Select Committee on Defence Minutes of Evidence


Examination of Witnesses (Questions 20 - 39)

WEDNESDAY 17 JANUARY 2001

MR KEVIN TEBBIT CMG, MR COLIN BALMER AND MR DAVID GOULD

  20. I can understand the married quarters; I am talking about the barrack blocks.
  (Mr Tebbit) I am talking about both.

  21. At a place like Aldershot we have been told in this Committee during evidence sessions that it is going to take at least ten years to get that to a standard which we might care to live in. At the same time we are asking young servicemen and women to live in pretty substantially poor accommodation and, surely, the prime contractor route is not the one for you to go down if you are unable to deliver on that? Type 45 is a classic example.
  (Mr Tebbit) You need PFI as well, private public partnerships. That is one of the ways of levering in capital which we may not have ourselves in the budget. We have to look at all of those measures. We have a big PFI programme in Aldershot itself. You are absolutely right, this is a balanced scorecard priority area, it is another red area. We have put some urgent effort into it. We are putting more urgent effort into it. It is one of Geoff Hoon's highest priorities. We do need to see improvements, but we are rather like Lambeth Council; we have suffered from a lot of under-involvement in the estate over the years and it is going to take a lot of money to put it right. It will have to have more and more resources put on. It is one of the reasons why when you look at our capital plan it is pretty capital-rich/investment-rich.

  22. If I were a young squaddie and I read this, I would say, "This tells me that you have managed to underspend three years in a row and yet I am still living in pretty awful conditions". Explain to me how you have not got the resource and yet you underspend according to your own report and you are going to do so again in the current year, all the predictions there? How on earth can you justify what you have said to me as a young serviceman living in pretty awful accommodation?
  (Mr Tebbit) I would point to the improvements that are being made and the trends which are there. They are not fast enough but they are in the right direction. As far as the budget is concerned, underspend is rather a euphemistic term. What usually happens in our budget is when you have got £23 billion a year effectively, the underspend was about 1%. Some of that was to do with overseas operations, which comes from the Reserve and is always a difficult figure to get precise. About £240 million was the underspend. We have to work to that margin because we cannot say precisely when our receipts are going to come in. Quite a lot of receipts come in the last two months and therefore we have to take prudent measures to make sure we are not going to overspend. We do that by negotiating voluntary agreements with major suppliers to phase payments across the period. It is quite normal commercial practice and we are becoming much more commercial across the board. The Defence Logistics Organisation and Procurement Agency both entered into those agreements. There was no underspend. That money, effectively, was then spent on those projects in April, May and June in the next financial year. It was simple financial management.

  23. The underspending that appears in this Report is not a real one, of course. It is purely fictitious figure that says the money was not spent during that time.
  (Mr Tebbit) It is to do with cash annuality.

  24. You say you have not made any underspend at all on capital investment and on your running costs.
  (Mr Tebbit) There are always fluctuations, but what I am saying is that the programme is running flat out, right to the margins. You clearly have to do some management in order to avoid overspending at the financial year, but there was no slack or give in the programme itself.

  25. If that is the case, you have agreed you are going to take over £242 million underspend in the current year. That does not include the £76 million shortfall due to extra costs in the Balkans, does it? Why not?
  (Mr Tebbit) That is money from the Reserve. It is very difficult to forecast precisely what you are going to need.

  26. Why is that so difficult? When I read the targets you are setting yourself—
  (Mr Tebbit) It is a very strange thought. Do let me explain. This is not a problem, there is no mystique here at all. When you are deployed on operations there are a lot of unforeseen operational requirements that come through. You do not know how many operations you are going to be engaged in. You do not know how much flying you are going to need to do or how much special equipment you will need for an operation—this is not steady state stuff—and that is the main reason why you find that sort of thing. We estimated more than we used. One of the problems about this is we do not try to charge for activity that would otherwise have happened in the budget. If we were trained at that level, we do not add it on to the operations. We say we would have been training at that level so that is the level we ask the Treasury for reimbursement for in the operation. There was also one particular thing there which is that we had built temporary field accommodation in Kosovo which is very good, since we are on the subject, as good accommodation as exists for any of the deployed countries in Kosovo. This is not all bad. And that was late and therefore the bills were not paid, did not fall due as early as we expected and that also accounted for that. I can assure you the problem with our programme is not that we have got lots of slack in it—it is right on the edges—but this is a necessary effect if you are to live within your means on an annual basis as Parliament votes.
  (Mr Balmer) Of the £77 million we, in a sense, misforecast for the operational costs to the extent that expenditure occurs in the current year, a lot of it is projects that have slipped a little, then we will be able to claim that from the Reserve in the current year.
  (Mr Tebbit) I should have said that. We carry over that money and it is spent on the bills that were delayed.

  27. If we take the £76 million and the £242 million you have already said you are carrying over, what additional provision will you seek in the Spring Supplementary Estimates and what will it be for?
  (Mr Tebbit) It all adds up to about £800 million, but I am looking at the Principal Finance Officer.

  28. These will all be red on your balanced scorecard.
  (Mr Tebbit) Some of them are to take up money made available to us in year. As part of the settlement last year we had £200 million for this current year extra to help us with the consequences of Kosovo, the urgent equipment improvements that we would knew we would need, so we have extra money in the budget this year (and, therefore, as part of the Supplementary Estimate) for things like Maverick missiles, GPS guided bombs and secured air-to-air communications, and we will also be spending some of that money on our accommodation upgrade.

  29. It is near to £800 million, you say?
  (Mr Tebbit) Yes, and there are little technical adjustments between Departments.
  (Mr Balmer) The total will be £832 million although we are still agreeing the final figure with the Treasury.

  30. Can you drop us a line to give us the detail of that?
  (Mr Balmer) The Supplementary Estimate itself will be published quite shortly and that will have the detail in it.

  31. That will be broken down into understandable transparent—
  (Mr Tebbit) Absolutely, it will say exactly what they are.

  32. That is what I am eager to know. I do not know what a balanced scorecard is.
  (Mr Balmer) I cannot guarantee that the way Parliament requires Supplementary Estimates necessarily gives you all the detail you would like. Insofar as it is does not, we will give you a little list in plain English which does describe where the money is going.

  33. My final question is about targets. Are your targets optimistic, realistic or deliberately and cynically pessimistic?
  (Mr Tebbit) I like to think they are stretched targets. We do not try and set targets which say 90% means you are doing brilliantly. We tend to set targets which are stretching so that a good achievement will be in the 70% to 80% field, and that is the normal best practice. We tend to do that sort of thing. Some of the Public Service Agreements are things that have to be done, but we are talking about quantitative targets. For our agencies, for example, we tend to set them around that level or regard that degree of achievement as being probably the right sort of thing. Target setting, as you know, is quite an art in itself and you get better as the years go by.

  34. You have made great play over the last two or three years about how important target setting is and when I have asked questions on it I have found it very difficult to get answers on how the targets are set. I would be interested to know who is responsible for the setting of these targets? Are they judged on historical performance? Are they judged on a realistic assessment of what is going on in a particular area at the time the target is set? Are they in some instances pessimistically set because you know from day one that you have not got a cat in hell's chance of getting near what should be reasonably expected?
  (Mr Tebbit) One general point—we have been able to see how we are doing over time on this. Often it is more important not to worry about the target in any one year but the trend, and we have been measuring trends and it shows that our targets, by and large, are getting twice as good as we were in performance.[2] It is also true that the areas of the Department which have been most susceptible to target—the agencies—have been delivering efficiencies at about twice the level of the rest of the organisation. I think targets do work and do work in the MoD.

  (Mr Gould) I will illustrate from procurement programmes if you like. We require our IPTs to assess their targets in the following way: that they look at the cost, quality and timescale parameters of each project and they set targets for those parameters at a 90% confidence level, which you can expect to be relatively easy to achieve (it is never easy but relatively easy)and at a 50% confidence level, so quite a tough target for them to meet, and we set the overall agency targets at the 50% level so meeting all those targets would require them to achieve a pretty stretching level of performance. IPTs are also required to set themselves hard targets and over and above those they set themselves a stretched target. We do not set all the stretched level targets because, frankly, that would be leading yourself into trouble, but they are constantly being pushed towards the stretched target as we go through quarterly reviews, project reviews, annual reviews so overall certainly for the equipment programme, and from my experience I know this is also true of the Defence Logistics Organisation, the targets are set at a pretty tough level.

  (Mr Balmer) It is perhaps worth adding that for all 37 defence agencies all their key targets have to be approved by a minister and they are all reported to Parliament at the beginning of the year.

  35. It is hardly fair. What is he judging it on? Just your advice?
  (Mr Tebbit) The difference is that Mr Gould was talking about the Procurement Agency and I was talking about the 37 agencies as a whole. Essentially the owner of the agency agrees the target with the agency chief executive. With very big agencies the owners tend to be ministers and that is why it works that way. That relationship is obviously the basis for target setting. I have taken a personal interest in this because it has been a very mixed bag. Some agencies have had very good targets and are very very good indeed, others less good and I have been trying to bring up the overall standard across the board. Now we have had a few years of this we are beginning to achieve our targets.

Laura Moffatt

  36. May I pursue the issue of just where the money comes from that is spent on the estate. We send our Secretary of State up to the despatch box to tell us we are spending more on defence. Where does that money come from? After you have taken out the unplanned cost of operations, is that increase in spending coming from selling off bits of the back garden, DERA whatever, receipts from those sales, or is there genuinely an increase in spending from the Treasury?
  (Mr Tebbit) There are a number of elements. Firstly, there is genuinely an increase in spending from the Treasury. It really is true that the defence budget will increase in real terms by 1% between this current financial year 2000-01 and 2003-04. It is also genuinely true that it is first time that defence expenditure plans will have increased in real terms for over a decade in each of the years. It is also true that as a result of the last spending round we have got £1,250 million of new money, even after inflation is taken into account. There are some other elements as well as the Treasury settlement. On top of that we are expected to make 3% efficiency savings, so there is an assumption that in addition to the settlement we will have these other resources available to us. The virtue of having a budget increase in real terms, even if it is quite small, is that you do have a new psychological relationship with the organisation. You can say to people if they really can save resources or get more output for the same level of resources, it is all ploughed back into defence. You are not having to perform against the Treasury cut and that makes a huge difference. It is not true of individual bits of the organisation but overall it is true. The other thing is that we have targets for asset disposals of £600 million over the period of the settlement of three years, of both land and equipment. That money comes back to defence so that £600 million could be added to the Treasury settlement, as could our 3% efficiency—and anything over 3% would also be for us. The Smart procurement gains in our equipment plans will obviously mean that we can buy more equipment.

  37. So the whole of the 1% comes from the Treasury. You said in a previous answer to my colleague, Mike Hancock, that it is quite fraught to rely on monies coming from asset sales because you do not know where it is going to come, so clearly an over-reliance on that is dreadful because it does not allow you to plan properly.
  (Mr Tebbit) It is a timing problem rather than a total problem.

  38. Explain what you mean by that?
  (Mr Tebbit) We have a clear plan for, for example, the estate sales. We are on target, we are selling what we planned to be selling at this stage.

  39. At the time you wanted to sell it?
  (Mr Tebbit) More or less. Last year we managed £287 million of defence sales against a target which was considerably lower than that. It was about £240 million from memory. This year our target is £200 million. Our experience since the Strategic Defence Review is that basically we have realised it over that period which ends in the next financial year, so we are pretty well on track there, it is happening, and the only problem, exactly as I said before, is end year management, making sure that it comes in the financial year or, if it does not, having to make provision for not receiving it. Asset disposals of other kinds are getting a little difficult. Disposing of defence equipment is not generating as much as we hoped, but it is a relatively small element in the budget. As you know, when DERA is finally converted into a private company—


2   Note by witness: This was factually incorrect and was corrected by subsequent sentence. Back


 
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