Evidence heard in Public

Questions 1 - 117



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Oral Evidence

Taken before the Public Accounts Committee

on Monday 27 February 2012

Members present:

Margaret Hodge (Chair)

Stephen Barclay

Matthew Hancock

Chris Heaton-Harris

Meg Hillier

Fiona Mactaggart

Nick Smith

James Wharton

Amyas Morse, Comptroller and Auditor General, Marius Gallaher, Alternate Treasury Officer of Accounts, Gabrielle Cohen, Assistant Auditor General, National Audit Office, and Tim Banfield, Director, National Audit Office, were in attendance.

Examination of Witnesses

Witnesses: Ursula Brennan, Permanent Under-Secretary, Ministry of Defence, Jon Day, Second Permanent Under-Secretary, Ministry of Defence, and Jon Thompson, Director General, Finance, Ministry of Defence, gave evidence.

Q1 Chair: Welcome. Today’s session, if we can manage this, is about getting you to help us understand how you are approaching the strategic defence and security review and the financial cuts over the coming 10 years. I would like to start exploring that, but may I say to all witnesses that everybody has to get away this afternoon as an imperative, so I hope you will keep responses concise and direct. If I interrupt, it will be because I think we are not entirely sticking to the point. We need today to get an understanding of how you are going to manage over the next 10 years. Fire away: talk to us in the first instance and let’s see where we go.

Ursula Brennan: The SDSR set out the strategy for what defence was due to achieve, and Lord Levene’s report set out the strategy for how we should organise ourselves to deliver on that set of objectives. If that was the strategy, the phase we are in now is implementation. We are seeking to put in place a control framework that ensures we have the right accountability, processes, decision making, project approvals and culture to enable us to deliver the SDSR objectives. We had to start, fairly obviously, by getting the budget into balance, and that is what has preoccupied us for most of the past 12 months. There has obviously been a lot of business going on and a lot of things happening, and there has been lot of work in the real world-in Libya and so on. In terms of transformation, however, the first focus was on getting the budget into balance. Once the budget is in balance, we can go on and tackle the incentives in the system to keep us on the straight and narrow-that is what we are starting to do now-and tackle the culture, sort out the governance and get the vision straight and so on. That, in a nutshell, is where we are now.

Q2 Chair: Okay. Let me ask a number of things. In March last year, you said that there was a shortfall of some £42 billion over the 10 years.

Jon Thompson: Yes.

Q3 Chair: Added to that, you have a flat budget, so because of inflation there is a real loss to you of how much? Over the spending review period you had to find some of the £42 billion-I accept that that is over a 10-year period-and find cuts to meet the fact that you had a flat budget. That is still better than most other Departments; nevertheless, how much was that over the four-year period? We’ll go on to think about the next period because we are trying to look at this over 10 years, but how much over the four-year period did you have to take out for inflation?

Ursula Brennan: How much did we have to take out for inflation?

Q4 Chair: You had two lots of cuts. One was the over-commitment, the £42 billion, which I accept has a 10-year timeline. The second lot of cuts were the financial cuts that you had to tackle because you did not get an inflation-proof settlement.

Ursula Brennan: Because of the size of our CSR settlement.

Chair: So how much was it altogether, accepting that one lot of cuts is over a 10-year period, and the other is due to inflation?

Ursula Brennan: I wonder whether it might be sensible for Jon Thompson to talk you through the finances. There is a difficulty. We had our comprehensive spending review settlement and sought to get our plans down to be able to deliver them.

Q5 Chair: There must be a cash sum.

Ursula Brennan: Yes, there is certainly a cash sum.

Q6 Chair: What is it?

Ursula Brennan: There is a cash sum for the CSR years, which is the settlement.

Q7 Chair: Yes. How much do you have to get out because of that?

Jon Thompson: Added together over the four years, around £7 billion.

Q8 Chair: On top of the £42 billion, which is spread over 10 years, you had £7 billion because of inflation. So you are looking at about £50 billion. I accept that some is over 10 years, and that it’s an odd way of looking at it.

Jon Thompson: Would it also be helpful if you had a comparable figure against the £42 billion over the 10 years? I am referring to paragraphs 19 and 20 of the report from the NAO, if that helps you. In paragraph 20, the comprehensive spending review reduced defence funding by 7.5% in real terms. Over a 20-year period, that equates to just over £21 billion. You have had to add that number to the £42 billion to get the figure.

Q9 Chair: Sorry. The £42 billion was over a 20-year period?

Jon Thompson: No, 10. That assumed that defence spending would rise in line with inflation. That was adjusted by the spending review period. What that gives you over 10 years is a further £21 billion to spend. You have to add the two numbers together-42 and 21-so over a 10-year period you are looking for £63 billion.

Q10 Chair: £63 billion.

Jon Thompson: Yes.

Q11 Chair: Can you tell us, out of the £63 billion-could you almost let us have a list of what was cut in that? We pick it up in dribs and drabs. I know you have cancelled Nimrod to save £1.9 billion, but have you got a list somewhere of what that entailed?

Jon Thompson: We have a clear list in the Department of what Ministers have previously agreed in order to reach the position that the Secretary of State announced in July 2011.

Q12 Chair: Can you share that with us? I asked the National Audit Office how we know; we need to know what you have cut out. There is a figure somewhere that shows how your budget is split up.

Jon Thompson: It is clearly available to colleagues from the NAO.

Chair: Yes, figure 6 shows the departmental spending. I have no clue of what has gone from where.

Jon Thompson: Yes, we can. It is easily available to NAO colleagues. It would not be a public document, given the classification of some of the changes that were made in the SDSR, but we could transparently give it to NAO colleagues and they could work out a way forward.

Q13 Chris Heaton-Harris: I think it would be a great idea if you could pass it on to them because then they can give us the benchmark that we require for later. I wonder at the time of all these cuts how your decrease in expenditure is going. Are you on track? My reason for asking is that two or three weeks ago during Prime Minister’s questions, the Prime Minister announced that you had done so well that we could afford a new C-17. You must be doing pretty well. Could you give us the big picture of that as well?

Ursula Brennan: Last July, we said that our budget was broadly in balance, which meant we had got a very long way towards getting our plans and proposals in line with the funding that we had available. We are in the last stages of completing that process. It was because we are so close to that that we were confident about being able to say that we could buy that extra C-17. Yes, we have those numbers back in alignment with each other.

Q14 Chris Heaton-Harris: And you are projecting forward as well, and it is looking healthy down the line-that you are going to be able to achieve those numbers?

Ursula Brennan: Yes, that is what we mean by getting the budget into balance: that we don’t simply manage to come in on budget within an individual year, but that we have a forward programme that is manageable and balanced. Clearly, when you are looking at a forward programme you are looking at slightly different things. In a current financial year, most of your budget is committed, you know what you are going to be spending, and a lot of it is already on contract. The further out you look, the more you are looking at proposals and plans, some of which you will want to change as you get there, so you are looking at slightly different things when you are saying whether it is in balance. But, yes, that is where we are.

Q15 Matthew Hancock: The further out you look, of course, the more uncertain the revenue line is as well. What assumptions have you made for the revenue line to ensure that it is in balance with the expected expenditure line?

Ursula Brennan: There are two things to say about that. The Government only plan their expenditure over comprehensive spending review periods, so we do not have a budget any more than anybody else does beyond that. What we did have was that we were given a planning assumption about planning for flat-real beyond that, bar a 1% increase in the equipment programme. That is the planning assumption that we are working to.

Q16 Chair: Has that changed since the economic circumstances have deteriorated? We heard evidence last week from the Cabinet Office and the Treasury in which they clearly said to us that we are not in for a four-year deficit reduction programme, but in for at least an eight or 10-year one. They gave you that before the change in the economy and therefore assumptions must change. Have they changed?

Jon Thompson: It has not changed since the updated evidence was given to you last week, no.

Q17 Chair: The assumptions you were given were at the time of the CSR. Have they changed now?

Ursula Brennan: The assumptions were changed last summer, which was when the 1% increase was given to us. We do not change the assumptions; the assumptions come to us from the Treasury and we are working to those assumptions.

Q18 Chair: But presumably-just knowing how this thing works in government-you have now started on the next CSR, haven’t you? I just know that you will have started on the next CSR. I cannot believe, given what has happened in the economic climate, that you have been given the same assumptions as when the CSR was completed last time round. All I am asking is: have you or haven’t you been given the same assumptions?

Ursula Brennan: No, we have not been given any different assumptions. We had the CSR assumptions. They were revised last summer to give us the 1% increase in equipment. There has been no change in those assumptions.

Q19 Matthew Hancock: It must be said that at the hearing last week, it surprised most people on the Committee, in a pleasant way, to hear that the Cabinet Secretary and the head of the home civil service said that you were doing a good job of turning round this deficit and that you had gone from being a red light to a less red light Department. I am sure you have heard about those compliments since they were said in a public session.

Ursula Brennan: Indeed.

Chair: Okay, I have a list of people-James, Meg and Nick.

Q20 James Wharton: Particularly looking at the £42 billion, and also generally at your expenditure, one way to manage a budget-we know from previous hearings that this happens-is to push out contracts for procurement, which can increase overall cost, but makes for a manageable train of expenditure. How much has that been a factor, and do you have any assessment of any extra costs and what they might be over the lifetime of contracts-from actually pushing them out in order to manage cash flow?

Ursula Brennan: Bernard Gray wrote a report about all this a few years ago, and he made an estimate of the cost of delay within contracts. He tried to look at the difference between delay because of technical problems or supply problems, and delay because we had deliberately extended these things out. We acknowledged in the SDSR that that had been a problem. The reason-it sounds like a cracked record-why we are trying to get ourselves in balance is so that we do not any longer have to delay things that are already on contract. It is when they are on contract that they are a problem.

Chair: But you have delayed the Astute.

Q21 James Wharton: I understand that, and I know where you are trying to get to and what you are trying to do to get there-it is commendable and I hope that you are successful. However, the fact is that you had to find £42 billion over this period. I suspect that, as part of that process, what you will actually do is move some expenditure out to make it manageable, because you have to balance your budget in any given year. Is that happening? I assume that it is, but perhaps it is not. If it is, do you have any assessment of the total additional cost throughout the life of those projects?

Ursula Brennan: The key thing to say is that the thing we are doing now, and the reason why we have been slowly working our way through this, is to get ourselves to a position where we will not be deliberately extending out things that are already on contract. Things may slip for all sorts of reasons, but we will not be extending out things out that are on contract. What we may do is to postpone something that we have yet to put on contract, if we have to, because we have financial problems, but that is different from when something is on contract. So, no, we are not doing that at the moment.

Q22 James Wharton: You have not done that at all with any projects in order to manage the cash flow?

Ursula Brennan: We are not doing that at the moment.

Q23 Chair: Just explain the Astute decision to us. The Astute decision, when we looked at it on the major projects, was a deferral.

Ursula Brennan: I am just trying to remember what the date was.

Jon Thompson: What the permanent secretary said is that we have not made any of those decisions in the budget for 2011 or the budget for 2012, which will be announced by the Minister in due course. There is a legacy of previous decisions that will flow, and then there is a stock of future decisions. In relation to management, going forward post-SDSR, we have not made any further decisions like that. We are now being very transparent internally and with the Treasury about how much of the budget is on contract and how much is not on contract so that people can be clear about whether we are doing any of this stretching out for cash-flow reasons.

Q24 Chair: When did you take the decision on Astute?

Jon Thompson: I think it preceded that.

Tim Banfield: Yes, it did.

Q25 Chair: When was it?

Tim Banfield: The decision was reported in the major projects report last year, so it would have been taken before the end of March 2011, which predates the discussions about balancing the budget we have just been having.

Q26 James Wharton: You say you are aiming not to have to push any more contracts back. Are you reasonably confident you are not going to have any further delays that would incur costs for the Department? Are you now confident you are where you need to be to deliver that? Also, would you be able to give us some indication of where that £42 billion in cost actually falls? You have a 10-year period, but you could be paying £20 billion in the last year or £20 billion in the first year. How is the money spread over that 10-year period?

Ursula Brennan: Are we confident that we are going to get to where we want to be? We will shortly be publishing a balanced budget, which we are confident will show that the budget is balanced, so, yes, we are confident about that.

Q27 James Wharton: Specifically, though, are you confident that you are not going to have to delay any further contracts to balance your budget in a way that will incur extra costs?

Ursula Brennan: Yes, we are indeed confident of that. As my finance DG says, over the past 12 months, we have not been deferring contracts in that way, and we are confident that we will not be having to do that in the future. In relation to how the cost reductions fall over the 10-year period, that is quite complicated. I come back to the point that where stuff is already on contract, you can see which years it falls in. A lot of the gap between our budget and spending plans was not really about plans-it was about unfunded aspirations. As to precisely what years they were going to fall in, we had a long list of things where there was an ambition to deliver, but we did not have the funds to deliver. That is the gap that we have been seeking to get rid of by getting into proper costed plans that match against the future. So, it is a bit more difficult to say precisely where the gap fell.

Jon Thompson: That is correct, but perhaps I can add something. For those things where, for example, you are running down the number of people over that 10-year period, we have a very clear plan. The numbers we can give the National Audit Office also break things down over the decade, so we could go further than the question that you asked.

Q28 Meg Hillier: It is a big job reconfiguring the way a Department of the size and scale of the Ministry of Defence does these things. Have you had discussions or gone to get international comparators? Some of this would, I guess, be secret, but have you, Ms Brennan, done that?

Ursula Brennan: Yes, I have talked to opposite numbers in several countries. When we were doing the SDSR, we expressly linked ourselves with the United States to learn from their previous reviews, and we are learning at the moment from their current reviews. They have also had people over here learning from us. We have some particular exchanges going on with the US about aspects of their system which we think are valuable. We have looked at other countries, too-Canada, Australia and a number of places. It is quite difficult, because our Defence Department is quite different from the Defence Departments of most other countries, which tend to have the armed forces and the Department of Defence managed and run separately. Ours is an integrated Department, so some of the lessons are a bit different, but, yes, we have been doing that.

Q29 Meg Hillier: Is there anything you can share with us that has helped you act in a better-value-for-money way?

Ursula Brennan: One example that might be worth mentioning is that the US has an organisation called CAPE, which stands for Cost Assessment and Program Evaluation. That is part of their process around their budget round. We have been looking at the steps they have in place in terms of the analysis and scrutiny of budgets. There is this whole question about whether you put all your energy in at the end of a project, when it is coming up for approval, or at the early stage, when people are scoping something. We have been looking at the way they do these things to see whether there is anything we can learn from that, and we have had exchanges of personnel to learn from them on that.

Q30 Meg Hillier: Is this way of working-this sharing of international experience-new?

Ursula Brennan: I think we have probably exchanged with the US for a very long time. The focus on how we work and the efficiency side has probably got more profile. We have always had exchanges with them on more strategic matters.

Q31 Meg Hillier: You have talked about some of the ways in which we work with the US. In the whole of this, there is a lot of discussion about what we can share with our allies. In terms of our capabilities that we must have delivered, how much more will we be relying on the US and our European allies? We have the jet fighter and certain agreements with France, but how much money will that save us? Are these things that could have been done better before? You are facing it now, but we could have done some of these things before, and I am wondering why we didn’t.

Ursula Brennan: Jon Day may want to comment on this. Through NATO, there are a number of things that we have always done in a sharing environment. The current financial pressures are pushing the European countries to look at working more closely together. The Anglo-French treaty is driven partly by effective joint working of two nations and partly by driving efficiency through doing that.

Could we have done some of that stuff earlier? It can be difficult to drive those things forward. The decision to say that you are going to work in an alliance is quite political. You do not just set off and do that without a political will to do it, so I don’t think it is something we could have set off and done on our own previously. I don’t know whether you want to add anything on NATO.

Jon Day: The reality is that we have always co-operated with NATO allies, from 1949 onwards. Over the past 15 years, particularly since the end of the cold war, that has become much deeper. For example, we had Italian officers taking part in one of our divisions and vice versa, and there was a UK-Netherlands amphibious brigade-there were lots of different types of capabilities.

We have not been as successful in co-operating on equipment programmes or types of capability. The UK approach has tended to be that this is something that smaller nations should do and that we-the bigger nations-should not. The change in perspective, which is brought on in part by the financial climate, but also by the closer relationship with France, is to recognise that there are things that we can do as well.

Q32 Meg Hillier: When we are working together, sometimes we have joint procurement, but there are restrictions on, for instance, the re-sale of something that is jointly procured.

Jon Day: There are, yes.

Q33 Meg Hillier: Have you looked at that value-for-money aspect? The Americans will not take anything unless it is produced in America-is that right? Perhaps I am paraphrasing.

Jon Day: Well, no. We sell the Americans a great amount. Generally, they-

Q34 Meg Hillier: For re-use in defence work, or just for parts?

Jon Day: In their own armed forces. That is not unusual at all. There are constraints, but we have tended to find-for example with Typhoon-that we have been able to operate around them.

Q35 Meg Hillier: Okay.

May I go back to a point you made, Ms Brennan? You said that in other countries, the Defence Department and military are separate. Is that something that has been discussed in light of the current financial framework? That is not to say that it would be a policy issue, but is it something that you have flagged up to Ministers? Are those countries more efficient for doing that, or is there benefit to having the two together as we do?

Ursula Brennan: We certainly looked at it a bit in the Levene reforms, and we were very clear that we were more efficient and effective operating as we do.

Jon Day: Most European countries have some form of separation, and most would kill for something along our lines, because they recognise that the integration of military and civilian people into a single headquarters is far more effective and efficient.

We did it, essentially, under Michael Heseltine in the 1980s and we are seen as brand leaders. I experienced what Defence was like before then. The problem is that at each level the military and civil servants bounce into each other and Ministers find it extraordinarily difficult, because you have competing advice.

Q36 Meg Hillier: So even with your improvement to a slightly less red light, as evidenced last week, we are more efficient than other European countries.

Ursula Brennan: It is extraordinarily difficult to get a unit of production in defence. The thing that we are very clear about is that we drove a lot of cost out of defence by getting rid of the duplication-the man marking-where you have civilian civil service departments and military departments. We are very clear that that enables us to operate more efficiently than any of the versions we have seen where those things are separate.

Q37 Nick Smith: Ms Brennan, it is pleasing to hear that you are making progress and that you have a new financial control framework. I am interested in how you are going to reach £63 billion of savings, knowing that you still have some items that, until quite recently, were seen as unfunded, particularly the aircraft carrier developments and the fighters to go on it. Could you give us the latest assumptions on how much they are going to cost?

Ursula Brennan: The latest assumptions about our budget will be announced by our Secretary of State within the next few weeks, so I cannot tell you anything new about that, because we are in the process of bringing that to a conclusion.

Chair: I don’t think that is what Nick actually asked. Do you want to ask it again, Nick?

Q38 Nick Smith: We have been told that they are unfunding those two issues at the moment-the redesign of the carrier and the fighters to go on it.

Ursula Brennan: You were told they were unfunded?

Q39 Nick Smith: Unfunded. The Minister said at a recent Defence questions that he did not know yet how much those items are going to cost.

Ursula Brennan: Ah, sorry. They are not unfunded. We have not reached the conclusion of working out what the cost is going to be. I thought you meant that we have not got funds for them within the programme.

Q40 Nick Smith: So what assumptions are you working on?

Ursula Brennan: We are working to the last set of assumptions we announced. We said when we announced the SDSR that we were going to go through the next phase of work-I am trying to remember how long we said it would take us-and I think we said it would take us 18 months to do that costing work. That is the phase we are in, so we do not have a different set of assumptions, because we have not completed that work.

Q41 Matthew Hancock: Does that include looking at options for how you could ensure that there are appropriate aircraft on the carriers for a cheaper price than the one already set out?

Ursula Brennan: One of the things we try to avoid is constantly going back to re-scope things, but we have work in train on delivering the SDSR assumptions.

Q42 Chair: Does that mean you are not looking at new assumptions, then, or does it mean that you are?

Amyas Morse: I understand that to mean that this is all going to be in the announcement, so you do not want to talk about it yet.

Ursula Brennan: Yes, we work to the assumptions that we have until we have a different set of assumptions.

Chair: Can Nick ask his final question?

Q43 Nick Smith: This is on a different item. I think nearly £600 million was agreed for defence cyber-security as part of the SDSR. What are the assumptions on the spending for that over the period ahead?

Ursula Brennan: I am trying to recall whether that sum for cyber-security was the sum across Government as a whole, or whether it was the MOD component of it. There was, under the SDSR, a sum of money for cyber-security, and a piece of work is ongoing. A group has been set up to deliver a set of cyber-security objectives. A particular focus of that, from memory, is on network defence-ensuring that our networks are properly defended. There has been a fair amount of work going into joint exercise problems in relation to cyber-defence. So there is a programme in train across Government to deliver the activity that was funded under the cyber-security programme.

Q44 Nick Smith: That sounds a bit woolly; and it was nearly £600 million that was agreed. Will you at least give us more information on the MOD’s share of that?

Ursula Brennan: We can let you have the details. I cannot recall off hand what the specific components of it were.

Q45 Nick Smith: Are you spending the money that was budgeted for that?

Ursula Brennan: We are spending our component of it, which was a small part of the larger whole. One of the key things that we have done is to review and reshape our own cyber-security team so that we have the right set of skills for undertaking cyber-security. We have been working with industry to try to raise awareness. In our case we are interested in the defence industry, but for the cyber-security programme as a whole it is about network defence in industry as a whole. There is a range of things, but we could certainly let you have a note about that.

Q46 Nick Smith: What is troubling me it that it is £600 million. It is a lot of money and it seems to be an expensive awareness-raising campaign on the importance of cyber-security.

Ursula Brennan: It is more than an awareness-raising campaign, but the bulk of it is not in the MOD. We can certainly let you have a note on what it has bought so far and is going to buy.

Q47 Matthew Hancock: Just before Amyas comes in, can I go back to the line of questioning that I was following and which you did not quite answer? You rather elegantly answered it, but in a way that did not quite answer it-if that makes sense. If I got that wrong, it was meant to be a compliment.

You were talking about the fact that you work within the assumptions until any assumptions change. Can I ask you a question about process? In working out the new assumptions and anything new that might come out of that, who makes those final judgments and what is the role of the ministerial Defence Board in that?

Ursula Brennan: The business of boards, Ministers and accounting officers is a bit complex, but in general, the decision making on strategy lies with the Secretary of State. He takes advice from the Defence Board and the Department, and we have a structure supporting the Defence Board and the Secretary of State.

Q48 Matthew Hancock: And he now chairs-

Ursula Brennan: And he now chairs the Defence Board. He either asks for advice on particular issues, or people come to him about issues via the Defence Board, or come directly to him. He then will call for information and decide whether he wants to make a change in policy. Some stuff will be within his sphere of influence, or if the policy is large enough, he might take it to the National Security Council or the Cabinet, for example, in the usual way.

Q49 Matthew Hancock: So, in changing a specification, for instance-and I appreciate there are often good reasons not to do so-if there were other considerations, such as defence industry considerations or the fact that building might be onshore, at what level would they be taken into account?

Ursula Brennan: It is for Ministers to set the strategy that says, for example, whether we want to build stuff in the UK. We had a White Paper published on that subject not that long ago. It is for Ministers to set strategy about the assumptions of that kind that they want to make, and then we provide them with the advice that says, "If that is what you want to do, here are the consequences."

Q50 Matthew Hancock: How has it been since the change, made some six months ago, to make the Secretary of State chair the key board? I have to say, I was rather surprised to find out that the Secretary of State did not chair the key board beforehand. In your early evaluation, how is that working compared with previously?

Ursula Brennan: Just one thing: strictly speaking, the Secretary of State is the deciding person, so the board supports the Secretary of State and it-

Q51 Matthew Hancock: So it is a ministerial decision, not a board decision, even though there is a board?

Ursula Brennan: Most business in Government is either a ministerial decision or it is formally an accounting officer matter of the kind that comes here. The structure of boards does not change that. Constitutionally, Ministers of the Crown are still the deciding officers, but they have a board that supports them.

Q52 Matthew Hancock: Yes, but if you are chairing the board, it is materially different from not chairing the board and then taking a decision separately.

Ursula Brennan: Indeed.

So, how it is working? I think that it is working very well. There was a lot of debate and discussion about how this was going to work. You now have the Secretary of State, assisted by the Minister of State for the Armed Forces; a set of non-executive directors, and we are going to have more of those; and a number of executives, who are both military and civilian. Therefore, this is a more strategic board than it was previously. The board is concentrating on the big strategic issues and not getting stuck into the weeds, as it had a tendency to do in its past life, before it had Ministers in the chair.

Q53 Chair: I want to take that further, because I looked at all this in the document the NAO provided for us. You have a massive task: you are trying to take £63 billion out of the budget. What are you not doing? Have you decided what you are not going to do in the future?

Ursula Brennan: There was a set of things that we announced in the SDSR that we were not going to do, and an additional set of things that we announced last summer in terms of further reductions in the size of the Army, for example, which we are working through at the moment. In terms of the things we were not going to do, a lot of those were announced in the SDSR, when we said that with a smaller budget-

Q54 Chair: If you look, you have got a smaller budget. I looked at figure 1 in the NAO document, which concerns your priorities for defence. That could have been written a decade ago-it is no different from what was written a decade ago. We know that you are cutting Nimrod, the Harrier jets and this, that and the other-we know those decisions have been taken-but the real question is: where is the change in what our defence forces are about? Figure 1 was motherhood and apple pie and could have been written at any time. I do not in any way get a feel for what has changed.

Ursula Brennan: The critical thing is that that is because the priorities for defence are the ones that are there. There is not a direct correlation whereby succeeding in Afghanistan flows through a little spreadsheet to a set of things, some of which have now been crossed off, or a direct correlation whereby promoting defence exports means that there is a set of things that we now will not do.

In all these areas, what we are about is saying, "With the resources we have available and with the tasks that we have to deliver, how do we organise ourselves to do those best?" A lot of it is about setting out trying to do things in different ways. That is what the whole transformation thing is about. You have a smaller number of civilians and you have a smaller number of military, but you still have to succeed in Afghanistan and you still have to succeed on operations. How are we going to equip ourselves to do that? We have been going through a process. We have a militarily-led process called Senior Judgment Panels, which seek to take the kind of tasks that we are doing and say, "What are the resources that we need to prioritise to do that? How can we do that more effectively and more efficiently?" It is not about specific numbers of helicopters needed to do specific things.

Q55 Chair: Okay. As I understand that, it is the same for less, almost. You want to change the way you are working to achieve the same for much less money.

Ursula Brennan: Except that it is not quite the same, because, as we said in the SDSR, there were things that were going to be smaller. In the SDSR, we set out the scale of ambition on what we would be capable of doing in stabilisation operations and so on, and that is smaller. The stabilisation operation described there is smaller than the one we are engaged with in Afghanistan currently, for example. It is not quite the same for less. It actually said that we will not aim to do things on that scale in the future, and that there is certain equipment and certain capabilities that we will not aim to have. It is not quite the same for less, but in terms of a set of outputs, they will be delivered in a different way.

Q56 Chair: Let me then ask you about what puzzles me. To get to not quite "the same for less", but delivered in a different way, you have this massive transformation project with some 37 different programmes. That is being led by Jon Day, so it is not being led by you. Jon Day has been taken off the main Defence Board. That, to me, if I am completely honest with you, Ms Brennan, gives the wrong message. If this is the most important thing the Department is doing, but it is not led by you, does not report in to Ministers on the Defence Board-messages are hugely important in changing the culture of an organisation-and you are not there chairing it, that feels like a lack of real commitment to a massive cultural change in the organisation.

Ursula Brennan: I will say a couple of things, and then Jon may want to comment. The size of the Defence Board and the number of civilians on it was driven by the proposals that Francis Maude, the Minister for the Cabinet Office, made with Lord Browne about what departmental boards should look like. There was a limit on the number of executives that we should have on the committee. In discussion with the Secretary of State, the number of executives that we came out with did not include the second permanent secretary. The transformation programme reports to the Defence Board and Jon comes regularly to report on the transformation programme to the Defence Board. He just isn’t a standing member of it. That was the second thing to say. Thirdly, what Jon is leading and chairing with the vice-chief is something called the Defence Operating Board (Transformation). "Operating board" because it is about saying that the Defence Board-the Secretary of State-has set the strategy and we are all signed up to the strategy. It is debated in the Defence Board and agreed. Jon is tasked with implementing that and making it happen, and he comes regularly to the Defence Board to talk about it.

Q57 Chair: So in a sense, he’s a member but he’s not a member. The other thing I would ask is why you chose not to chair it.

Ursula Brennan: With the scale of the business that we have to undertake, we have always had-for some time within defence-a system where we had the second permanent secretary and the vice-chief of the defence staff operating in a role that we call joint chief operating officer. Their task was to say, "There is such a lot of business that is transacted by the Defence Board that we need a group that will drive the reform, to take that portfolio of change and make sure it is happening, so that the Defence Board"-on which I sit-"can actually get the strategic view and not get stuck into the detail of the large portfolio of projects." That is the programme we are operating.

Q58 Chair: But do you accept at all my assertion that if the cultural shift you are trying to achieve within the organisation is your main priority, what you do matters as much as what you say? In putting the No. 2 and not a No. 1 there, and having the No. 2 not officially on the Defence Board, what you do does not match up very strongly with what you say.

Ursula Brennan: I recognise the point you are making. The only other thing I would say about it is that the major communication strategy that we will be having about defence transformation will follow the announcement of the settling of our budget, because we wanted to be able to tell staff that we were in a position to have a balanced budget. When we do that, that communications programme will be led by the Secretary of State, the Chief of the Defence Staff, and me, with Jon Day very closely engaged.

Q59Amyas Morse: The Committee has had a lot of hearings on various equipment projects over the years-very interesting they have been, no doubt-so, I wonder if it would be helpful to ask, what’s different? As people come forward in future with major equipment proposals, how will that work? How will you decide which ones are in and out? How will all that go on?

Ursula Brennan: We have been, over a number of years, making changes to the way we do approvals for and the management of equipment. The key things we are putting in place are around the gateway into the system. So the Defence Board gets regular reports, and there is a sub-group of the Defence Board called the Major Projects Board, which the Secretary of State chairs, looking at our biggest programmes to make sure that they are on track. So, one change is strategic level view of our biggest programmes.

A second set of changes is around the investment approvals regime, where we have already made changes; we now have Jon Thompson as our finance DG chairing the Investment Approvals Committee, which is taking a very firm line about not only value for money, but affordability, and programmes that come forward are rejected when we are not able to demonstrate that funding is available within the programme. Bernard Gray is engaged on a major programme of reform within Defence Equipment and Support, around looking at improving our processes and skills across a range of areas. He has brought in a finance director at DG three-star level from industry to boost finance skills within his organisation. We are doing a set of things, having got our budget back into balance, to ensure that it does not go back out of balance.

Jon Thompson: Is it possible to add one point? I agree with all of that, but the other thing worth noting is that we have entered into a long-term strategic partnership with KPMG on how you cost the equipment programme. There is an independent view now within the organisation. So you have things like parametric data, comparative data and so on, and if a project says it is going to cost x, where is the independent view about whether that is a reasonable estimate? We have entered into a long-term partnership with them, to give us an improvement in how you cost projects.

Q60Stephen Barclay: When you will be publishing the revised accountability arrangements?

Ursula Brennan: We have circulated around the Department a draft blueprint for our organisation. We currently have a draft of a head office version of that.

Jon Day: It is fair to say that they would be published formally because we are going through a process of consultation. I would expect them to be published formally in the next couple of months.

Q61 Stephen Barclay: Paragraph 19 says: "The Department has a track record of planning to deliver more than it can afford." Paragraph 23 comes on to that and states: "Many of the business units have not been empowered to carry out their roles, and their activities have been micro-managed by Head Office… Senior responsible owners… have not been held to account for significant project failures." Paragraph 26 introduces revised accountability arrangements. Headings of the different programmes fill four and a half pages of the report. So there is a massive number of programmes. For what it is worth, I think the Department is making good strides in the right direction but there is a massive change programme going on. I have two central questions. First, what has changed with the accountability, given that the report identifies our past concerns about that? Secondly, do you have the right information to deliver what you claim you will be able to deliver?

Ursula Brennan: Could I tackle that quickly under three headings? One is the management of individual projects and programmes where there is work under way by Bernard Gray on improving the quality of our performance on equipment programmes. The second is the big portfolio of change, which Jon Day is managing, so that we have visibility of all of our projects and programme and we have SROs for delivering them-all the transformation and the SDSR objectives and so on. The third thing, which is what I thought you were alluding to, is the way in which we are changing our structure to delegate budgets so that top level budget holders, effectively the chiefs of the three services and so on, will be given budgets and will be held to account for managing them in a different way. Cutting over to that is a very complex process. We are doing it effectively in a sort of shadow form from this April with a view to actual financial changes in the IT systems from April the following year.

Q62 Stephen Barclay: Sure, but what I am driving at is this. You have accountability at multiple layers and we have debated it before. What is unclear to me is how the Committee will have visibility of how that has changed. We already have senior responsible owners. We have had that debate on a number of occasions. Again, appendix 3 is extremely helpful in setting out lines of responsibility. I think that is the first time that the MOD has done so. But it is at such a high level that it does not then map into the accountability point. So what we need as a Committee, and it may be in a note or in work with the NAO, is some senior level organogram where I can see who the senior responsible owners are, what they will be accountable for and what will then be an issue taken by the board. What tends to come to the Committee is a confused accountability structure.

Ursula Brennan: One component of that and the thing that takes this appendix 3 down a level is the thing I was referring to as the blueprint, which has been out in draft for some months now and is about to be finalised which has organograms and accountabilities that go down a level. Those accountabilities will be, say, within the Navy. There will still be projects that cut across that. By their nature projects are cross cutting. We can certainly let you have a copy of the blueprint when we finalise it which shows the organisation below this, but that will always have cutting across it the accountabilities for individual projects and programmes.

Q63 Stephen Barclay: What we are trying to get at is that you are working very hard to try to fix this hole and you are making progress. But I am sure you would want to, and we would certainly want you to, entrench that through accountability as probably the best mechanism and other mechanisms to ensure that it does not get into such a mess again so that you do not simply clear it up for it to get worse but you clear it up and leave it cleared up.

Ursula Brennan: That is why we wanted this blueprint to say, "This is what you are accountable for. This is your role. This is how you will be held to account." From April of this year we will start the process of holding budget holders to account in a different way from the way we have done it in the past.

Q64 Stephen Barclay: Do you think that in five years’ time the MOD will be regarded as an example of international best practice for value for money and living within its means?

Ursula Brennan: I do not make predictions, but I sincerely hope that we will be able to come back in five years’ time and say that all sorts of things, no doubt, will have gone not quite as we planned, but that they will not have been doing what we were doing in the past, which is interfering with projects because we were having affordability problems.

Q65 Matthew Hancock: And international best practice?

Ursula Brennan: On some of that, I have to say that we probably are already-

Q66 Matthew Hancock: There is nothing wrong with a bit of ambition.

Ursula Brennan: No. It is just that these are such complex programmes that there are certainly already places where we are in the vanguard of best practice in project and programme management.

Q67 Stephen Barclay: May I use a specific to bring the example to light? You can only hold people accountable if you give them the right information on which to hold them accountable. The focus of this Committee is often on the big ticket procurement, rather than the business as usual, where there is often significant waste. I know that the NAO has started some work on this and will provide more information, but I have asked a series of parliamentary questions on the defence inventory. I asked whether we are warehousing lots of kit that is no-longer fit for purpose, whether we are warehousing kit that is no longer workable because military equipment has changed, what the costs are, and what the staffing is, and I know that the NAO is looking into that. However, what was interesting for me was that the answer that came back was, "We don’t hold that data, so we cannot, at the moment, answer the question." I then look at appendix 2, which has these change programmes, and if you do not have the data, how do you then hold someone accountable for delivering on that?

Ursula Brennan: One of the things-Jon, having lived through it, knows the history of this very well-that the MOD has gone through is holding all the data and things centrally and pushing responsibility out to many business units. At the moment, we are living with a history-this Committee has seen many examples of this-where items of business have been run by local business units using their own local business information. When you then want to try to get a picture across the Department, whether in terms of our estates infrastructure or our inventory, we do not have the information. The reason for creating the portfolio that you see in appendix 2 is actually to try for the first time to bring this stuff together and then to enable us to say what the big things are where costs should be driven out and to ensure that we are concentrating our energies on those top ones. That is why this programme is in tiers-tiers 1, 2 and 3-so that we can focus on the things that will drive out the most waste.

Q68 Stephen Barclay: Again, that is the right aspiration and, to an extent, I would expect you to say that. What we saw, for example, when we looked at logistic supplies, which was in a previous Report, is that part of the problem was that, because it was a Cinderella area, the IT spend was put back and put back, because people wanted to buy the shiny military kit and not invest in the back office, which was contributing to the significant costs in terms of resupply to Afghanistan.

Coming back to accountability, one of the issues-I have raised it before, but I have not had an answer as to whether it will change-is the churn of SROs. We know that many military postings are for two to three years. Of course, you have to keep people fresh, and, of course, you have to have milestones for them to work, but are you satisfied that the churn in posts of those in key accountable positions has now been addressed?

Jon Day: Not yet, but we are putting in place the arrangements to enable us to do so. You cannot, for example, stop somebody from retiring if they wish to go.

Q69 Stephen Barclay: But you do not offer them early retirement knowing that they are in a key post.

Jon Day: It depends on the circumstances. You might. The intention is, however, that new SROs, as we appoint them, will stay in post for a significantly longer period of time.

Q70 Stephen Barclay: If you say not now, and I appreciate the candour of that, by what date do you expect to be in a position to satisfy the Committee?

Jon Day: On the basis that people, particularly military people, have tended to stay in post for about two years, it will take us up to two years to cycle out everybody who is moving out, so I would expect in around two years.

Q71 Chair: What does sufficient time mean? On the aircraft carriers, what does that mean?

Ursula Brennan: One of the things that I think one of the witnesses here said on a previous occasion is that for some of those very long programmes, which last 30 years, you do not actually want to just keep the same person doing it for 30 years. One of the things that, in defence equipment and support, we are actually trying to do and get better at is where people have something that has sometimes been called a career anchor, where you have expertise in something and you spend some time doing a particular project role-long enough to be doing it for the right length of time, your four or five years-then you go off and do something related; and then you come back again to an area where you had skill, which you have developed, and you bring that back to the same space. We are increasingly seeking to create careers in equipment and support in that way and also in our operational policy and international strategy, where the same thing arises.

Q72 Amyas Morse: Just on this accountability thing, you do see what we are driving at, which is if you have people saying, "Well, I’ll only be there for two years," it is impossible to allocate who is responsible for the thing. They can play the feather game. It drives quite a lot of problems. We are interested for accountability, but so should you be, for management. You can’t just let it be a perpetually moving feast so you don’t know who did what or is accountable for what.

Jon Day: This was at the heart of Lord Levene’s recommendations. He recommended, I think, between four and five years, which is what we would aim at as the norm.

Q73 Amyas Morse: When should we expect that by?

Jon Day: Well, that’s what I said, a couple of years.

Jon Thompson: Just to be clear about the answer to your question, in the delegated model, the main document between the Department and each budget holder will be called a command plan, which will set out six key elements of the relationship between the centre of the Department and the Army. One of those will be a responsibility matrix, so we are all clear about who exactly is responsible for what, as well as budget, people, information and so on and so forth.

Just generally, also, paragraph 30 of the Report says something about our commitment to information systems on logistics; last summer we announced the Future Logistics information system investment of £356 million to try to address the problems that are spelled out well in the qualification of the accounts from the NAO. The answers to both your questions would be: it is highly likely that there is stock lying around we do not need any more and that is no longer any use; and there is a significant provision on the balance sheet that recognises that, and we are working our way through it.

Q74 Stephen Barclay: That is extremely welcome, but in some ways I would expect to see paragraph 30 there, because we have had an NAO hearing-a PAC on it-and surprise, surprise, it goes up the priority list and gets funded. What I would be interested in is whether the welcome rhetoric at the top is being matched within the Department.

I could take another example, but I think there is frustration with suppliers I have spoken to around generic products, so that when the MOD purchases vehicles it bundles the vehicles with the parts. To use specifics to bring it to life, if you take Land Rover, when after-sales parts for Land Rover were being put out to tender the design authority to determine those parts was, surprise, surprise, Land Rover. So it makes it very difficult for SMEs to get into the market to offer much cheaper generic parts to the same standard.

We could pick various examples. That is just a recent one that has been flagged with me. So you get a rhetoric at the top, particularly from Ministers, which is all very welcome, on SMEs. "We are opening out, we are going to make the tendering easier": all the things you would expect Ministers to say; and it comes back to this culture point that is endemic in the report-to what extent you have got visibility on how many specialist procurement officers you have got. Have you got the right number now, as part of job reductions? Are you cutting the right people? Again, it comes back to this data point, so that you can ensure that you have got the data to judge if the culture has been changed.

Chair: Can you make a quick comment on that?

Ursula Brennan: Okay, a quick response on that. No, we haven’t got all the procurement people we need. The procurement area, when we were looking at redundancies, was one of the places where we said no, people would not go, because they had skills that we needed to keep. We have a programme that is a combination of upskilling and bringing people in.

What is the assurance that we are going to address the kind of problem you are talking about? Yes, it takes time. One of the things that the investment approvals committee does these days is we have reviewed the questions we ask at the initial stages of a contract. Whether that would stop the Land Rover problem that you have described next time round I do not know, but that is what it is designed to do-to try and make us more conscious of where the areas are where we are building in cost because of the ways we have described the contract in the first place.

Q75 Matthew Hancock: I was rather surprised in that discussion about length of service within particular roles. In the past, you have said that the number of years isn’t as important as making sure there are key milestones for sign-off before people move on. If you have a long project-for example, a 30-year project-you don’t want just an arbitrary number of years; you want to make sure that someone has a milestone to which they are accountable. That is the appropriate time to let someone move on, and indeed they shouldn’t move on until they have got there. I was expecting that to be your answer. Why not?

Ursula Brennan: It is perhaps worth noting one difference in the public service and the civil service, and particularly with the military. A business can incentivise people around that kind of milestone, but we don’t have pay regimes that enable us to do that. The military have a very structured career progression, which is necessary for them because they cannot draw people in late in life. In the civil service, if there is a skills gap, it could, if necessary, buy in from the market. The military cannot do that. So you’ve got to balance the milestones and the length of period. We need to say to people when they take on a job, "In future when you do this kind of thing, how long are you going to last?" Absolutely what you want to do is to make the changes happen at appropriate points around the milestones, but you need to give people an assurance that they will be asked to do this for around four to five years, not that the milestone might slip and they will have to wait until it does.

Q76 Nick Smith: I have two questions, one general and one specific. First, the general one is related to a point Amyas made earlier about how it will work, which you partially answered, Miss Brennan, by saying that you were going to do it in a different way. I am interested in how the top brass-the joint chiefs of staff-will engage with this because, typically, they are seen as wanting to gold-plate staff and to ask for kit that hasn’t been designed yet. We all know about the point about value for money. How will you make sure the joint chiefs of staff are reading from the same page as you?

Ursula Brennan: We have put in place a new group called the Armed Forces Committee, chaired by the Chief of the Defence Staff, which provides the assurance given by the Secretary of State that he will want the Chief of Defence Staff to come to the Defence Board with the collective wisdom of the armed forces chiefs, and that if they reach agreement on that committee, great, he will have the agreed advice of the armed forces chiefs, but if they don’t, they will leave themselves in the hands of the Chief of the Defence Staff who brings that advice. They are very clear that there is a place where that advice is brought to the table. That is how they are brought in.

How do we avoid the gold-plating problem? I don’t know that it was individual chiefs who were necessarily responsible for that, but I think the gold-plating problem goes back to the firm role of the Investment Approvals Committee and the ability simply to reject proposals that don’t represent good value for money. We have been in the process of pushing back programmes that have come forward with the comment, "This is going to cost a bit more than we thought." The answer is, "Go away, and come back to us when you have a proposition for bringing it in at the budget at which you were asked to bring it in." Relentlessly doing that means that people start to get the message.

My personal view is that in our planning round over the past 12 months, the Defence Board and Ministers have been resolute in their refusal. They have said, "We are not going to have debates about lots of individual items of detail. We are going to force people within the Department, civilian and military, to do the prioritising, make the judgments and give the advice." I think that is starting to change the culture and that people are starting to believe that it is their job to come back with the advice, and not to talk about everything, and leave it to Ministers to decide between them.

Jon Day: May I briefly add two things that I think are relevant? Both flow from the Levene report. The first is that, increasingly across defence, particularly among the people coming up now into more senior posts, a joint defence mindset has developed over 15 years of joint operations from the Balkans to Afghanistan and Libya. There is a generation of increasingly senior military people for whom the joint defence approach is the norm.

Secondly, the aim of the new approach to managing the senior cadre of officers, called by Levene the joint assured model, is specifically intended to encourage the sort of defence mindset that you are talking about.

Q77 Nick Smith: It seems that there are two boards and a new joint approach built on tri-working. Have you got a good example of how that has worked in the last few months?

Ursula Brennan: I can think of instances within the organisation where projects have been given very clear messages about the need to plan within their baseline. Also, there have been issues-I would not necessarily want to discuss them here-that have been difficult, and the very clear message that says, "We want a single military view on that" has created a lively debate that has actually led to that.

Q78 Chair: Following on from that-I know I keep coming back to it-you are really trying to pull this lot out of your budget, and you have to be very radical in your approach, so I wondered what radical ideas you had. The one obvious radical idea would have been to merge the three services, as the Canadians have done. Did you look at that?

Ursula Brennan: We did. That is the kind of thing that you do in an SDSR, not as an individual budgetary planning issue. Merging the three services would be a very major enterprise. Jon may want to come in on that.

Jon Day: I am a former head of defence planning in NATO, and I had to live with and deal with Canadians during that period. The fundamental problem is that each of the three services has a very different fighting ethos. It requires a different ethos to lead an infantry platoon, fly a fast jet or command a minesweeper. The Canadians found, when they brought everyone under one cloth-that is exactly what they did-that they lost that edge and that ethos. The limited savings that accrued were undermined by what was widely held to be the much lower military capability that the merger resulted in.

Ursula Brennan: One thing to add, just quickly, is that we looked at where to find the place to get savings out of doing things jointly. We tackled that in two ways. There is a whole tranche of things under the support umbrella-defence business services, and the corporate back office set of things around infrastructure-so we went and took a quite vigorous look at things that could be done commonly across the three services. Then, at the other end, the new joint forces command, which starts up in April, is another place where we have basically said, "Let us bring together bits that were sprinkled around the place." We already have a joint helicopter command, for example. Where are the things where we can bring those together and run them and manage them singly? We think we have got benefits from doing stuff jointly without the huge politics-with a small and a large P-that would come from attempting to create a single service.

Q79 Chair: Except that the problem you have is the current problem of competition, which may be healthy in some ways, but may be harmful, particularly when you are trying to reduce expenditure.

Ursula Brennan: The Defence Board now has the Chief of the Defence Staff supported by the Vice-Chief. Not all the service chiefs are on it. That is the place where, whatever competition is going on, there is a single strategic place where those decisions get taken and the advice comes. It is through one route, not lots of different routes. I think that is a serious difference in the new regime.

Q80 Nick Smith: I want to come back to the three services working together. Like Mr Barclay, I thought appendix 2, with the list of initiatives and programmes, was a good thing. It is nice to have it mapped out. There were aspects about which I have some questions, particularly training. I notice on page 34 the reference to the defence technical training change programme, and on page 36 a reference to the "Overall approach to service training" having "Not yet commenced". I have a political interest in this. In south Wales, in St Athan, it was anticipated that there would be a tri-services training academy. After the last general election result, that got put to one side. Given your emphasis on tri-services working, and the undoubted value-for-money benefits that I am sure could be found in having one place for training, why does the thinking on that not yet seem to have been done?

Jon Day: That highlights the fact that the transformation portfolio is consciously designed to bring together all major aspects of change in defence: the SDSR implementation, the measures we have taken subsequent to SDSR, our approach to efficiency, work that is going on within individual services and TLBs, and the legacy change programme.

A point on something you mentioned earlier: a problem in the past has been that we have tended to operate in stove-pipes without effectively looking across defence as a whole. Transformation is explicitly designed to do that. It is aimed to avoid stove-pipes, ensure coherence and manage dependencies. This list is a demonstration of how difficult that will be. As far as training is concerned, you are right. What we have picked up here are two separate programmes, one of which is the heir, if you like, to the original defence training programme. That is where your constituency interest applies.

Frankly, I think the other training area is one that, over the coming months, we will be able to rationalise. Part of transformation is to ensure that we are sequencing and prioritising effectively. At the moment our focus on joint training is particularly on what you have described-the son of DTR, which includes joint training of the kind that you have discussed.

Ursula Brennan: To emphasise the point, the defence technical training change programme listed there is the successor to the St Athan-based programme. That programme turned out not to be value for money, and we did not proceed with it. This is the revised version. That is why it is not instantly being implemented. With regard to the other reference to training over here, technical training was the place-particularly because of the heavy industrial element of investment in the costs-where we ought to have been able to drive efficiencies by doing it jointly. That is why it was earlier in the programme and is higher up in the listing here. That is where we are concentrating. Later, we will drive through other areas of training where we think we can do it more efficiently and cheaply, but this is absolutely prioritised by where the cost goes and where we can drive cost out. That technical training sadly did not work first time round. We have got another programme in train to do it more efficiently. As for other types of training, if we think there are costs to be driven out, we will come back to that later, but this is where the bigger cost is to be found.

Q81 Chair: May I pick up things that we have not covered? To be clear, on page 12, in paragraph 16, we are told that the strategic direction will be set by the permanent secretary and the Chief of the Defence Staff. Who is in charge?

Ursula Brennan: All that describes is that there are distinct responsibilities between the Chief of the Defence Staff-

Q82 Chair: Who takes the decision? I keep going back to this: we have less money. The Chief of the Defence Staff says, "You need x"; you say, "Can’t afford it." Whose will prevails?

Ursula Brennan: The reason I said that is because there are different responsibilities for different things. I do not make decisions about operations, and the CDS does not make decisions that relate to the role of the accounting officer. The Secretary of State is the person who decides, on the basis of advice. The advice comes to the Defence Board. I bring the accounting officer advice, and I am supported by Jon Thompson as the finance DG. Quite simply, he gives advice on the best military way of delivering the capability within the resources that we have available.

Q83 Chair: Within the resources?

Ursula Brennan: Yes, within the resources.

Q84 Chair: Does the chief still have access to No. 10?

Ursula Brennan: The chiefs and the CDS have a personal accountability for their individual services.

Q85 Chair: To No. 10?

Ursula Brennan: The Chief of the Defence Staff has a personal accountability to the Prime Minister. The individual chiefs have, by custom and practice, had the ability to speak to the Prime Minister, but none of that overrides the accounting officer responsibilities or the Secretary of State’s role. The evidence that we are finding in the Defence Board is that that is how it works.

Q86 Chair: I am glad to hear it, and I hope that you will use your accounting officer powers if it should ever come to pass that you need to. May I ask about the defence industrial strategy? I think I am right in saying that we have seen reports in the media recently of two decisions to acquire outside the UK.

Ursula Brennan: The MARS tankers.

Q87 Chair: What does that mean? Are we getting a new industrial strategy that does not prioritise the defence industrial capability in the UK and prioritises best value?

Ursula Brennan: We published a White Paper on the defence industrial strategy. The decisions we have taken have been in the context of that.

Q88 Chair: Does it mean-

Ursula Brennan: It is open procurement. "The protection of operational advantage and freedom of action" is the language that we have used.

Q89 Chair: What does that mean for the defence industrial base?

Ursula Brennan: There are large amounts of equipment that we continue to procure from the United Kingdom.

Q90 Chair: And you will in future?

Ursula Brennan: I am sure that we will carry on procuring equipment from the United Kingdom in the future, but we have to make sure that we get equipment that is best value for money. There are certain circumstances in which we say we will not go abroad, when there are particular capabilities that we need to protect and keep onshore, but in general, we will seek to get the best that we possibly can.

Q91 Chair: Let me take an example-I am trying to test you as to whether there is a change in the balance of the argument. Part of the reason for the aircraft carriers was always to maintain that defence industrial capability. I think the NAO has told us, having had access to all the ministerial papers on the decision taken by this Government in relation to the aircraft carrier, that that still remained a priority. You wanted to keep the jobs in the defence industrial capability in that area-that was a priority. Is there now a change in the balance of the argument, so that when you are taking those decisions you are looking more at value and best price than at industrial capability? It is not a pejorative question; it is just out of interest.

Ursula Brennan: Can I just clarify? On the aircraft carriers, the key industrial capabilities and so on were in relation to terms of business agreements and contracts. Clearly, when you are making judgments and choices about where to buy something, if you have a contract to do with a volume of work to a particular company, that will be a relevant factor. The White Paper set out that, in general, our aim is to drive for open procurement, where we get the best value for money. There will be circumstances in which we want to keep particular capabilities onshore in the UK. When that is the case, we will state so clearly, and in the past, we have entered into long-term agreements in order to keep those capabilities going. That is what the strategy will be. That will mean that sometimes we will be buying things off the shelf, internationally, and sometimes we will be routing to the need to protect our fighting edge by buying from within the UK.

Q92 Stephen Barclay: I am a bit puzzled by what is new about that. I should have thought that our aim has always been to achieve value for money, but on some occasions we have put domestic jobs as a priority. I would have thought that would have been our policy for the past however many years.

Ursula Brennan: I do not think it is a vastly exciting change of direction.

Q93 Stephen Barclay: In other words, it is as before.

Chair: Jon Thompson is shaking his head. We are merely trying to get clarity.

Ursula Brennan: The White Paper set out a strategy. Precisely how that differed from what went before-

Jon Thompson: A factor that you need to take into account is the so-called question of sovereignty, over which there is a judgment to be made. To what degree do we need to keep sovereignty, and to what degree does it not play into the procurement issue? On the specifics, there was a very clear value-for-money case, in relation to the MARS tankers, for going overseas. It was significantly different in financial terms. A range of factors will drive you to a value-for-money conclusion. It is not just about money; a range of other factors can be brought to the table in judging value for money.

Q94 Chair: What is different?

Jon Thompson: What is different is that at the margin, I suspect, we will see the open competition principle leading to open competition. We would not normally go for a yellow book; we might have some arrangements that are more open to competition.

Ursula Brennan: We always defined areas where we said that the UK needs to keep that capability onshore. I think that in the White Paper we have been more rigorous about saying, "We must strive for value for money", and therefore we should be absolutely certain that only the minimum number of things appear in that operational capability area.

I think it is not a huge volte face; it is more that we are defining that list of narrow capabilities as narrowly as we can. Effectively we are saying that, when we do that, we are doing it at the sacrifice of some assurance about value for money, and we want to be absolutely certain that we do that in the lowest possible number. And I think that is probably-

Q95 Matthew Hancock: What if there is no such sacrifice? What if you can get better value for money, but also deliver it in the UK?

Chair: Of course you can have that.

Q96 Matthew Hancock: You may say that.

Jon Thompson: If there is a value-for-money case which is onshore, you would go for that case, wouldn’t you?

Q97 Chair: The trouble is that that is not the aircraft carrier type.

According to The Guardian, MOD expenditure on consultants from April to December 2011 was £225 million, 2% less than before, and you have something called a framework agreement for technical support, which appears to be your way of getting round the system. Do you want to comment on that?

Ursula Brennan: They are two different things. On the consultancy cost, across Government there has been a drive to reduce the amount of money that we spend on consultants. In the MOD, we have a number of areas where we have particular and sometimes quite abstruse technical specialists in relation to air-worthiness and some nuclear issues-some specific and technical areas-and we have always had a regime for being able to buy in that kind of expertise, which it would not make sense to try and grow for ourselves.

There was a report that showed that we were not managing that as tightly as we should have done and we took steps swiftly to get that pushed back into the shape that it should have been in. That is what the FATS thing is about. But it is not the same as consultancy and the routes for approval are different, because FATS is about where you have got this particular technical expertise that you need to buy in-

Q98 Stephen Barclay: So there is no management consultancy whatever within that contract.

Ursula Brennan: There should not be management consultancy within FATS.

Q99 Stephen Barclay: Well, "should not" is not the same. I had an exchange with the Department of Health, in which they said that they were getting their consultant costs down, but then in the footnotes said that their contractor costs were going up and that they could not explain what the difference was.

The point here is that you give a good understanding as to this framework getting technical, very specialist-nuclear-related and that sort of thing. That does not sound to me, distinguished though KPMG are, like the sort of work that, often, KMPG would be doing. So I am just trying to understand-

Ursula Brennan: No, they would not be on the FATS contract; they would be on the consultancy contract. We have not eliminated it to zero. It is down by 90%.

Q100 Chair: So is the £225 million in The Guardian-I never believe everything in The Guardian-which is 2% less than what you spent last year, FATS?

Ursula Brennan: I think that is FATS.

Jon Thompson: Yes, that is FATS.

Q101 Chair: And it is 2% down.

Ursula Brennan: Yes.

Q102 Chair: And when you say you have got tighter on it, you are expecting it to go-

Ursula Brennan: The graph for spending on FATS is terribly dependent on the stage you are at on particular varieties of projects. One of the things that we used FATS for over past 12 months-we had a lot of projects that we were terminating, where we had to get into the value of contracts and some of the accountabilities, and that kind of stuff.

So some of the FATS work will have arisen over the last year as we were closing off contracts and getting out of them and out of liabilities-there were some quite technical things that needed to be done. So we were not surprised to see a growth in FATS on account of that, because it was work that was part of getting out of contracts in order to save money.

Q103 Chair: Can I ask you about your bonus system? According to The Sunday Telegraph, 55,000 of you have had a bonus-and somebody on the Defence Board got a bonus of nearly £86,000 last year.

Ursula Brennan: That was speculation; it was not a person on the-the newspaper, I think, actually said, "it is believed to be". Whoever believed that was incorrect.

Q104 Chair: So that is all not true in The Sunday Telegraph? Do I have to add that to my list of untruths?

Ursula Brennan: Many of these stories muddle up a variety of different things. We have a regime for staff below the senior civil service, and the Government consciously decided that it would be more cost-effective to pay civil servants by taking a chunk of the pay budget and turning it into performance awards paid at the end of the year, which are non-consolidated and do not go into people’s pensions.

So if you have a pot of money to pay out and you pay out a chunk of it in a non-consolidated lump sum, you reduce the cost of your pay bill. That has been done across the whole of Government. As a result, large numbers of people across Government have been paid bonuses in that way. Different Departments-

Q105 Chair: Do you pay NI on bonuses? I have no idea.

Ursula Brennan: You do.

Q106 Stephen Barclay: What was the largest bonus paid by the Department last year?

Ursula Brennan: I was talking about bonuses below the senior civil service. There is then a regime common across the civil service for senior civil servants’ bonuses. There is a third group for people brought in on individual contracts, quite often from the private sector, who are incentivised to achieve particular results. They may be on bonuses-again, across the civil service-of 20% of salary, and more where-

Q107 Stephen Barclay: I was just after a figure. You said that the media had reported a particular bonus figure that was speculative and incorrect. Just as a matter of fact, what was the largest bonus paid by the Department last year?

Ursula Brennan: I do not think I know what the largest bonus was. It will have been to one of the fixed-term appointment people and may have been the sum of money mentioned in The Daily Telegraph, but the person is not a board member.

Q108 Stephen Barclay: Can we have a note, please? It just seems odd, given the topicality of bonuses, that senior management do not know what the top bonus was.

Ursula Brennan: The bonus in question would have been to a trading-fund person, not to one of our formal staff.

Stephen Barclay: Perhaps we can have a breakdown for the three categories of the highest bonus paid to a permanent senior member of staff and whatever the third category was.

Q109 Chair: Finally, there is a worrying para that states that you are going to review whether you need the £6.8 billion of equipment bought under the UOR for Afghanistan. What does that mean? Are we going to scrap it?

Ursula Brennan: Can you point me to it?

Chair: Page 26, para 49.

Jon Thompson: It means that at the end of the Afghan campaign, you have to make a decision about the equipment purchased under the UOR.

Q110 Chair: That sounds to me like you are going to try to scrap it.

Jon Thompson: No, you have to decide whether you wish to bring it into the core defence equipment budget or whether you wish to scrap it at the end of an extensive campaign.

Ursula Brennan: Some of it is in a pretty knackered state. If you look at the equipment, some of it is in very good condition, but some of it has been blown up; you don’t bother bringing back to the UK, at great expense, equipment that has been blown up. There is a programme of work in train at the moment to determine which items it would be cost-effective to bring back and what to do with the stuff that is not.

Q111 Stephen Barclay: On a related question, I may have just missed it, but has the Department published a figure of what it believes to be the cost of Libya to the Department-as distinct from what Libya has cost HMT, reserves or wherever else money may have come from? There will have been degradation of equipment and an impact on the MOD where other parts of Government have not subsidised you as much as perhaps you would have liked, so do you have a working estimate of the cost of Libyan operations?

Ursula Brennan: There was a published figure for the cost of Libya.

Jon Thompson: The Secretary of State has regularly announced-quarterly, I think-to Parliament the cost of the Libyan operation.

Chair: But do you know?

Q112 Stephen Barclay: What is the up-to-date figure?

Jon Thompson: I do not know, but it is around £150 million. We can give you a direct written answer. The Secretary of State has been very clear about-

Q113 Chair: To the Department?

Jon Thompson: To the Department.

Q114 Chair: This is really interesting. If there is a military engagement, I always thought that the cost was borne by the Treasury, but that is not necessarily the case. Is that right?

Jon Thompson: That is true, yes.

Ursula Brennan: The excess cost of operations is borne.

Q115 Chair: But there is a row over what is excess.

Ursula Brennan: There is not a row. Actually, we have had a very good relationship with the Treasury about that. They obviously try to make sure that we are not slipping things in under the radar. There is a rigorous process that we go through that says, "In order to do the Libya campaign, what things are we going to need that we either wouldn’t have spent or would have been using somewhere else and what do those things cost?" We then have a discussion with the Treasury about that and about paying for it.

Q116 Fiona Mactaggart: I am not suggesting that we are planning to do anything like this, but presumably at some point someone has asked what might be the cost of Britain supporting any action in Sudan, or what might be the cost of Britain supporting any intervention in Iran.

I am just wondering what happens when you are absolutely at the totally speculative might-be-the-cost moment-what happens between then and possibly spending it? It might be sensible to know what the cost is before you decide what your country’s contribution to something like that might be.

Ursula Brennan: In that respect, the Ministry of Defence operates in the same way as every Government Department that I have ever worked in. You have your programme of business that you are undertaking and you look forward at the risks that might be incurred-

Q117 Fiona Mactaggart: But President Assad does not listen to that.

Ursula Brennan: Sure, but you look forward at what might be going to happen and you ask yourself questions about what risks there are and the extent to which a risk is something that you just want to bear in mind or whether you want to do something about it.

In the case of Libya, we went through a process of initial, "If we were to be involved, what sort of things might happen?" Then you go through a series of refinements of costing and of the actions that get undertaken. It is no different from any other kind of prudential risk-based planning and assessment of the risks you face.

Chair: Okay. Thank you very much indeed.

Prepared 29th February 2012