Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 100 - 119)



  100. It would be helpful to have a clarification.
  (Mr Tebbit) This is not a doing down of the MoD's budget, it is a victory for everyone.


  101. If Mozambique was not a good example of joined-up government, I really must say Sierra Leone is. If the Committee goes to Sierra Leone they will see where DfID are doing an extraordinarily good job, as are the Ministry of Defence and our Armed Forces. It is so good, like closed circuit television, the crimes are being displaced to poor Guinea, who are less prepared to match and tailor the RUF.
  (Mr Tebbit) We are doing a prototype budget arrangement with Sierra Leone at present. In this current financial year, pending the introduction of this budget, effectively it is working like that in practice. We are working very closely with DfID, the Foreign Office, and the Treasury. The Treasury have topped up departmental money and it is operating in the way I would expect it to operate.

Mr Gapes

  102. My questions are not critical of the concept, it is just the actual way in which it works. We need to be clear, in practice is it going to work any more effectively than in the past or are we still going to have these problems? It seems, from what you said, that the commitment is for all three departments to work very closely together.
  (Mr Tebbit) The commitment is there. In practice there will be no doubt teething problems to iron out. I do not expect this to create bigger problems or new problems.

Mr Viggers

  103. Are there other examples of interdepartmental budgets or is this unique?
  (Mr Tebbit) There are a lot of these across government now. The basic philosophy behind all this is that the citizen is not getting the service the citizen wants, they are getting the service that individual departmental structures provide for them. There is a lot more effort nowadays in creating these cross-cutting budgets so that the money is used to actually address the need rather than address the particular departmental structural responsibilities. I think there are about nine or ten.
  (Mr Balmer) When the government published the Spending Review 2000 document with all of the public service agreements in it there were several at the back which covered the cost-cutting reviews, most of which ended up with the pooled budgets.
  (Mr Tebbit) The Foreign Office is involved in seven cross-cutting budgets.

  104. At what point will an operation be classified as an A, B, C operation which is eligible to be subsidised for or paid for out of this budget?
  (Mr Tebbit) This is more for conflict prevention activity. As I say, a major peacekeeping operation would probably be funded directly from the reserve, as now. I would expect Kosovo to be continued to be funded from the reserve. I would expect there is an understanding that that is the case.

Mr Hood

  105. Agencies. Looking over the last decade there seems to have been a rising tide of new agencies, reaching its peak a few years ago at 44. There have been mergers and disbandments since, bringing it down to 37. Was there a grand design behind these broad trends? Why is the trend now down? Have the benefits of agencification exceeded the costs in some areas, or is it now seen that some of these agencies were inappropriate?
  (Mr Tebbit) I do not think so. I do not think there was any particular significance attached to the number. Why it has gone down is that some of them have been merged. We merged some agencies into bigger agencies. Some have been absorbed into business units, where we found that the agency was effectively within the chain of command and it did not make much sense to give it a completely independent existence. Basically the agencies have proved their worth very successfully. The fact that we are down to 37 from 44 I do not think is particularly significant in terms of whether we believe or not in agencies. They are a very useful thing. We now have 65% of our civilian staff working in agencies, so it is a very big element of the department.

  106. Are you telling the Committee that the direction is to look for further mergers or are 37 as much as you think you need? Will there be further mergers in the future?
  (Mr Tebbit) If we felt we should change and create new ones we would do it. The numbers have no particular significance or magic about them. If I were to predict I would think that we probably started by creating agencies within the sort of existing structure and we did not think quite so carefully about the design of agencies around outputs. As we are now looking much more in terms of how to deliver the department's business I would expect to see slightly fewer agencies. It has nothing to do with size and the number, it is just the way that the world is moving.
  (Mr Gould) To give you an example of that, we used to have two agencies that were involved in aircraft maintenance, one was based at the old naval air organisation, which looked at rotary wing helicopters, the other was based on RAF maintenance, if you look at it they are both doing the same thing and now they are merged into one single agency.

  107. Does resource accounting have an impact on this?
  (Mr Gould) I do not think resource accounting does, but the fact that resource accounting makes you look at outputs is part of the discipline of looking at the outputs. There is a better way of organising the way all this work is done.
  (Mr Tebbit) I do not want to sound too low key about this because some of these agencies will have put up with a huge strain during Kosovo. We made massive demands on them, like the Storage and Distribution Agency, which had to push out a massive amount of emergency requirements. Their work-load went up by something like 75% and they coped absolutely brilliantly. They are winning prizes, as it were. That particular agency was one of the finalists in the TNT Modernising Government Partnership Awards. The MoD agencies are very successful. Of all of the Government agencies we have one third of the total. This is a big chunk of government agency activity.

Mr Cohen

  108. Can I follow this up? The Defence Aviation Repair Agency and the Army Base Repair Organisation are both planning to become trading funds in 2002. What is the purpose of that and what additional benefits does that move bring?
  (Mr Tebbit) We just apply the usual commercial criteria. If the agency has external customers as well as the MoD then, clearly, a trading fund is appropriate because there is visibility about its efficiency and business. If the MoD as a customer has other sources of supply, other than the agency, then equally it is good to put the agency on a trading fund basis so it is competing comparably with outside suppliers. We do not create trading funds where the agency is solely supplying the Ministry of Defence because it is an unnecessary complication, it is where we have outside players and we have competition and we need to see a level playing field.

  109. The two I specifically mentioned here, how do they fall into that criteria? The Defence Aviation Repair Agency, does the MoD have other suppliers for that?
  (Mr Tebbit) They will have to compete for their work with private sector companies and show they are efficient, and equally they will try to get contracts from the private sector.

  110. Is this process really a process of softening up for privatisation themselves?
  (Mr Tebbit) Not necessarily. These are called "next step" agencies. I doubt somehow that the RAF will rely entirely on the private sector for its operational frontline servicing. It need not move beyond the trading fund, there is no dogma there. It would certainly be a necessary step if you were going to privatise them, but doing that does not mean we are committed to that. Indeed, we have other trading funds within the department, the hydrography department and the Mapping Agency. I do not want to mention DERA again.

  111. I hear what you say about the commercial element. What is wrong. For example, how are those two agencies performing under the trading funds, are they under-performing or are they doing all right? Why change if they are doing all right?
  (Mr Tebbit) Within our £23 billion I have to make sure we get the very best value for money from whatever source. This is the discipline that we need to make sure we have very efficient organisations. It is not quite as simple as that. If you have an operational requirement we do have to create a particular arrangement to offset that bit of their costs which are necessary for the operational deployment. We do have that built into the model.

  112. That is what I was going to come to, the operational requirement, and ask a question about that. Firstly, presumably, the implication would be there would be quite a lot of job losses from this route if they are going to have these structures and comply with them.
  (Mr Tebbit) Or gains, if they are very effective and take work away from the private sector. Provided, as I say, we have full fairness and a level playing field, that bit of their cost will be subsidised by us for the operational deployed aspect of their work. There has been some quite detailed discussions with industry to make sure there is a level playing field.
  (Mr Gould) In terms of job losses, numbers in both of those agencies have been going down because of cuts and throughput of work. Where work was allocated not on a hard charging basis, that has been happening anyway. One thing which being a trading fund does is it makes it a lot easier for these agencies to start joint ventures with private sector companies and to provide comprehensive support, which is actually an opportunity for them. I do not think becoming a trading fund presents any greater threat to job losses than what was happening already, it does provide an opportunity for them to get together with private sector companies, as is happening in some parts of DARA to provide comprehensive support for aircraft types. It is quite a good opportunity. What you do tend to find when you have greater commercial discipline of the trading funds is that some of the internal structure of those jobs changes and you have, maybe, fewer managerial and supervisory posts and more productive jobs.

  113. What about operational guarantees, we want our planes repaired so they can fly when we need them. If you are setting up these funds what security of repair are we going to have?
  (Mr Tebbit) We make sure we have the security of repair we need. I have to say, private companies have been pretty good in supporting equipment right up to the frontline. In 1990 Vickers were right there in the Gulf doing the tanks in the desert. One would not want to be disappointed with the private sector industry because when the call comes they have always responded. We do negotiate a very detailed protocol with the private sector companies so they are satisfied that it is a level playing field.

Mr Brazier

  114. I cannot let that pass without saying, it is a very artificial situation, because we had a clearly defined frontline with no activity behind it. Somewhere like the Balkans, where the situation was more complicated, had it turned into a fighting war it would have been very different.
  (Mr Tebbit) This is not some sort of underhand comment for me implying that we are going to weaken the frontline's capabilities.
  (Mr Gould) The fact is very, very little of DARA is deployed on operations. None of ABRO is deployed on operations.

  Chairman: We are going down there quite shortly to talk to them.

Mr Cohen

  115. This question of targets for the agencies, we have dealt with them earlier on in the session on the agencies. On the one hand you say it is stretching performance, but really it is a bit like shifting the goalposts every year and you do not really get true comparisons. I see in your report you say that a lot of the agencies met certain requirements on them, presumably some did not meet them, and that means some failed to meet them. Taking that point aside, this whole business of targets does not seem to me to be sophisticated enough for the agencies to get comparisons.
  (Mr Tebbit) There is always room to get better. Agencies on average achieve twice the rate of efficiency of improvements than the rest of the department. That is reflected in the budget adjustments we make for their operating costs, that is a good sign. As I say, we tend to look for targets which give success of around 70% to 80%. This year they have gone down from a 78% average to 72%. I think that is good because it shows we are being tough with them, rather than simply moving up to 100% and saying, "This is easy". In 1999, the year of the performance report, 63% of the indicators showed an improvement. In the previous year 48% showed an improvement in the performance. Measuring them year-on-year does give one the ability to see if things are getting better. It is a discipline that is proving very useful. You are right, this is a very difficult area, this target setting business and trading funds make it easier to see how organisations are performing.

  116. You are commenting on comparisons.
  (Mr Tebbit) The comparisons year-on-year are more reliable.

  117. This is something that came out when I looked at the Defence Review, in Annex G, United Kingdom Military Assistance. There was a target there. Loads of countries are asterisked as receiving MoD subsidy. Why do Spain, Sweden and Saudi Arabia get MoD subsidy? It is page 86.
  (Mr Tebbit) It does not mean they were subsidised.
  (Mr Balmer) We have a small fund within the Ministry we give to policy staff for subsidising, usually training for allies, friendly nations. They can judge when it is in the best interests of the Ministry of Defence or the government at large to encourage a particular country to send students to one of our training courses, who would otherwise not come if we charged them a full rate. We do from time to time subsidise people on that. We have a disciplined approach so that policy staff have to record they have subsidised that piece of training from an internal budget. That is what this is usually about.
  (Mr Tebbit) We are very expensive as a training organisation. It is better for us to subsidise and keep the costs real than pretend that it is cheaper than it really is.

  Mr Cohen: Thank you. I wanted to clear up that point.

  Chairman: The Committee's eyes glaze over when we talk about resource accounting and budgeting. It is only our Audit Adviser, Mr Balmer and Harry Cohen who really understand what is going on.

  Mr Brazier: And me!


  118. Looking at the National Audit Office's comments on several departments' dummy runs, they were less than complimentary. We heard of the Cabinet Office, the Department of Health and Ofgas that the National Audit Office were giving a disclaimed opinion when it came to the information provided. They went on to say, "Because of a pervasive inability to gain sufficient audit evidence the auditor is unable to reach a view about the accounts. The National Audit Office or the MoD gave us evidence of where the problems were in this dry run audit. I would like to ask Mr Tebbit and Mr Balmer how heavily will the National Audit Office be qualifying last year's, ie 1999-2000, resource accounts? Will they be able to pass the accounts at all? What happened with the last attempt, was it subterfuge or just an inability to provide information?
  (Mr Tebbit) It is a hugely big shift of change for us with a budget so large. We have the biggest single change management programme in Europe to do this. We had disclaimed accounts last year and we are going to get a disclaimed account this year, I expect to have a further disclaimed account. It is going to be, in my view, a positive disclaimed account, in the sense that I expect the C&AG to say that good progress is still being made to resolve all the outstanding issues and to say he has confidence and we will be able to move beyond the disclaimed accounts provided this process is sustained, or we have a very positive report. I ought to say, I would not be surprised if what we get from Sir John Bourne also says this is a credit to the Ministry of Defence rather than a failure, because of the size of the challenge. The key problem that we still have is in the supply systems. As I say, partly because we previously did not retain details about the cash costs and, therefore, data on the value of our supply chain was very weak. Once we paid for them, as it were, we then ignored them under the old cash regime. The other thing is being able to track the movement of these things as they go from an internal bit of the department to another and move from being assets under construction to consumption. We are getting better. The Defence Logistics Organisation has about 16 priority programmes to complete in order to do this. They are working flat out on it. Although we have a disclaimer it is a very positive disclaimer. That is about the only outstanding issue that we have. We also know the range of the problem, it is not a black hole. We are now starting our first year of full resource accounts. We are having to plan on the basis of resources. It is going to be a very difficult time. We are "falling fowards" in performance but we are going to do it, it is going to happen. This is a transformation of the way we do business. We are recruiting a lot of people to move to a resource basis. We have had a huge internal training programme as well. I am surprised Mr Balmer has any hair at all, he was very dark haired not long ago.

Mr Brazier

  119. None of these people will provide any long term value for the frontline.
  (Mr Tebbit) This will be tremendously valuable for the frontline. We will be incentivising and moving equipment and supplies faster through the system into the frontline. Once you have a capital charge, once you are bearing the burden of unused assets on your own budget, you just want to get it off and out. The procurement organisation and the logistics organisation will now have an incentive they never had before of moving these items.

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