Select Committee on Defence Eighth Report

 
 

 
1  Report

Background

1. One of the important but often over-looked roles of the House is to approve the Estimates providing money for government three times each Financial Year. Financial oversight and the detailed scrutiny that ought to accompany it must be of enormous importance to any Parliament that claims to be doing its job properly. Yet Committees of the House have in the past often expressed unhappiness with how this oversight is carried out and scrutiny undertaken.[1] Since it was set up for the very first time almost thirty years ago, the Defence Committee has frequently turned its attention to the Estimates. Our predecessor Committees have agreed regular Reports covering one or more aspects of the financial provision of the Ministry of Defence (MoD) in most Sessions of Parliament.

2. We have ourselves examined each Estimate from the MoD since we were appointed following the last General Election.[2] We are very conscious of our duty to provide the House with a Report setting out our analysis of the figures and forecasts provided by the department we scrutinise. However, we are also conscious of how little time we have each Financial Year properly to consider the Winter and Spring Supplementary Estimates and to prepare a Report for the House, given the proximity of these Estimates being laid to their being before the House for approval. This absurdly compressed time-frame—in this instance some fifteen working days between the laying of the Estimates and the date on which the vote on the Estimates will take place in the Chamber—is not the fault of the MoD. We are grateful to the MoD for the speed with which it has responded to the questions sent to it (which answers form part of the evidence to this Report[3]) and for the co-operative spirit which informs its dealings with us with regard to the scrutiny of its Estimates. We are also grateful to the Committee Office Scrutiny Unit which has to assist all those departmental committees asking for its assistance in analysing their respective Estimates over this very short period of time.

3. Notwithstanding recent welcome extensions in time, the time permitted for any departmental select committee to examine its appropriate Supplementary Estimate, from the date of laying until the date of decision, even taking into account the support and co-operation from which it might benefit, is still unreasonably short. This is clearly unsatisfactory for those committees keen properly to examine their departments' Estimates which can provide less thorough scrutiny than would otherwise be the case; and still less satisfactory for the House which enjoys less detailed consideration of that scrutiny than would seem appropriate for the voting of very significant sums of public money for use by the government of the day. This has to change if Parliament is to be able to do its job effectively.

4. Once again the memorandum supplied by the MoD for its Spring Supplementary Estimate is commendably clear and thorough.[4] Although we have raised a few points with the MoD prior to, and within, this Report where we feel more information might have been provided or some explanation for elements of the Estimate given, the MoD should be commended for continuing to provide a clear and informative Estimates memorandum.

Spring Supplementary Estimate: an overview

5. The Spring Supplementary Estimates (SSE) for Financial Year 2007-08 were laid before the House of Commons on 19 February 2008.[5] The Ministry of Defence is seeking a net increase in resources and capital of £2,192 million—in cash terms a net increase of £894 million.[6] This is the additional sum of money required by the MoD to fund its activity over and above the sums already voted in the Main and Winter Supplementary Estimates. Table 1 provides a breakdown of this requested increase in expenditure.

Table 1: Change in Resource and Capital Expenditure sought in the Spring Supplementary Estimate
Resource Expenditure   
Provision of Defence Capability (RfR1)  1,447.124 
Operations and Peace Keeping (RfR2)  1,022.500 
War Pensions and Allowances (RfR3)  3.00 
Total Net Request for Resources  2,472.624  
Capital Expenditure   
Net Provision of Defence Capability (RfR1)  (669.000) 
Operations and Peace Keeping (RfR2)  388.000 
Total Net Request for Capital  (281.000)  
TOTAL CHANGE IN CAPITAL AND RESOURCE  2,191.624 

6. The requested resource increase of £1,447 million in Request for Resources (RfR) 1 (Provision of Defence Capability) is explained in the Department's Estimate memorandum.[7] The increase is primarily due to 'non-cash' resource requirements forecasted by Top Level Budget-holders (TLBs) for depreciation, provisions for staff early release schemes and fixed asset value impairments. The net reduction of £669 million in the estimated capital figure comprises the £709 million balance of the £959 million receipt from the sale of Chelsea Barracks not already provided for in the Main Estimate, offset by a £40 million increase in the capital budget funded by the last tranche of Qinetiq sale proceeds.[8] This in turn offsets the resource increase so that overall RfR1 request is £778.124 million, as opposed to £243.074 million at this stage in the last Financial Year.[9]

7. The requested resource increase in RfR2 (Operations and Peace Keeping) of £1,022 million is largely to fund the additional costs of conducting operations in Iraq, Afghanistan, the Balkans and elsewhere. There is an additional capital request of £288 million, which means that the overall RfR2 request is £1,410.5 million,[10] as opposed to £429 million at this stage in the last Financial Year.[11] RfR2 is the area where our Reports on the Supplementary Estimates have focused in the past, and this is, to some extent, where we will focus in this Report. No forecast for these costs is given in the Main Estimate at the beginning of each Financial Year, and it is only by scrutinising the Winter and then the Spring Supplementary Estimates that the year-on-year trajectory of additional costs for operations can be gauged. In this Report we also comment on the response which we have just received from the MoD to our last Estimates Report, Cost of operations in Iraq and Afghanistan: Winter Supplementary Estimate 2007-08.[12]

8. We have in the past taken issue with the MoD for failing to supply with the Main Estimate any indication of what magnitude of operational cost the Ministry expects the country to have to shoulder during the Financial Year, and which it will ask the House to vote at each of the Supplementary Estimates within that Year. Clearly it is difficult for the MoD to give an exact or near-exact estimate for operational costs up to 12 months in advance. Nonetheless, some indication of the working assumptions within the Ministry would be useful for the House to have at an early stage during the Financial Year. We are therefore pleased to note that the MoD in its response to our Report on the Winter Supplementary Estimate has said that it will, at the next Main Estimate, include a forecast for Urgent Operational Requirement (UOR) costs within RfR2. While this does not go as far as we might like in providing a full estimate earlier in the Financial Year, since UOR costs form a significant proportion of RfR2 costs as a whole (some 80% in 2006-07)[13], this will be useful data and we are pleased that the MoD has decided to give the House more information in this way.[14]

9. Likewise, the House is usually during any Financial Year only given the opportunity to see what the costs for operations in the Balkans are expected to be towards the end of that Year, in the Spring Supplementary Estimates. In part, this is on account of these costs being presented in first instance in the Estimates of another department, namely the Foreign and Commonwealth Office (FCO). In past Reports we have asked the MoD to provide information about likely Balkan costs within its own Estimate earlier in the Financial Year. We are again pleased that the MoD has decided in its next Main Estimate to set down its own assumption for what these operational costs are likely to be in Financial Year 2008-09. The MoD points out that this figure will necessarily be subject to amendment within the process of formulating the subsequent Winter and Spring Supplementary Estimates, something we accept the inevitability of.[15] Nonetheless, we again commend the MoD for increasing the amount of information which this will make available to the House at an early stage in the Financial Year.

Operations and Peace Keeping: Iraq and Afghanistan

10. The most notable element of the Estimate is the significant increase signalled in the expected additional costs of operations in Iraq and Afghanistan in the current Financial Year, as set out in RfR2. In the Winter Supplementary Estimates, the MoD estimated the additional costs of operations in Iraq and Afghanistan for 2007-08 as £955 million and £964 million respectively (excluding indirect costs). The MoD now estimates that these costs will be £1,449 million for Iraq and £1,424 million for Afghanistan.[16] A breakdown is given below in Table 2, showing the change in estimated costs since this Financial Year's Winter Supplementary Estimate.

11. This is an increase in estimated additional costs for this current year of around 50% for both theatres. While some increase in cost was expected, and indeed flagged up by MoD in its memorandum for the Winter Supplementary Estimates,[17] the proportion of increase is higher than anticipated. (The comparable increase between the Winter and Spring Supplementary Estimates for 2006-07 is also set out in Table 4.) It is worth noting that with the inclusion of indirect resource costs given in last month's Spring Supplementary Estimate (not available in the Winter Supplementary Estimate) the total expected additional costs of operations in 2007-08 are increased still further: to £1,648 million for Iraq and to £1,649 for Afghanistan (Table 2). These increases in costs since the last Supplementary Estimates are mainly attributed to increased operational tempo (in Afghanistan) and to UORs.[18]

12. These are clearly very significant increases, not least with regard to operations in Iraq. While we are aware that the drawdown of forces in Iraq will not immediately lead to a comparable decline in costs, nonetheless, the magnitude of the increase in the costs estimate there is surprising. The capital cost estimate for Iraq, for example, has almost doubled, while the estimates for stock/other consumption, equipment support costs and other costs and services have all increased by over 50%.[19] It is worthwhile stressing that these increases in estimated costs for this Financial Year have occurred not since the MoD's Main Estimate was laid on 30 April 2007 but since the Ministry's Winter Supplementary Estimate was laid on 15 November. In other words, with the exception of the indirect costs of these operations, the higher cost estimate was presumably unforeseen only three months ago. Where in future Supplementary Estimates bring significant increases in the cost of operations, the Estimates memorandum should make clear to what extent the increase is the result of previous under-estimation and where it is a genuine cost increase.

Table2: Operations in Iraq and Afghanistan—changes in anticipated additional costs since Winter Supplementary Estimates (from RfR2)
Cost Type  Iraq Forecast £m 2007-08—as at Winter Supp Est  Iraq Forecast £m 2007-08—now  % change  Afghanistan Forecast £m 2007-08—as at Winter Supp Est  Afghanistan Forecast £m 2007-08—now  % change  
Resource-Direct         
Military personnel  95 93  -2.1% 62  79 +27.4%  
Civilian personnel  12 15  +25% 6  +33.3%  
Stock/other consumption  169 263  +55.6% 138  237 +71.7%  
Infrastructure costs  106 109  +2.8% 95  163 +71.6%  
Equipment support costs  234 357  +52.6% 185  220 +18.9%  
Other costs and services  108 162  +50% 103  162 +57.3%  
Income generated/ (foregone)  5  0% (3)  _  
Total  729 1004  +37.7% 586  877 +49.7%  
Capital  226 445  +96.9% 378  547 +44.7%  
Capital Additions  226 445  +96.9% 378  547 +44.7%  
Total  955 1449  +51.7% 964  1424 +47.7%  
Indirect Resource costs  N/A 199  _ N/A  225 _  
Total  N/A 1648  _ N/A  1649  _ 

13. Also of particular note are infrastructure cost estimates for Afghanistan, which have risen by almost 75%, and stock/other consumption costs for Afghanistan which have risen by a similar magnitude. Capital costs estimates for Afghanistan have also increased by almost 50%.[20] In its response to our Report on the Winter Supplementary Estimate, the MoD said that at that point "80% of capital spending [in] Afghanistan this year [was] the result of Urgent Operational Requirements reflecting the level of operational activity in Helmand Province. Recent high value equipment requirements include protects patrol vehicles, electronic Counter Measures and communications upgrades".[21] A comparison between the estimated costs of operations for this Financial Year and the outturn of actual costs for the last Financial Year is set out in Table 3. This reveals that the only expected cost reduction for Iraq this Year will be for military personnel. Every other cost is static or has increased. Capital costs for Iraq and Afghanistan have risen by 163% and 207% respectively since 2006-07; and overall costs, once indirect resource costs are added in, have risen by 72% and 122% respectively.

14. One area where the increase in operational costs seems particularly large is with regard to indirect resource costs for both theatres—these are now expected to be more than eight times greater for Iraq in 2007-08 than they were in the previous Financial Year, and just less than five times greater this Year for Afghanistan than they were in the Year before. The memorandum from the MoD is not as informative on this point as it might be, stating simply that the total of £424 million in indirect resources cost for FY07-08 (as opposed to £69 million for FY06-07) is to cover "the cost of capital, depreciations and impairment charges associated with fixed assets purchased under UOR arrangements".[22] We expect the MoD to provide us with a full explanation for the very significant increase in the indirect resource cost of operations in response to this Report. In addition, we suggest that the MoD states clearly its expectations with regard to the size of the indirect resource costs of operations in Iraq and Afghanistan in the next Financial Year, should operations continue at their current tempo.

15. We have already acknowledged the difficulty that the MoD faces in attempting to gauge what costs might spring from operations over the course of any Financial Year. However, we are concerned that the very difficulty of attempting to provide robust forecasts for the cost of operations might discourage the Ministry from trying its best to provide a thoroughly considered forecast for the Supplementary Estimates, Winter and Spring, during the Financial Year. Table 4 sets out the differences in forecast from the last Financial Year with regard to operations in Iraq and Afghanistan between the Winter and Spring Supplementary Estimates.

16. This Table appears to show that the magnitude of change between those two points then was substantially less for Iraq in particular than it has been in this current Financial Year. This seems to suggest either that the nature of operations in the last few months has significantly thrown off course otherwise robust forecasts provided with the Winter Supplementary Estimate, or that the forecast provided in November last year was particularly weak.

Table 3: Iraq and Afghanistan—SSE forecast for 2007-08 compared to outturn 2006-07
Cost type  Iraq outturn £m 2006-07  Iraq Forecast £m 2007-08 (SSE)  
% change
 
Afghanistan Outturn £m 2006-07  Afghanistan Forecast £m 2007-08 (SSE)  
%

change
 
Resource Direct         
Military Personnel  
100
 
93
 
-7%
 
50
 
79
 
+58%
 
Civilian Personnel  
15
 
15
 
_
 
4
 
8
 
+100%
 
Stock/other consumption  
218
 
263
 
+20%
 
164
 
237
 
+44%
 
Infrastructure costs  
83
 
109
 
+31%
 
101
 
163
 
+61%
 
Equipment support costs  
206
 
357
 
+73%
 
112
 
220
 
+96%
 
Other costs and services  
137
 
162
 
+18%
 
89
 
162
 
+82%
 
Income generated/

(foregone)  

5
 
5
 
_
 
(2)
 
8
 
_
 
Sub-total  
764
 
1004
 
+31%
 
518
 
877
 
+69%
 
Indirect resource  
23
 
199
 
+765%
 
46
 
225
 
+389%
 
Total  
787
 
1203
 
+52%
 
564
 
1102
 
+95%
 
Capital 
169
 
445
 
+163%
 
178
 
547
 
+207%
 
TOTAL  
956
 
1648
 
+72%
 
742
 
1649
 
+122%
 

Table 4: Comparison between changes in anticipated costs, WSE to SEE 200607 and WSE to SSE 2007-08
Cost type  Iraq Forecast £m WSE 2006-07  Iraq Forecast £m SSE 2006-07  % change  Afghanistan Forecast £m WSE 2006-07  Afghanistan Forecast £m SSE

2006-07  

%change  
Resource Direct         
Personnel  77 126  +63.6% 32  54 +68.8%  
Stock/other consumption  191 212  +11% 103  140 +35.9%  
Infrastructure costs  106 89  -16% 73  99 +35.6%  
Equipment support costs  189 214  +13.2% 81  122 +38.3%  
Other costs and services  112 139  +24.1% 67  77 +14.9%  
Income generated  5  4  _  
Total Direct Resource  680 785  +15.4%  360 496  +37.8% 
Capital         
Capital Additions  180 195  +8.3% 180  254 +41.1%  
OVERALL TOTAL  860 1,002  +16.5% 540  770 +42.6%  

Operations and Peace Keeping: the Balkans

17. The additional costs for operations in the Balkans are comparatively slight. In the past, and for the last time this Financial Year, the additional cost to the MoD of these operations, which are signalled earlier in the Foreign and Commonwealth (FCO) Main Estimate, only become visible in the MoD's Estimate by the time of the Spring Supplementaries. Thus it is only towards the end of the Financial Year that the MoD provides directly to the House its forecast for the cost of operations in the Balkans.

18. In our Report on the Winter Supplementary Estimate 2007-08, we asked the MoD to consider placing in its next Main Estimate a forecast for its operational costs in the Balkans for that Financial Year. We are pleased that the MoD has agreed to include such a forecast, and accept that the MoD may have to amend this forecast over the course of the Financial Year in its Winter and Spring Supplementary Estimates.[23] We remind the MoD that the opportunity for such amendment does not, however, free the department from its responsibility in the first instance to provide as robust a forecast as possible. The House can only benefit from early sight of the MoD's firm assumptions as to the cost of such operations.

19. In a supplementary memorandum to our Report on the Winter Supplementary Estimate 2007-08, the MoD stated that its then unpublished assumption for the cost of Balkan operations, conceived at the time of its Main Estimate, had been in the region of £20 million.[24] It now stands, according to the figures in the Spring Supplementary Estimate, at some £31 million.[25] This 55% increase is significant, albeit the sums involved are much smaller than for Iraq and Afghanistan. Current developments in the Balkan region, in the aftermath of the declaration of independence by Kosovo, may lead to further increases in this figure. In this context of uncertainty, the agreement by the MoD to provide an early forecast figure for this cost in the next Financial Year is important and particularly welcome.

Conclusion

20. We again stress the unsatisfactorily tight deadline to which all departmental select committees are expected to work in their study of the Supplementary Estimates. There is surely a direct link between the capacity of committees to dedicate time to analyse the Estimates and the likelihood of departments improving the clarity and thoroughness of the information they provide to the House, and to its committees, alongside their Estimates. It is vital that the current situation improves. As things currently stand, it is simply not possible to scrutinise these important figures as fully as they deserve.

21. Nonetheless, we recommend that the House of Commons approve the request for resources set out in the MoD's Spring Supplementary Estimate. The £2,192 million, in large part requested to meet the forecast additional cost of operations in Iraq and Afghanistan during this Financial Year, represents a significant sum of public money, but we believe that the task our Armed Forces are carrying out is one that requires significant resource—especially in terms of new equipment and force protection, both so essential to their missions abroad.


1   See, for example, the Sixth Report from the Select Committee on Procedure, Procedure for debate on the Government's Expenditure Plans, HC 295 of Session 1998-99; and the First Report from the Liaison Committee, Shifting the Balance, HC 300 of Session 1999-2000 Back

2   These Reports can be found amongst those listed on pages 18 and 19 of this Report. Back

3   Ev 9 Back

4   Ev 1-8 Back

5   HM Treasury, Central Government Supply Estimates 2007-08 Spring Supplementary Estimates, HC273, February 2008 Back

6   Ev 2, para 2.5 Back

7   Ev 1, para 2.1 Back

8   Ev 4, paras 4.3 and 4.6 Back

9   Defence Committee, Tenth Report of Session 2006-07, Cost of military operations: Spring Supplementary Estimate 2006-07, HC 379, p5, Table 1  Back

10   Ev 5, table 5 Back

11   HC (2006-07) 379, para 3  Back

12   Defence Committee, Second Report of Session 2007-08, Costs of operations in Iraq and Afghanistan: Winter Supplementary Estimate, 2007-08, HC 138: the Government response can be found in this Report at Ev 10-11 Back

13   Ev 10, response to recommendation 6 Back

14   Ev 9-10, response to recommendation 2 Back

15   Ev 10, response to recommendation 4 Back

16   Ev 5, table 6 (these costs do not include Indirect Resource DEL costs which are not included in forecasts given at the time of the Winter Supplementary Estimates) Back

17   HC (2007-8) 138, Ev 4, para 5.1  Back

18   Ev 5, para 5.1 Back

19   See Table 2 Back

20   ibid Back

21   Ev 10, response to recommendation 6 Back

22   Ev 4, para 4.4 Back

23   Ev 10, response to recommendation 4 Back

24   HC (2007-8) 138, Ev 8 Back

25   Ev 5, table 6 Back


 

 
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