of maintaining the units involved at their normal state of readiness) of operations in Afghanistan. Funding for these additional costs of these is provided by HM Treasury from the Special Reserve. For the year 2011-12, the DEL for operations in Afghanistan is £4,025.6 million.

Table1: Estimated Cost of Operations in Afghanistan 2011-12

Cost Type
Afghanistan £M
Direct Resource DEL
Civilian Personnel
26.3
Military Personnel
178.4
Stock/Other Consumption
682.7
Infrastructure Costs
299.1
Equipment Support Costs
611.1
Other Costs and Services
614.4
Income Generated (-)
(22.7)
Provisions-Non-Nuclear
6.4
Total Direct Resource DEL
2,395.7
Non Cash Resource DEL
449.2
Total Resource DEL
2,844.9
Capital DEL
Capital Additions
1,180.7
Total Capital DEL
1,180.7
Total Estimated DEL Costs
4,025.6
Annually managed expenditure
8.7

Data source: Ev 5, Table 9

13. We recommend that in next year's Memorandum on the Main Estimates the table showing expenditure on Afghanistan (and the wider Gulf) should show not only the estimate for 2012-13 but also the Estimate and out-turn for 2011-12.

14. The Estimates Memorandum says that the £4.025 billion provided for Afghanistan represents 90% of the current forecast cost. We were unclear whether this meant that the real cost could be closer to £4.4 billion this year. The MoD told us that the 90% figure had been used at the request of the Treasury, to recognise "the significant volatility of the costs and the desire to produce a prudent, taut and realistic Estimate". It assured us that nonetheless, should the funding prove insufficient, the Treasury will fund any agreed additional costs.

15. The Treasury has agreed to fund operations in Libya, which began on 19 March 2011 on the same basis as it funds operations in Afghanistan, that is that the additional costs will be met from the Treasury Reserve. No provision for them appears in the Estimate. The Memorandum explains that "it is too early accurately to forecast the cost of UK operations in Libya [...]. However [...] the net additional costs will be charged to the Reserve. We are working closely with HM Treasury on the forecast costs as the data becomes available".[12]

16. On 23 June 2011, the Secretary of State for Defence announced that the net additional cost of operations in Libya for six months was estimated as being in the region of £120 million, excluding costs associated with capital munitions expended. Based on current consumption rates, the cost over the same period of replenishing munitions might be a further £140 million.[13] We recommend that the Department report regularly to Parliament on the cost of operations in Libya.

17. As we have noted in our Report on Operations in Afghanistan,[14] the Department does not know the full cost of military operations, only of the additional costs. While it is true that personnel would be paid, and equipment procured and used (largely for training purposes), even if the Armed Forces were not engaged in operations, their deployment brings with it additional costs in terms of training opportunities cancelled or deferred and equipment wear and tear that will eventually have to be met. We recommend that the Department make an estimate of the full cost of military operations.

Non-Departmental Public Bodies

18. For the first time the Estimates include the expenditure budgets of Non-Departmental Public Bodies (NPDBs), broken down into resource and capital elements. Grant-in-aid cash support from the MoD to enable this expenditure is also shown. For 2011-12 the details are as follows:

Table 2: Expenditure budgets of Non-Departmental Public Bodies
Body Resources £'000 Capital £'000
Grant in Aid

£'000
Army Benevolent Fund[15]
--
--
--
Council for Reserve Forces and Cadets Association
94,536
2.026
96,562
Royal Hospital Chelsea
11,197
--
11,197
National Army Museum
5,609
--
5,221
RAF Museum
7,741
--
7,741
Royal Navy Museum
785
--
785
Royal Navy Submarine Museum
551
--
338
Royal Marines Museum
828
--
643
National Museum of the Royal Navy
1,301
113
1,236

Data source: Ev 4, Table 7

19. The Council for Reserve Forces and Cadets Associations received a transfer of capital funding from Land Forces TLB (Top-Level Budget-Holder) for vehicle purchases, and the Royal Museum of the Royal Navy received capital funding from Fleet TLB for the purchase of exhibits for the Royal Navy museums.

Planned cost reductions and write-offs

20. The Estimates reflect the Department's intention to reduce spending compared to the previous year's. Inventory consumption is to be reduced by 27%, infrastructure costs by 26% and equipment support costs by 14%. These are not insignificant reductions and we would expect them to have some impact on operational capability, or to require radical improvements in efficiency to be achieved rapidly. It is not clear whether these are efficiency savings or represent a reduction in activity. The Estimates Memorandum sheds no light on this. We requested more detail of the source of the savings, but the response was:

The precise details and savings profiles of the Non Front Line savings are still being confirmed by the Department. The largest portion (£1.8 bn over four years) will come from manpower reductions. Other major initiatives include the Defence Infrastructure Transformation Programme (£0.57 bn); changes to civilian terms and conditions (over £0.2 bn); and a review of Equipment Support (£0.2 bn).[16]

21. We would like to see more information provided on the specific impacts of expenditure reductions on capability in 2011-12. We recognise that the Government has set out, in the Strategic Defence and Security Review, its plans for defence over the medium term, and some of these decisions have been re-iterated in the introductory passages of the Estimates Memorandum. Nevertheless we recommend that in the response to this Report the Government provide a progress report on how the particular expenditure plans for 2011-12 contribute to the strategy, particularly what reductions in staffing and equipment are planned during the year, and, insofar as security considerations allow, how this will affect capability during this period.

22. Another area where information was limited was depreciation and write-offs. The Spring Supplementary Estimates included some £12 billion of write-offs and impairments "associated with decisions taken as part of the SDSR process". We asked for an explanation of the major groups of items or projects included within the total and the amounts of write-offs for each, and why the SDSR decisions had led to such huge write-offs and write-downs.

23. The Spring Supplementary Estimates included a request for parliamentary cover for asset write-offs following the SDSR. We asked for more information about these and were told that the seven most significant write-offs were as set out below:

Table 3: The seven largest asset write-offs

Asset
£bn
Nimrod MRA4
2.389
Harrier
1.254
'A' vehicle reduction
0.431
Type 22 frigate
0.340
RFA Largs Bay
0.108
HMS Ark Royal
0.097
RFA Fort George
0.092

Data source: Ev 20, Table 10

The most significant write-offs of Assets Under Construction are:    

Table 4: The most significant write-offs of Assets Under Construction

£ bn
Nimrod MRA4
1.050
Harrier
0.110
     Data source: Ev 20, Table 11

The Department also told us that there might be further write-offs and impairments as a result of the SDSR and the Internal Planning Round process "in subsequent financial years".[17]

24. In respect of the Main Estimates, we noted that £10 billion was budgeted for depreciation and write-offs in 2010-11 and asked whether, of this, any further major write-offs were expected in 2011-12. We also asked to be provided with the expected total of write-offs and write-downs resulting from the decisions taken in or flowing from the SDSR, broken down by service, with the largest individual items separately identified. The Department responded:

Estimates of SDSR related costs had to be made in time for inclusion in the SSE published on 14 February. However, much of the detailed work required to produce accounting estimates of auditable standard had not, at that time, been completed. As a result not all of the costs originally envisaged will be included in the 2010-11 accounts. Our SSE Estimates Memorandum stated that the final outcome would be subject to further refinement and adjustment during the 2010-11 audit of the MoD's Annual Report & Accounts. It also noted that, as the SDSR implementation process continued, there may also be further write-offs in subsequent years. We have closed out the accounts for FY 2010-11 and it has become clear that some of the approved funding will certainly not be required until FY 2011-12 and may not be required until FY 2012-13 and beyond.

In FY 2011-12 we are reviewing our current budget provision for Depreciation and Impairments (Inventory & Asset-related) to better understand the impact of the revised post SDSR asset base, and associated PR11 decisions, to assess whether we will need to request further non-cash funding in our FY 2011-12 SSE. Our SSE Estimates Memorandum will provide more detail on this should that be necessary.[18]

We are not sure what this means, but deduce that some of the 2010-11 provision for depreciation and write-offs will be carried forward to 2011-12 or even later years.

25. We are disappointed by the Department's inability to provide the detailed information we requested about expected write-offs and impairments and look forward to the provision of the promised additional detail in the departmental Report and Accounts.

Personnel costs

26. In the Spending Review, the Government announced plans to save around £300 million a year by 2014-15 from civilian and military allowances. Press reports suggest, for instance, that cutting the numbers eligible for the parachute supplement of up to £2,000 pa could save more than £4 million a year. On the other hand, we note also that operational allowances will be doubled.

27. We asked for a breakdown of the proposed savings, and also what impact the changes would have on individuals, on average.

28. The Department told us that reductions in civilian allowances were expected to save £55 million a year by 2014-15, on the basis that there would be a 50% reduction in each of overtime, volume of travel time, Short-Term Detached Duty and Long-Term Detached Duty.[19] They gave no detail on military allowances, saying only that the assumptions were that there would be savings in respect of allowances related to subsistence, travel, separation, relocation, continuity of education and local overseas allowances, and that savings would also arise as a result of the reductions in the size of the Force Structure.[20]

29. The MoD also said that it was not possible to estimate on average how individuals would be affected by the changes of allowances (some increased, others decreased). The Department said:

There is no "typical Serviceman" upon which such calculations can be made. Eligibility to allowances varies considerably depending on factors such as professional trade or specialty, location, or personal circumstances. As some allowances, such as the Operational Allowance, have increased while others are being reduced there is no doubt that some personnel will find themselves receiving increased allowances in some areas while receiving less elsewhere.

It assured us that, although the changes to allowances were a necessary part of the Department's planned reductions to respond to the current financial position, appropriate allowances would continue.[21]

Personnel reductions

30. The SDSR suggested that military personnel would be reduced by 17,000 by 2015. The Department explained that this was to be achieved through a variety of means, including reduced recruiting and fewer extensions of service. In addition there will be a redundancy programme, which is expected to be complete by March 2015, with the majority leaving the Service between 2012-13 and 2013-14. The current assessment is that 11,000 personnel will be made redundant at a cost of between £600 and £700 million but the final cost would depend on "the personnel selected for redundancy and changes to patterns of voluntary outflow".[22] Press reports indicate that the voluntary redundancy programme has been over-subscribed and that applications (or even resignations) have been received from individuals who might have achieved high command.[23] We recommend that the MoD explain in the response to this Report how it will ensure that the voluntary redundancy process does not impact on the future leadership capability and effectiveness of the Armed Services.

31. If the number of Service personnel is to be reduced, without a commensurate reduction in commitments, there must be a risk that the length of operational tours will be increased or that the 'harmony guidelines' which govern each branch of the Armed Services and set out what proportion of time personnel may spend away from home, will be breached. The Department told us that the scale and timing of the reduction in personnel numbers has been designed to ensure that there would be no effect on tour lengths or harmony for personnel deployed in relation either to Afghanistan or to Libya. We welcome this limited assurance but are aware of the possibility that reductions may have an impact on other personnel. We will continue to monitor this matter.

32. Civilian personnel are also to be reduced, by 25,000 by 2015, at a total estimated cost of £580 million over three years. The initial planning was based on three tranches of releases of 4,000 by 31 March 2012, a further 8,000 by 31 March 2013 and the balance by 31 March 2014, but the initial Voluntary Early Release Scheme attracted almost 14,000 by the closing date, offering an opportunity to make financial savings earlier. Accordingly it has been decided to allow the voluntary early release of 8,000 in 2011-12. A further 900 are expected to leave through outflow under Transfer of Undertakings (Protection of Employment) (TUPE) arrangements and natural wastage. The total cost of redundancy and early release in the year 2011-12 is estimated at about £270 million, though a final figure will not be available until offers of early release are accepted later in this financial year.[24] In our Report on the Performance of the Ministry of Defence 2009-10 we have highlighted what we perceive to be the risks of any precipitate staffing reduction.[25]

Conclusion

33. While we welcome the provision in this year's MoD Main Estimates, the preceding Spring Supplementary Estimates, the accompanying Memoranda and in response to our more detailed queries, of some information which has not been published in earlier years, we find it frustrating that in some instances the Department appears to be unable or unwilling to provide the kind of detailed information we ask for, notably in respect of the total cost of military operations and the detail of savings proposed. This prevents proper parliamentary scrutiny. We expect these gaps to be filled. We will continue to monitor the quantity and quality of information provided.


1   HM Treasury, Central Government Supply Estimates 2011-12, Main Supply Estimates, 26 April 2011, HC 921 Back

2   Ev 1 Back

3   Ev 10 Back

4   Ev 12 Back

5   Ev 19 Back

6   Hansard Society 2006, The Fiscal Maze: Parliament, Government and Public Money, July 2006 available from www.hansardsociety.org.uk/blogs/downloads/archive/2007/09/17/the-fiscal-maze-jul-2006.aspx Back

7   HM Treasury, Alignment (Clear Line of Sight), March 2009, Cm 7567 Back

8   Liaison Committee, Second Report of Session 2008-09, Financial Scrutiny : Parliamentary Control over Government Budgets, HC 804 Back

9   Votes and Proceedings, 5 July 2010, p 123 Back

10   Ev 1 Back

11   HM Treasury, Supply Estimates: a guidance manual, March 2011, available from www.hm-treasury.gov.uk/d/estimates_manual_032011.pdf Back

12   Ev 6 Back

13   HC Deb (23 June 2011) col 24WS Back

14   Defence Committee, Fourth Report of Session 2010-12, Operations in Afghanistan, HC 554 Back

15   The Army Benevolent Fund received no grant. The MoD told us that its listing as an NDPB is anomalous and arises because Land Forces/MoD have ex officio positions on its Committee and that the Department is seeking to have it removed from this classification for Estimates purposes Back

16   Ev 11  Back

17   Ev 19 Back

18   Ev 11 Back

19   Ev 10 Back

20   Ibid. Back

21   Ev 10 Back

22   Ev 11 Back

23   "Hundreds of Army's best soldiers apply for redundancy", Daily Telegraph, 18 June 2011  Back

24   Defence Committee, Third Report of Session 2010-12, The Performance of the Ministry of Defence 2009-10, HC 760, Ev 14 Back

25   HC (2010-12) 760 Back


 
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Prepared 28 July 2011