Select Committee on Defence Eighth Report


The Format

8. As we have described in the preceding section, unlike other departments the MoD's annual report is divided up between a number of publications, and each of these has been subject over recent years to extensive and continuous revision. While the intentions of these revisions are good, and the rationale for the division of material is coherently advanced, the overall effect is to make it difficult to get a clear view of the state of defence affairs at any particular moment. We attempt below to draw the separate strands together.

The Expenditure Plans, Investment Strategy and Performance Report


9. The MoD's Expenditure Plans report for 2000-01 was published following the March 2000 Budget.[27] Because of the imminence of the announcement of the results of Spending Review 2000, it related only to two years (2000-01 and 2001-02)—the remaining years of the 1998 Comprehensive Spending Review—rather than the usual three.[28] The most recent Expenditure Plans report, for 2001-02, was published in April 2001, and covers the three years of the Spending Review 2000 (2001-02 to 2003-04).[29]

10. Because of the idiosyncratic design of the MoD's annual reporting cycle, its contribution to the series of departmental expenditure reports is considerably thinner than the average for other departments, and contains less discursive material. (To make only one relevant comparison, the MoD's latest report is at 64 pages long, twice as long as its predecessor, whereas the FCO's[30] is 160 pages.) Much of the type of discursive material that is available in the other departments' annual reports is, in the MoD's case, included in its Performance Report (see below) and to a lesser extent in the Investment Strategy and Defence Statistics.

11. The effect of this way of allocating material between the different elements of the reporting cycle is to leave the MoD's Expenditure Plans report as a rather dry, drab and uninteresting document. Its format has remained much the same from the era of the SDE, and it does not set out a clear set of formal plans against which subsequent Performance Reports can be set. That is done, apparently, in the MoD's own Departmental Plan. We recommended in our Report last year that we should have access to the MoD's Departmental Plan.[31] In its response, the government stated—

    It remains the Government's position that we have no current plans to disclose to the public or the Committee the details of the Ministry of Defence's internal forward plans, other than those already published in the Expenditure Plans. But, with the settlement of new three-year spending plans in the summer [of 2000] and the introduction of Resource Accounting and Budgeting (RAB) from 2001-02, the Ministry of Defence will take the opportunity to review the content of next year's Expenditure Plans document.

12. The 2001-02 edition of the Expenditure Plans report was published on 2 April 2001. This year's Expenditure Plans Report is a modest improvement on the last, but does not show evidence of a radical rethink of its content. It focused almost exclusively on the expenditure projections previously announced in the Spending Review, and reproduced the data that would be presented in the Resource Estimates for 2001-02. Even if the Department is unable to disclose the contents of the Departmental Plan to us (we did not suggest its publication), the Expenditure Plans report is the obvious document in the cycle in which the Department's key short term targets should be set out. (The Investment Strategy is the place for long term targets.) Only if these are stated at the beginning of the reporting period will the Performance Report carry credibility as a fair assessment of achievements against those targets.

13. We have some comments to make below on how the Expenditure Plans report might be better linked to the key goals of the government's defence policy and how the resource allocations might be put in a wider context.[32] So while we welcome the evidence of a modest rethink, we recommend that the Expenditure Plans report is completely recast as a forward-looking document, disclosing as much as is practical about the aims and objectives of the MoD over the succeeding 12 to 36 months.

14. We discuss in detail the implications of the Spending Review 2000 for the defence budget below.


15. The MoD's first Investment Strategy was published in December 1999, and accompanied the Performance Report for 1998-99. We examined the Strategy as part of our inquiry last year into the MoD annual reporting cycle, when the MoD told us that it had been the first time that the values of the Department's asset base had been published, and that these had not long been available even within the MoD itself.[33] The first Investment Strategy was, in the MoD's eyes, 'essentially work in progress, the sort of document [that] we can improve on in future years'.[34] The second Investment Strategy was published last October, though only on the MoD's website.[35] This time it was not published simultaneously with the Performance Report (for 1999-2000), which was published two months later. Whether by accident or design, such a separation was helpful in reinforcing their different purposes—one document a backward looking reporting exercise, the other a framework for future action. On that basis, the Strategy might better accompany the Expenditure Plans. The MoD's Principal Finance Officer had told us, in our previous inquiry, that there was scope for improving the correlation between the figures in the Investment Strategy and the Expenditure Plans.[36]

16. The latest Investment Strategy covers similar ground to its predecessor. However, it is longer and has more details on asset usage and investment plans, in part a result of it now being able to report on asset-related initiatives such as the estate strategy. We welcome these improvements, and the more explicit linkage of capital expenditure projections to the results of last year's Spending Review,[37] figures which we examine in more detail below.

17. In our inquiry last year, MoD witnesses told us that the Department "intends to update [the Investment Strategy analysis] on an annual basis".[38] In its subsequent response, to our Report, however, the MoD stated that it had been working on a revised version of the Investment Strategy as part of the Spending Review, and that the Strategy would now be updated every two years, matching the proposed timetable for Spending Reviews.[39]

Investment Summary

18. Last October's Investment Strategy set out the budgets for capital investment for three years ahead. These were subsumed in the headline numbers of the 2000 Spending Review (paragraph 98), which reveal different trends for 'capital' and 'current' costs over the Review period. Capital expenditure is set to grow by 11% in real terms, and current expenditure to fall by 2% (Figure 1).

Figure 1: Capital and Current budgets of the 2000 Spending Review[40]

Real terms[41] - capital
Real terms[42] - current
Real terms changes over 3 years:

19. This emphasis on capital investment follows a trend of the SDR[43], which we noted in 1998 would involve a 5% real-terms increase by the third year of the Comprehensive Spending Review,[44] despite a more general budget tightening for the Department. In our current inquiry Mr Kevin Tebbit, the Permanent Secretary, told us that within the latest Spending Review's proposed increase on capital spending—

    ... the priority is equipment. We are in the peak period of delivery for big new equipments and Eurofighter, for example, will be at its high period of delivery at that stage, so will assault ships, so will Apache attack helicopters.[45]

Over the next three years, around 80% of the MoD's capital expenditure will be on 'fighting equipment'.[46] The MoD's budget will also have to bear significant costs beyond the period of the relatively near-term Spending Review—on the Future Carriers, Joint Strike Fighters, Astute submarines, the A400M aircraft and other programmes. The published documents of the Department's reporting cycle do not make visible the long-term pressure likely to be maintained on the defence budget from such programmes.

20. Also in the longer term, the Department's Defence Policy 2001, published on 7 February, envisages that —

    Pressure to reduce manpower requirements will intensify, and manpower requirements will become a far more significant factor in decisions on equipment procurement ... .[47] We ... will be placing a premium on designing equipment which is less manpower intensive to operate and support.[48]

Our MoD witnesses explained that the background to this emphasis on less manpower intensive equipment was that —

    ... we expect the size of the pool of the right age group to reduce quite significantly over the next 10 to 15 years. ... One of the ways of responding to that, apart from increasing our recruiting effort, is to try and reduce the requirement for service manpower, in particular, to operate equipment and support it.[49]

That long-term balance between equipment and personnel is a key issue which will require constant re-examination over the coming years.

The PFI and Public-Private Partnerships

21. This government has continued the policy of bringing private capital to bear on public spending plans through the Private Finance Initiative. The MoD has a large programme of PFI and public-private partnership schemes in the capital investment field, where assets are provided by service contractors rather than the MoD. Some of the more significant ones were listed in the Performance Report.[50] We have expressed opposition to the proposed PPP for the Defence Evaluation Research Agency on a number of occasions.[51]

22. There are 36 defence PFI deals so far (with a combined capital value of £1.8 billion),[52] with a further 70 in prospect (worth another £10 billion).[53] This compares with £67 billion of capital assets owned by the MoD.[54] The increased use of the PFI for equipment-related programmes raises particular issues, which we have sought to examine in a number of our inquiries. These issues include the long term financial consequences of being tied to PFI service contracts (payments in 1999-2000 were £309 million,[55]and are expected to rise to £523 million by 2003-04);[56] the MoD's ability to control standards (for the equipment, its maintenance and the staff who operate it); security of access to equipment in times of crisis or contractor insolvency; and maintaining military ethos as functional areas are increasingly civilian-manned. On the latter, the Chief Executive of one of the MoD's training agencies told us during our recent Policy for People inquiry that, with civilianisation of instructor posts, he believed—

    ... there are specific areas ... where it is perceived that we have gone too far, and we are looking at how we can redress those particular issues ... One particular [area] ... is the Joint Elementary Flying Training School ... [57]

That was an interesting aside, but it is not evident to us that the civilianisation of elementary flying instruction is a critical area for uniformed personnel to be involved in. It is in areas closer to the front line that we have greater concerns.

23. In our 1998 inquiry into the Strategic Defence Review, Lord Gilbert, the then Minister for Defence Procurement, explained to us his criteria for considering the scope for PFI schemes. He said that "if something is in the front line, it is not pursued".[58] The MoD's latest Investment Strategy notes, however, that—

    ... we are generally committed to a 'level playing field', with no predisposition towards either a private or an in-house solution. But, before public funds are made available for any new capital investment, private financing must be shown to be inappropriate, unworkable or uneconomic.[59]

Furthermore, the Strategy states that the MoD is—

    ... looking at ways of moving PPP closer to the front line, to include potentially dedicated war-fighting equipment where feasible.[60]

When we put our concerns about this to the Secretary of State, he told us that—

    ... we will not in any way compromise military capability for financial reasons ... That is the test that I will apply to any proposal for using private finance.[61]

However, the economic case for each PFI must also be judged stringently against the cost of a public sector solution, and should not be pursued for purely ideological reasons. The playing field should be genuinely level. We welcome the assurance that PFIs will not compromise front line military capability but we detect a shift in the policy on the boundaries of PFIs since the SDR less than three years ago. We note that some existing programmes—for example, the Future Strategic Tanker Aircraft—are already very close to that front line. We repeat our earlier warning about the dangers of allowing PFI to take control of its war fighting capabilities out of the MoD's hands.

The Defence Estate

24. The Investment Strategy notes that, in regard to the defence estate, the MoD intends to concentrate activities on a smaller number of larger core sites.[62] The Spending Review anticipates a continuing high target for estate disposal receipts—£600 million in the three years to 2003-04. Receipts had been significantly lower before 1996,[63] when £1.6 billion was secured by the Treasury from the sale of the married quarters estate in England and Wales. The Investment Strategy stipulates sites being offered to the commercial market to achieve best value, and only 'in exceptional circumstances sites [being] offered to local authorities or public bodies.'[64] We also questioned the Secretary of State as to whether there had been another nuanced shift in policy on the disposal of the defence estate.[65] We suspect there is now greater pressure to maximise receipts and less emphasis on returning such areas to uses which benefit the public. The Secretary of State told us—

    Clearly, it is in our interest and in the interests therefore of all those who work directly and indirectly for the Ministry of Defence that we maximise the return on the disposal of surplus sites. That is not to say that we will always look to the very highest price, we will certainly take account of other factors—Government policy elsewhere and environmental issues and so on—but, nevertheless, I think it is fair to say that you would have to persuade me quite hard if you were objecting to the policy that we should not try and maximise the return for the Ministry of Defence. In doing so, it does then increase the resources that we have to be able to do [other] things ...[66]

We would encourage our successors to examine the performance of the Defence Estates agency in some detail. It is now over six years since the Defence Committee looked at this topic,[67] and a reappraisal is certainly due.

25. Future estate rationalisation might also be possible, the Permanent Secretary told us, as more aspects of training were put onto a tri-Service basis.[68] Mr Tebbit also told us that—

    ... we are looking at our estate so as to concentrate on a smaller number of core sites and to dispose of those that are less important to us or can generate greater revenue. ... I suspect there is a long­term trend that we are looking for of moving increasingly away ... from the south and south west of the country, increasingly closer to the traditional recruiting areas of the Armed Forces, which is good for stability and retention, and also enables us to make some economies of scale.[69]

26. The estate has long been the Cinderella of defence expenditure. Works services and infrastructure investment have often been seen as the items of expenditure most readily susceptible to end-of-year adjustment as managers seek to stay within their budgets. This was a factor behind the Defence Aviation Repair Agency's plans to move out of its long-neglected St Athan site, which we described in our recent report on the Agency.[70] In our Policy for People inquiry, we noted the inadequacies of accommodation for single and married personnel, and the slow progress in putting things right.[71] The MoD expects that capital charges for land and buildings under Resource Accounting and Budgeting (as on other fixed assets), will prompt budget holders to pay much more attention to managing their estate holdings more effectively.[72] In our current inquiry our MoD witnesses nevertheless accepted that—

    We have many years of under­investment in the estate, particularly housing ... we have suffered from a lot of under­involvement 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.[73]

27. The Secretary of State has since announced that—

    ... a significant proportion of the new money provided to the Defence budget in Spending Review 2000 will be devoted to a major and sustained upgrade programme for single living accommodation. Together, existing and new projects, including PFI, will see investment in this area reaching around £200 million per year.[74]

Despite the promise of upgrading married quarters within five to seven years,[75] using part of the receipt from the sale of the married quarters estate in 1996, that programme will still not be delivered until 2005.[76] For the moment, therefore, our scepticism about this latest initiative for tackling the unsatisfactory state of single accommodation will only be allayed by practical results.

27  Cm 4608, published on 10 April 2000 Back

28  ibid, p 5 Back

29  Cm 5109, published on 2 April 2001 Back

30  Cm 5110 Back

31  Second Report, Session 1999-2000, op cit, para 17 Back

32  See paras 75-79 Back

33  Second Report, Session 1999-2000, op cit, para 20 Back

34  ibid Back

35 Back

36  Second Report, Session 1999-2000, op cit, para 20 Back

37  Investment Strategy, para 1 Back

38  Second Report, Session 1999-2000, op cit, para 20 Back

39  Seventh Special Report, 1999-2000, HC 452, para 11 Back

40  The subsequent Expenditure Plans made minor adjustments to some of these figures (Cm 5109, p 13) Back

41  2000-01 prices Back

42  2000-01 prices Back

43  Q 177 Back

44  Eighth Report, Session 1997-98, The Strategic Defence Review, HC 138, para 385 Back

45  Q 49 Back

46  Ev p 80, table Back

47  Defence Policy 2001, para 14 Back

48  ibid, para 30 Back

49  Q 176 Back

50  Cm 5000, pp 46-47 Back

51  Sixth Report, Session 1997-98, The Defence Evaluation and Research Agency, HC 621; Ninth Report, Session 1998-99, Defence Research, HC 616; Ninth Report, Session 1999-2000, The Future of DERA, HC 462; and Fifth Report, Session 2000-01, The Draft Defence Science and Technology Laboratory Trading Fund Order, HC 289 Back

52  The Government's Expenditure Plans 2001-02 to 2003-04 and Main Estimates 2001-02: Ministry of Defence, Cm 5109, p 40 Back

53  Cm 5000, paragraph 101 Back

54  Investment Strategy, p 7 Back

55  Resource Accounts for 1999-2000, HC 50, Note 21 Back

56  Cm 5109, p 40 Back

57  Second Report, Session 2000-01, op cit, HC 29-II, Ev p 205 (QQ 656,657) Back

58  Eighth Report, Session 1997-98, op cit, para 301 Back

59  Investment Strategy, para 37 Back

60  ibid, para 39 Back

61  Q 247 Back

62  Para 49 Back

63  In the three years to 1995-96 disposals averaged £75m a year, and in the following four years £192m

(Minister's letter to Mr Crispin Blunt MP, 8 March 2001, placed in the Library of the House). Back

64  Para 57 Back

65  QQ 182-185 Back

66  Q 182 Back

67  First Report, Session 1994-95, The Defence Estate, HC 67 Back

68  Q 7 Back

69  ibid Back

70  Fourth Report, Session 2000-01, The Draft Defence Aviation Repair Agency Trading Fund Order 2001, HC 261, para 22  Back

71  Second Report, Session 2000-01, op cit, paras 107 and 144 Back

72  Q 7 Back

73  QQ 19,21 Back

74  HC Deb 14 March 2001, c 600w Back

75  Report by the Comptroller and Auditor General, The Sale of the Married Quarters Estate, HC 239, 1997-98, para 1.2 Back

76  Second Report, Session 2000-01, op cit Back

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