CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 760-i

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

DEFENCE COMMITTEE

THE PERFORMANCE OF THE MoD 2009-10

WEDNESDAY 9 FEBRUARY 2011

URSULA BRENNAN and JON THOMPSON

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Defence Committee

on Wednesday 9 February 2011

Members present:

Mr James Arbuthnot (Chair)

Mr Julian Brazier

Thomas Docherty

Mr Mike Hancock

Bob Stewart

Ms Gisela Stuart

Examination of Witnesses

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

Q1 Chair: I welcome both of you to this one-off session. We have to finish by 11.30 because of a Committee visit to Plymouth this afternoon, so we will have to be extraordinarily disciplined and short in our questions and answers. I would be grateful if you would bear that in mind. Will you please introduce yourselves for the record?

Ursula Brennan: My name is Ursula Brennan. I’m the Permanent Secretary at the Ministry of Defence.

Jon Thompson: My name is Jon Thompson, and I’m the Director General of Finance at the Ministry of Defence.

Q2 Chair: Welcome to your first inquiry and your first Committee evidence session. What I asked your predecessor as the first question at the last such inquiry was this: the report and accounts have been qualified again-why? But what I’m going to ask you is this: do you expect that in the foreseeable future there will be no qualification or limitations on the accounts by the Comptroller and Auditor General?

Ursula Brennan: The foreseeable future-that’s an interesting timeline. I can foresee that our accounts will continue to be qualified in some areas. I might ask Jon Thompson to expand on that a bit, if I may. I think my predecessor said on a previous occasion that the accounts had been qualified in the past, and some of those things we’ve dealt with, but then different qualificational issues have come up. In relation to how the accounts are qualified at present, some of those issues will take time to resolve and therefore the qualification won’t go away speedily; others we will be able to delete. But the MoD’s businesses are very complex, and I’m afraid I do expect that in some areas we will continue to have a qualification.

Q3 Chair: But no commercial organisation would be able to continue to exist with constant qualifications, would it?

Ursula Brennan: Some of the areas where the NAO audits us are in relation to, for example, the IFRIC (International Financial Reporting Interpretations Committee) -the new financial standard. I don’t know to what extent it would be as complex as this for other businesses, but certainly for the MoD, the complexity of that means that we are not in a position to say we could have a clean bill of health. In relation to some areas, such as inventory and items of equipment that move around between here and Afghanistan and so on, we have a programme that will get us out of that qualification, but it will take time. I do recognise that that is different from where a business would be.

Q4 Chair: But the impression created is that when your accounts are qualified, there is a sort of shrug of the shoulders and a feeling that, "Oh well, this is all very difficult. We’re in a complicated world. There’s nothing we can do about it. We’ll do our best to get them right next time, but we know they’ll be qualified."

Ursula Brennan: I can absolutely assure you that that’s not the case. The scale of the energy and the effort that is going on and the programmes behind each of the areas of qualification is very significant and, in relation to the Joint Personnel Administration, is proving very successful. That has been a seriously big programme of work, so there certainly wasn’t any shrugging of shoulders. The position is similar in relation to spares and inventory.

Jon Thompson: I will just add that I think the National Audit Office has given you a report on the performance of the Department for 09-10. In relation to the JPA, one of the qualifications that was there for 08-09 has been removed for 09-10, and I would expect us to continue to improve that. But on stock and capital spares, I think that qualification is likely to be there for two to four years. I’ll happily explain why if that would be of some interest and benefit.

Q5 Chair: Yes, it would. Why will it take so long to get control of that?

Jon Thompson: If you compare the limitation of scope in 08-09 with that in 09-10, you’ll discover that the 09-10 limitation of scope was somewhat wider-it covered a wider range of issues-and was somewhat deeper. That’s because the Department is continuing to identify what the problem is. The problem has been there for some considerable time-several decades-but it didn’t come through the external audit review, so it was first reported in 07-08 and then the qualification has changed. We now think that the Chief of Defence Materiel has fully understood the nature of the problem.

To give you some sense of scale, we’re running 845,000 lines of stock, spread across 78 IT systems, covering anywhere in the world we currently have bases. The stock is worth £9.1 billion, so the scale of the operation is really significant, and these are longstanding problems that we now think we understand. There is a significant programme of work to try to rectify that, but given how big the problem is, we think it will take between two and four years to get to the position where the Comptroller and Auditor General will be satisfied with the accounts on that matter.

Q6 Thomas Docherty: If one of your major suppliers had accounts like this, would you, as the permanent secretary, be comfortable dealing with them?

Ursula Brennan: I think it would depend on what the qualification of their accounts was about. As Jon Thompson has explained, I think the breadth and complexity of the business that we do means that we will always find it difficult to comply in some of these areas, and where you have separate IT systems that you are seeking to bring together, it takes time to do that and to do it efficiently. If we were looking at a supplier, we would certainly look at whether their accounts were qualified and would want to know on what basis and whether it was a matter of serious significance to us.

Q7 Chair: Do you agree with the Chancellor of the Exchequer that your accounts are chaotic?

Ursula Brennan: That our accounts are chaotic?

Chair: Yes.

Ursula Brennan: I don’t believe our accounts are chaotic.

Q8 Mr Brazier: Just for a moment drawing an analogy with the private sector, the distinction between management accounts, which are essential tools for decision makers, and ordinary accounts, which are for accountability to the outside world, I’ve been quite critical over the years of deficiencies in the former, but I am perhaps slightly more sympathetic to you than my colleagues on the latter. Resource accounting came in between the last time I was on the Select Committee and this time. Do you feel that some of the demands that have arisen from that are in fact creating unproductive work for people who are already very busy on a variety of other things?

Jon Thompson: You could take that opinion, and indeed we took that opinion positively in relation to International Financial Reporting Interpretations Committee 4, which is the subject of a full qualification-IFRIC 4. We made a decision that the cost of implementing that accounting standard, estimated at some £10 million-

Q9 Mr Brazier: Sorry, what is the standard?

Jon Thompson: The standard attempts to identify where, when you have a contractual relationship with a third party, that contract effectively gives you control over assets owned by the third party. Given the scale of the operation in the MoD, we made an assessment of whether we could implement this practically and have an unqualified opinion if we implemented it. We made a series of judgments and concluded that the scale of what we were attempting to do, coupled with the reliability of the information we would get from third parties and the cost of implementing it-some £10 million-was something we decided we would not proceed with, and we would gain a qualification. Because if we implemented it, not only would we spend £10 million, we thought that we would ultimately end up with a qualification on the accounts on that matter anyway, so we made the decision not to spend the £10 million.

Q10 Mr Brazier: A matter that perhaps you might feel able to write to us on-I’m conscious of time. But if there were areas-and that would appear to be No. 1 on the list-where you feel that particular accounting requirements don’t provide anything useful from a management angle, nor a great deal from the accountability angle, so you could save money. I think the Committee would be very interested to see that list. One of the things I find slightly depressing is that everyone focuses on so-called civil service numbers, which is a completely meaningless addition of apples and pears of many different sorts. What has risen steadily as a proportion of the MoD work force, over the 30 years I’ve been tracking this, has been the number of people specifically involved in finance. I found that slightly depressing, given that we have accounts at the end of it that are still being qualified. Could you let us have in writing a few ideas as to whether there are any easy wins in terms of reducing work without losing accountability? Would that be possible?

Jon Thompson: I am happy to give you a note on that. Just to put this into context, the size of the Finance Department in the Ministry of Defence, which is some 3,500 people, is well below the Treasury’s benchmarks on cost.

Q11 Chair: I think the comment I made about the Chancellor of the Exchequer saying your accounts were chaotic was probably wrong. I think he said that the Ministry of Defence’s budget was chaotic, with which you might well agree.

Ursula Brennan: I hadn’t heard him say anything about the accounts, I must confess. I think the reference to whether the budget was chaotic was part of a number of comments that were made about the size of the forward programme and its affordability.

Q12 Chair: We will come on to that in just a moment. You’ve come into this job at a time of turmoil and turbulence. What’s the greatest challenge you face?

Ursula Brennan: I think there are two challenges, actually, for me. One has to be the main effort of the Department, which is ensuring that the whole Department is geared to success in Afghanistan. For me, that’s about making sure that whatever else is going on, we don’t lose sight of that priority. But, obviously, the second priority is that, having had the SDSR, we’ve got to restructure and reshape the Department in all sorts of ways to deliver that. That’s the big challenge for me: to take the conclusions of the SDSR and make sure that the Department is streamlined and stripped back in the areas where we don’t need effort, becomes more efficient and is equipped to head off to deliver the SDSR outcomes.

Chair: Okay. We’ll try to go into that in the course of the next 40 minutes or so. Gisela Stuart.

Q13 Ms Stuart: Can I stay with the subject of transparency? You no longer publish the annual reports. We’re just wondering how you’re going to make it clear how you measure up against public service agreements and departmental strategic objectives. I think your report mentions access to websites, but we also understand that they’re actually limiting the number of MoD websites that are up at any one time. Can you explain to me how, in the absence of a published annual report, you are going to ensure that we have access to information in an easy and transparent way?

Ursula Brennan: The decision not to publish the public service agreements and departmental strategic objectives was a decision that the Government took. It wanted to change the way Government reporting was done. The Treasury, which leads on this, issued guidance saying, "Don’t publish in that old form any more. We’re going to have a new way of reporting." Instead, we now publish the full resource accounts, with a lot of financial detail, but we also publish a business plan. That is the way that the new Government holds Departments to account-against those structural reform business plans-and reporting is done on a regular basis against those. There will still be a lot of factual information published, and there will be a business plan, which is reported on quarterly. Any failure to achieve targets is reported on quarterly. That will be the Government’s new regime for performance reporting.

Q14 Ms Stuart: Will that be on separate websites, or will that be one website? How is it going to work? Is there one portal which gives access?

Jon Thompson: They are all published together by the Cabinet Office, for all Government Departments.

Q15 Ms Stuart: So there will not be an MoD-specific website, where I can access that information the way I could have accessed it in hard copy?

Jon Thompson: I am sure that we publish it on our own website, but then they are collectively published all at the same point by the Cabinet Office.

Q16 Ms Stuart: When you say you’re sure you do, are you saying you do, or you think you do?

Jon Thompson: We do.

Q17 Ms Stuart: And it’s just one MoD website?

Ursula Brennan: There is a main MoD website.

Jon Thompson: There is one MoD website.

Q18 Chair: That answer sounded to me as though it were more certain in words but less certain in body language.

Ursula Brennan: I was just trying to remember, from having surfed the website myself periodically. There is a main MoD website, our internet site, and it has a section on annual reports and so on. I haven’t checked there recently, but that’s where this business plan should be. It is, indeed, on that website, but it’s also on the Cabinet Office website. The Cabinet Office puts them all together, but we have a section. If you go to our website, it is called "business plans", "annual accounts" or something. In there, instead of finding the old regime, you will find the new business plan. It is on the main MoD website.

Q19 Ms Stuart: So I, as a member of the public, can now access on the MoD website the things I would have found before in the published version-the public service agreements and the departmental strategic objectives?

Ursula Brennan: You can access the new business plan, but under the new Government that is a different set of things. We no longer have PSAs and DSOs. There is a different approach to performance across the whole Government. You can find our reporting on that approach on either our website or the Cabinet Office website.

Q20 Ms Stuart: Do you go back and check that it is there?

Ursula Brennan: My colleagues have confirmed to me that it is there.

Q21 Ms Stuart: I now want to move on. You have sent us a wealth of material, for which we are grateful. It formed the basis of the annual report, but you didn’t give us permission to publish it. Why not?

Jon Thompson: We did not, because a decision was made by the Chancellor of the Exchequer that no such information would be published for any Department. We, therefore, followed those guidelines. It is as simple as that. Given the Committee’s question about whether it can publish the information, we are currently inquiring with the Treasury about whether it is possible to publish those data. The matter is between the Departments, but at the moment our position is very clear. It is the same as every other Department. We have not published, and neither has anyone else.

Q22 Ms Stuart: So the new age of transparency amounts to, "Yes, you can have our figures, but you can’t publish them," and, "Yes, we have websites, but they now publish less information."?

Ursula Brennan: The thing to bear in mind is that the previous Government had a regime for what they wished to account for to the public, and they published that; the new Government has a new regime of things that they wish to account for, and it is published and is transparent. There is an interim period for which there is material pertaining to the previous Government,. Whether that interim material will be published is something that we are pursuing with the Treasury. It is an interim issue.

Q23 Ms Stuart: Doesn’t that mean that once the new regime is fully implemented we will have access to less information? Not only are we not allowed to publish it, you probably won’t give it to us, either.

Ursula Brennan: It is certainly different information.

Q24 Ms Stuart: Is it less information? Surely you must have a sense.

Ursula Brennan: It is a different approach. We don’t have PSAs, we have priorities and things. Numerically, I don’t think there is a difference.

Q25 Ms Stuart: But I could judge to what extent you had met the PSA, but a priority is an intention, a desire, a wish. How do you measure priorities against PSAs?

Ursula Brennan: We do have detail. If you access it on the website, there is detail about what we are planning to do. The Government will publish whether they have done what they said they would do by the dates they said they would do it.

Q26 Ms Stuart: I am still not clear about what is so secret about the bits in the interim material. All I can see is that you’ve given information that we’re not allowed to publish. That makes me feel very uneasy, because, if it is publicly available information, we should be able to publish it.

Jon Thompson: We find ourselves in a position in which we are trying to explain a policy that was not created by the Department. It was made by the Treasury and applies to all Departments. We are awaiting guidance on the metrics we can publish, because there has been a significant amount of data in our previous annual reports. Some of that has been overtaken by the transparency section of the business plan, which says what we will publish in the future. We are waiting for guidance on the difference between those two and whether we can publish such data. So we require further clarification from the Treasury.

Q27 Chair: If this Committee issued you with a freedom of information request on the stuff that you sent us, it wouldn’t be a defence to say that the Chancellor of the Exchequer had told you not to publish it, would it?

Ursula Brennan: I suspect that, were you to issue us with an FOI request, the response would be that consideration is being given to the format in which to make available that material on the interim period. As I have said, it is a question of there being an old regime that reported in a particular way and a new regime that reports in a new way. So what should we do about the material relating to a previous Government covering that interim period? The Treasury is considering what it wishes to do about that, and we will respond accordingly.

Q28 Ms Stuart: We already have the information, so you would not consider in what shape or form you would release it. If we FOI-ed the information we already have, what would your defence be?

Ursula Brennan: As I say, in those circumstances we could use the defence under FOI that there is the intention to publish the material in due course.

Q29 Ms Stuart: So you would come back with that.

Ursula Brennan: I don’t know. The judgment about the publication of all this information is being made in the Treasury. I am simply saying that if you FOI-ed us, we would ask the Treasury. It is possible its response would be that it is proposing to make the material available in this way. I simply don’t know.

Q30 Chair: The mechanism of the Freedom of Information Act is that one can write you a letter, but one doesn’t have to. One could make such a request in open Committee meeting. I would like to make such a request, please. I would be grateful if you could treat it as a Freedom of Information request.

Ursula Brennan: We will certainly do that.

Q31 Mr Brazier: I am going to ask several questions together as time is quite short. How is the Defence Reform Unit comprised and has it changed? How much time at the moment do Lord Levene and the Secretary of State devote to it? Can you give us an indication on any thinking so far?

Ursula Brennan: The Defence Reform Unit is a group of people chaired by Lord Levene, with a number of external members and two internal members-the Vice-Chief of the Defence Staff and the Second Permanent Secretary. That is as announced and has not changed. It is supported by officials within the Department. What is it doing and how long will it take? When the group was set up, it was agreed with the Secretary of State that it would report in the summer of this year-the aim is for July. We always agreed with Lord Levene that we wouldn’t wait for a big bang. If there were things that started to emerge from the group, he would present those to the Secretary of State and we would be able to get on with them and not wait until July.

The group is looking at the whole Department-the way we are organised, our processes, the non-front-line elements of the Armed Forces, relationships between different parts of the Department and governance-basically at the functioning of the Ministry of Defence. In terms of emerging conclusions, two of the first areas that the group has been looking at have been pieces of work that we had already started, and which the group has given us further steers on. One relates to back-office systems-HR, finance, commercial and so on-which one of the group’s members, Gerry Grimstone, had already reviewed. The second area the Levene group has focused on in its early days is Defence Estates and the infrastructure organisation. In both areas, we hope to have some conclusions we can crack on and implement reasonably quickly.

Q32 Mr Brazier: That is very helpful. In July 2010, the NAO reported that the Department had: "insufficient visibility of costs to enable effective prioritisation and identification of efficiencies." In other words, management information. Do you feel you have access to the right management information, which will help yourselves and the Levene committee make responsible management decisions, and which will stand the test of time? I will add a supplementary. Thinking of your earlier helpful answers, to what extent do you think you as a Department suffer from being expected to report in an identical format to other Government Departments, when your business is so different from everybody else’s? I have at the back of my mind the damage that the Treasury did in the early days of the procurement process by trying to cut costs at the beginning, so we ended up with much larger costs at the end.

Ursula Brennan: There are several things bundled up there. To what extent do we have the information that enables the Levene group and the Department to make efficiency savings? I have never worked anywhere where we felt we had enough management information. There is always more information that you would like and you would like it quicker and in clearer formats. It is one of the areas we are continuing to try to improve. But for the purposes of the SDSR, we did quite a lot of analysis of the Department and a lot of analysis, as you might expect, around the equipment programme. But we also did a lot of analysis about where our costs were, about the numbers of civilians we have and where they are located and so on.

So we went into the SDSR with the information we already had. I am confident-and the Levene group is confident-that you don’t need the nth detail to be able to get to where you need to make big changes. One of the benefits the Levene group brings is a sharp focus on saying, "Is this an area where there is a high level of spend? Is this an area where there is a high level of overhead? Then let’s go there first, in order to decide whether we need to reform it." We have certainly got enough information to be able to support them in that process.

Q33 Mr Brazier: Right. How much time do Lord Levene and the Secretary of State each devote to the process, would you say?

Ursula Brennan: Lord Levene himself devoted a lot of time in the run-up to the launching of the group. The group itself meets monthly and then it has sub-groups that also meet monthly, so everybody on the group meets twice a month on a regular basis. But all the members are putting in additional time, in terms of getting out and meeting people and having conversations which are part of their evidence-gathering work. The Secretary of State devotes quite a lot of his time to this. He has regular meetings-he had a meeting with the support team for the Levene group last week, and it is one of the high things on his agenda.

Q34 Mr Brazier: My last question. You reminded your audience in the United States-you kindly provided your speech-that there had been five reviews of the defence structure in the last 20 years. Why should the results of this one make a significant difference?

Ursula Brennan: You have my speech there. I think I went on-or maybe it was in questions afterwards-to attempt to answer that question. One of the things we are doing differently this time round is not just to go after that head office and back-office structures. We are looking more broadly at the business processes within defence, at the culture within defence, at the governance of defence, and at issues like, how should front-line commands be supported? So we are going more broadly and more deeply than I think previous reviews have done. But I suspect probably all the people who did the previous reviews said that, so the proof of the pudding has to be in the eating.

Q35 Chair: Still on that-you have been asked to save £8 billion over the next four years. What does that mean in practice in capital spending?

Ursula Brennan: The savings that we propose to make fall into several different categories. There are efficiency savings-we have £4.3 billion of efficiency savings-and there are capability savings, where we have announced that there are certain capabilities that we are going to cut. We have a programme. The capability savings come from things like withdrawing the Harrier from service, and so on, where we make savings from doing that. The efficiency savings come from quite a long list of things that we will be doing. Some of it is Lord Levene’s work on streamlining the Department. There are savings from streamlining the Defence Estates, so that we get out of occupying estate that we don’t need and are able to have a more aggressive estates sales programme; and also from managing them more effectively. There are some assets which we are able to sell, including parts of the telecommunications spectrum and some other assets. There is re-negotiation of contracts with our suppliers. There are efficiencies to come from doing training in a different way, with more synthetic training using simulators, which is less expensive on time and on equipment like aircraft. We are also making savings in some areas on pay and allowances. So there is a range of things that we propose to do in order to deliver that savings challenge.

Chair: We will come on to the pay and allowances issue in a few moments. The efficiency savings you talk about-is there any process for validating these efficiency savings within the Ministry of Defence?

Jon Thompson: The difference between this spending review and previous ones is that we have committed them all to being cashable. Therefore we have to show minuses in the budget. In order to balance the budget we have to deliver cashable efficiencies. We are not scoring in this efficiencies through savings in time, for example, for which you can put a pound sign at the front and quantify. It is all cashable and is built into the Department’s budgeting processes. So it will be possible for the National Audit Office to track them over the spending review period to see whether what we are committed to in the spending review is delivered in cash terms.

Q36 Chair: Since the SDSR has come out, people of repute such as, for example, James Blitz, Alexander Barker and Malcolm Chalmers, have been saying that there is still a black hole in the money at the Ministry of Defence. Are they right?

Ursula Brennan: When people talk about a black hole in the Ministry of Defence, one of the things that we have to bear in mind is what we said we were seeking to do in the SDSR. In the SDSR we said, "Here is our vision for the Future Force 2020, which we will aim for in 2020." The Prime Minister, in announcing that, acknowledged that achieving Future Force 2020 would require real-terms growth in the defence budget. Now Governments don’t set spending plans beyond four years. Therefore we are in a position that we have an aiming point and a statement from the Prime Minister in which he said, "My own strong view is that this structure will require year on year real-terms growth in the defence budget in the years beyond 2015. Between now and then the Government is committed to the vision of 2020 set out in this Review and will make decisions accordingly."

Q37 Chair: Does that mean it is Government policy to have that increase in defence spending?

Ursula Brennan: Spending post-2015 will be a matter for a new comprehensive spending review and a new SDSR. He was giving his own strong view that A, it required an increase and B, it was his intention to aim for that force.

Q38 Chair: But is it Government policy?

Ursula Brennan: He is stating a clear, personal view here.

Q39 Chair: So it’s a personal view, not Government policy?

Ursula Brennan: Government policy on spend post-2015 will be settled in the next Comprehensive Spending Review. Governments don’t set spending for Departments beyond those four years. So there can’t be a Government policy on spending in those outer years.

Q40 Chair: Does that mean that you cannot, as a Department and as the financing officer, bank on that increase?

Ursula Brennan: I can only bank on a presumption about the line of funding that we have continuing in future years.

Q41 Chair: So you cannot rely on the desire to have an increase in Government spending on defence?

Ursula Brennan: I cannot rely on that in terms of committing forward expenditure. What I can do, and what we are doing as we settle our spending round, is to have discussions with Ministers about how they wish to address the ambition to move towards Future Force 2020 and the implications of that for spending in those later years.

Q42 Chair: You are going to have to start making decisions then, based on a flat budget rather than an increasing budget, aren’t you?

Ursula Brennan: Unless a commitment is made to an increase in budget, yes, that is the presumption that we have to make.

Q43 Chair: And that commitment has not yet been made, has it?

Ursula Brennan: We are in the final stages of the planning round where these matters are being discussed.

Q44 Chair: But that commitment has not yet been made?

Ursula Brennan: The only commitment that has been made is the comment made by the Prime Minister-

Q45 Chair: Which he described as a personal view.

Ursula Brennan: He gave it as his own strong view. I think the Secretary of State has also said that it would take more than one planning round to get to the ambition for 2020. So there is expectation that one would not settle all of this in one single planning round.

Q46 Thomas Docherty: On the capability savings, how much are you hoping to save from closing one or more RAF base during the next period of four years?

Ursula Brennan: I can’t yet tell you what we are hoping to save from closing bases. There is a bit of a complex story that says that the RAF may not need a base for flying, but that it may make sense for the estate as a whole to move an Army unit, for example, into an RAF base. Which base gets closed at the end of this process will determine how much money is to be saved.

Q47 Thomas Docherty: You must have a goal though. I can’t believe that you’re starting this process without having a plan. If you need to make £3.7 billion of savings, you must have an ambition to reach a certain target on saving. Otherwise it strikes me as being a pointless exercise. If you made £5 savings, that would not be acceptable. You must have a figure that you are aiming towards.

Ursula Brennan: We are certainly aiming to make savings out of reducing the size of the Defence Estate. At the moment, we are working out the detail of that, and when we have that detail we will announce the amounts.

Jon Thompson: Just to add further, in terms of the generic estate, the public situation is that we estimate we can make savings of £350 million over the four years. That is across the estate.

Q48 Thomas Docherty: The whole estate? Including Germany or is that UK only?

Jon Thompson: UK.

Q49 Chair: I want to get back to the issue of money because that seems to me to be your main job. We have a Strategic Defence and Security Review that promised savings, many of which I understand have not been fully identified in detail. Would that be right?

Ursula Brennan: Some of them have been fully identified in detail, but some have not.

Q50 Chair: Some of them? That is always good, but many of them have not.

Ursula Brennan: The areas where the savings will come from have been identified, and I listed some of those.

Q51 Chair: But not the projects?

Ursula Brennan: Well, if you like, the projects that will take those savings out have been identified, but the precise profile of that over the four years has not.

Q52 Chair: Okay. We have a defence review that has delayed several programmes-yes?

Ursula Brennan: Some programmes have been delayed. Yes.

Q53 Chair: We know from the Bernard Gray report that delaying programmes adds many millions to the costs of those programmes, doesn’t it?

Ursula Brennan: It depends when you delay and what you delay. In a project where the metal is already being cut, delaying is very expensive. Delaying a project that you envisaged bringing in at one point, but that you now decide to bring in at some future point, doesn’t necessarily add to costs. That is to do with us just deciding that we can live with a gap in something. Some of the most problematical cost increases from delay occurred where we already had items in service. In this particular instance, we have actually taken some things out of service rather than do that.

Q54 Chair: Yes, but it strikes me that the total result of the Strategic Defence and Security Review is that there is a black hole, which you have not yet acknowledged, and the need for an increase, which is not yet Government policy, of an amount that has not yet been quantified. Would that be a fair summary of where we are?

Ursula Brennan: I would just like to comment on the black hole part of that. One thing that is quite important for us in defence when we address this is to distinguish what the inputs are that enable people to make such calculations about black holes. When we look at the defence programme, there is stuff that we are already committed to-expenditure where we are already committed, we are on contract, we have the people and we expect it to go forward. There are then things where we said, "We would like to be able to do this", but we have not yet committed expenditure to it. That is on the input side, and there is a distinction between what is already in the basket and what is in the wish list.

On the other side, in terms of the resources, there are four years of the Comprehensive Spending Review where the budget is set, and then there are the later years and decisions on that budget will be taken in the future. Judgments have to be made about what assumptions we should make regarding the amount of risk we should carry in those years, what is likely to happen to the budget in those years, and what is likely to happen to our requirements in those years. That is why we prefer not to try and talk about and calculate a gap. We are trying to talk about managing the defence budget to live within our budget for the first four years, and then to agree with Ministers on sensible assumptions that we should make about future years when the budget is not set.

Q55 Chair: Won’t you have to start making decisions now as to how to cope with a possible flat budget after 2015?

Ursula Brennan: The process called planning round 11 is indeed the process we are in at present, and that needs to be completed within the next couple of months.

Q56 Chair: And you’re expecting planning rounds 12 and 13 to be much harder, aren’t you?

Ursula Brennan: I don’t know whether I’m expecting planning rounds 12 and 13 to be much harder, in that one of the things that will be a great benefit in those later planning rounds is that we have adopted a very rigorous approach to analysing our costs this time around. Bernard Gray, having arrived as the Chief of Defence Materiel, is doing an in-depth study of the costs of the equipment programme, and the Secretary of State has asked us to make sure that we are absolutely certain about what those input costs are. I think that means that we will start planning rounds 12 and 13 with a much clearer sense of what the input costs are, and indeed, what the costs of the programme itself are and of the things that people wish to do in future. I am not saying that 12 and 13 will be easy, but we will approach them from a different position compared with previous planning rounds.

Chair: I will leave that there, unless other members of the Committee have other questions. Moving on, Bob Stewart.

Q57 Bob Stewart: May I first declare an interest? My brother commanded 201 squadron of the RAF-so, we’re talking Nimrods.

The Nimrod MRA4 has been scrapped, although we understand that we already have spent £4 billion on it. How much is the cost of scrapping it? Be quick. How will that show in the accounts? What will the savings be to the Ministry of Defence?

Ursula Brennan: We estimate that we will save about £2 billion over the next 10 years, by not bringing the aircraft into service. Scrapping it was the cheapest and most cost-effective approach, rather than putting it into storage somewhere or seeking to sell it. I don’t know precisely what the actual physical dismantling will cost, but the net effect will be that we expect to save that amount of money.

Perhaps Jon Thompson can respond to the question of how that appears in our accounts.

Jon Thompson: The current estimated write-off, as at Monday of this week, was £3.531 billion.

Q58 Bob Stewart: That is how much we have spent?

Jon Thompson: That is the write-off. It is slightly more than what we have spent, because there are other factors in it, but it is £3.531 billion. That is the write-off. It will occur in the accounts as a write-off, as part of a series of write-offs and write-downs of the value of the balance sheet of the Ministry of Defence.

Q59 Bob Stewart: Are you able to say how much compensation is paid to the main contractor?

Ursula Brennan: For these areas where we have taken equipment out of service, we are negotiating with the contractor. While those negotiations are ongoing, it wouldn’t be good for our commercial purposes to reveal where we are getting to with that.

Q60 Bob Stewart: I understand, but there will be a penalty for breaking the contract, and that will be clear at some stage.

Ursula Brennan: All these contracts will have different details of what happens if you terminate the contract early and we are in negotiations over that. In due course, we will be clear about exactly how much money is to be spent.

Jon Thompson: That will add to the number I just gave you.

Q61 Bob Stewart: We cannot go back on Nimrod at all, can we?

Ursula Brennan: No.

Q62 Bob Stewart: So, if we required that capability to be put into our defence posture in the future, we would have to go elsewhere. Is that correct?

Ursula Brennan: What we have said about the Nimrod is that we recognise that we have removed a capability from our armoury, and that in terms of the way that we think about what the Nimrod brought us, it was part of a layered defence of a series of things that enables us to provide security. We recognise that we have removed one of those layers. It is not so much that we would go and borrow someone else’s, as it were, but rather, we would rethink how we use other-

Q63 Bob Stewart: So, we have a gap in our capability.

Ursula Brennan: One of the things that is quite difficult is that when one says there is a gap in the capability it makes it sound like there is a fixed thing called capability-capability is always a range of things in terms of-

Q64 Bob Stewart: Well, I will be precise. We can’t see underneath the water in the seas around us except using helicopters with dunkers. In other words, we have a gap in our capability and we are blind around our coasts, and have been since March when the last Nimrod was flying. It’s a question, madam.

Ursula Brennan: Yes, we have removed a capability. I would prefer not to comment on the implications of that for our security because I don’t think that is a helpful thing to discuss, but I do confirm that we have removed a capability, and that increases the risk that we take. However, we mitigate that risk by the range of other things that we do.

Q65 Bob Stewart: Not fully though?

Ursula Brennan: Well, as I said, I don’t think you can think of capability as a bucket, where there is 100% and we have taken some percentage out of it. What you are looking at all the time is a balance of risk; we have taken some more risk, we recognise that.

Bob Stewart: Fine. Thank you.

Q66 Thomas Docherty: Turning to the aircraft carriers, had it been cheaper to do so, would the MoD have cancelled one or both of the QE class carriers?

Ursula Brennan: I don’t think I can answer for what Ministers might have decided to do in terms of choices they might have made because there is a balance between capability and cost. If I remember rightly, in announcing where we were on the carriers, Ministers were clear that this was a capability that we wanted-we were going to take a gap in it, for reasons that were explained, but it was a capability we wanted. The decision to say that the best way to achieve this is by waiting for a period before bringing that capability back on-stream, that was the judgement that was taken. The question whether, had it been cheaper or if the finances had stacked up in a different way, they would have taken a different decision-I think that is a decision where Ministers weighed up costs and capabilities and came to that judgement. I cannot say hypothetically what they might have done had the cost-capability balance been different.

Q67 Thomas Docherty: Would you agree with the statement from the Treasury Select Committee Chairman that BAE Systems-and I am assuming, by extension, Babcock-put a gun to the head of the MoD?

Ursula Brennan: I think there is a lot of misunderstanding about the carrier contract and the Terms of Business Agreement around ship-building in the UK. I would disagree that BAE Systems put a gun to our head. We entered into contracts about the carrier which had absolutely normal termination conditions, but we also entered into the Terms of Business Agreement which was about managing the liability that would fall on Government eventually for the shrinking of the UK ship-building industry. The military ship-building industry in the UK has overcapacity. At some point dealing with that overcapacity is a responsibility that falls on Government. In order to manage that result, the Government entered into a Terms of Business Agreement. The interrelationship between the carrier contract and the Terms of Business Agreement is what leads you to decisions about what is the sensible way forward.

Q68 Thomas Docherty: My final question is on the decision about Ark Royal, Illustrious and Ocean. You have announced that you are taking Illustrious out of service in 2014, and will continue to have Ocean until the QE class enters service at some point. There are two parts to the question, in reverse chronological order. First, is the MoD still intending to enter QE into service in 2016 or does it now intend to wait until 2019-ish, when the Joint Strike Fighter comes on to service, and therefore Ocean will do five years? Secondly, what are the savings that are made by taking Illustrious out of service, as opposed to Ocean?

Ursula Brennan: We have said that we plan to bring the Carrier Strike capability on-stream in 2020.

Q69 Thomas Docherty: The Prime Minister said 2019 in the Chamber, but if that has now slipped-

Ursula Brennan: That might be Carrier Strike versus the actual carrier, because there is the carrier itself and then there is the aircraft on it.

Q70 Thomas Docherty: Well look, QE is due to launch in 2016, so my question is whether the launch date is 2016 or 2019.

Ursula Brennan: Sorry, we’re distinguishing between-

Thomas Docherty: No, just let me be clear. The Prime Minister has told the House that the Joint Strike Fighter will land on the decks of the Queen Elizabeth in 2019. Is the Queen Elizabeth entering service in 2016 or 2019? What are the cost implications of that? Will Ocean continue until 2019? On the cost savings of Ocean versus Illustrious, how much is being saved-given that you are having to re-fit Ocean-by taking Illustrious out of service in 2014 and having Ocean running until a subsequent date? These are very large ticket amounts.

Jon Thompson: Perhaps I can help with the first question. At the moment I can’t confirm that decision, because we need to consider what adaptions need to take place to the carrier in order to fly the Joint Strike Fighter from it. Ministers are currently considering how those options work. It may be that we need to revise the date; I can’t say whether we do or do not at the moment. That is still under consideration by our Ministers.

Q71 Thomas Docherty: And on Ocean and Illustrious, how much are you saving by taking Illustrious out and keeping Ocean? How much have you saved by taking Ark Royal out? There is a logical series of savings.

Ursula Brennan: We concluded that it was more efficient to take out Illustrious than Ocean. I don’t have the detail of exactly how much the savings are.

Q72 Thomas Docherty: Can you write to us?

Jon Thompson: We can. We have not given that information publicly, but if you wish for it privately, we can provide it.

Q73 Chair: In writing. I understand that there are sensitive and complicated arrangements about the in-service date of the QE class of carriers. It would be helpful if you could explain the cost differences arising out of when the carriers come into service, please.

Jon Thompson: We may not be able to provide that to you immediately, because the exact adaption and mechanism required for the carrier variant and the cost of that have yet to be specifically finalised.

Q74 Thomas Docherty: Can I just clarify? Are you saying that the SDSR did not have that fairly basic detail?

Jon Thompson: No, I am not saying that at all. We made an assumption about what that was. If you require specific detail we may have to provide you with a range. We made a financial and operational assumption and we built that into the SDSR. I am conscious of the fact that our Ministers have yet to make that decision. We need to be clear on our Ministers’ position before we may be able to give you a good deal of data.

Q75 Chair: Can I ask a different question? Are you confident that the carrier variant of the Joint Strike Fighter will be able to land on an aircraft carrier of the length of ours, it having been designed for the length of an American aircraft carrier?

Ursula Brennan: We are confident of that, but we are also working with the Americans on the carrier variant as part of that Joint Strike Fighter programme. So we are well placed to ensure that, if anything changed in one direction or another, we would be involved up front and would be able to influence it. We are confident that it can land on the carrier.

Q76 Thomas Docherty: When you write to us, will you also explain about the savings and expenditure, about the switching engines, and cats and traps? I understand that switching variant is cheaper but there is an add-on cost to cats and traps. It would be helpful to understand what the saving is per unit on the JSF.

Ursula Brennan: As Jon Thompson explained, when you look at carrier strike, it is always difficult if you take one item in isolation because you don’t necessarily get the right picture. In relation to the carrier variant, there are the costs of the carrier aircraft, the cats and traps, maintenance and so on. We are not yet in a position to put detailed numbers against all of those. We do know from looking at it in terms of the comparison between the STOVL (Short Take Off Vertical Landing) and the carrier variant, that the carrier variant is a cheaper way of doing it. We are working on the detail at the moment, so we are not in a position to give you that information, because we do not yet have it.

Q77 Bob Stewart: Are you saying that we can land a JSF on our carrier? Is the implication that we can land it, but that it would be safer to land on a US carrier?

Ursula Brennan: No, I was not saying that at all; I was just saying that we can land the carrier variant on our carrier. Things are always changing with these programmes.

Q78 Bob Stewart: So a pilot limping back with a choice between landing on a US carrier and a British carrier would choose the British carrier, would he?

Ursula Brennan: If he is one of our pilots, I imagine he would want to land on one of our aircraft carriers.

Q79 Bob Stewart: He might, but, if he is going to be safer landing on a US carrier, he will go for that one.

Ursula Brennan: There is no suggestion that it would be unsafe to land on one of our carriers.

Chair: There aren’t hundreds of these aircraft carriers around, anyway.

Q80 Ms Stuart: Particularly not in Edgbaston.

In your own words, over the next four years you’re going to lose one in three of your staff. That is quite significant. A recent survey compared the confidence of staff in their own Department and it looked at whether changes are for the better, how decisions are made by senior management and whether the Department is well managed. In every single one of those measures not only is the MoD in the lowest quartile, but the MoD’s result has deteriorated compared with 2009. Are you aware that there is a perception that this Department is not well managed? If so, what are you going to do about it?

Ursula Brennan: I am aware of those survey results, which go across the whole civil service. I am aware that, across many Departments, results have worsened in the most recent survey.

Q81 Ms Stuart: But not all.

Ursula Brennan: Indeed, not all. One of the things that we are doing in response to it is analysing the places where, despite the restriction in public sector budgets, businesses and parts of businesses have done better. We know that some obvious answers come out of such surveys-small, highly professionalised units score well within our own area. There are particular bits of our business that score highly, just as similar things do in other areas of Government, but we know that we have a hill to climb.

What are we doing about it? One thing we are doing is getting some practical learning by looking at what successful people have done and seeing how applicable that is to us. Secondly, I have asked every member of the senior three-star director general community within the Department to report to me personally. I have sessions in my diary over the coming months on what they are doing to improve their dialogue with staff, because, for me, communication is a key issue. We need to give our staff more information about what we are doing, and we are taking action to do that, but we also need to listen more to their concerns.

I am working at the moment with the top team and getting each of them to explain to me what they are putting in place to demonstrate that they are upping the extent to which their leaders are talking to their staff about precisely those problems and what they are doing about them. There are many projects that you can do, but, for me, ensuring that leaders are talking to and listening to their staff will be the absolute key to changing those figures.

Q82 Ms Stuart: I simply note that your results were pretty bad in 2009, too, which was well before there were any budget cuts-actually, there was a perception that money was not an issue for the MoD.

Ursula Brennan: Indeed, I recognise that.

Q83 Ms Stuart: That neatly brings me to my next question. With the cuts in civilian staff, how will you ensure that you use your human resources effectively so that you do not end up putting extra burdens on highly qualified and expensive military staff?

Ursula Brennan: We are absolutely clear that our ultimate target is financial. Shifting from civilian staff to military staff will simply run up against the buffer that it doesn’t meet our financial targets. So we are expressly not in the business of militarising civilian roles.

How will we ensure that we don’t end up doing that? One thing that we are doing is saying that we want to streamline our processes and remove some of the burdens that land on our civilian staff. We are not just cutting the bodies; we are cutting the processes and the activities that people undertake. The MoD is a very complex organisation-it is a matrix organisation with lots of people reporting to each other. One of the things that Lord Levene’s group is looking at is streamlining things so that, instead of having five people in a process, you slim it down to only two- a policy end and a delivery end. That is part of how we will be addressing this.

Q84 Ms Stuart: You are currently in the process of managing a voluntary redundancy scheme. What have you budgeted for the cost of redundancies?

Ursula Brennan: We have a funding line for redundancies, but I am not sure of the cash sum. We expect to manage redundancies over a period of years, and we will stagger it. One of the things we do not yet know is what the take-up will be. So we are trying to manage the amount of money we have in the budget and the number of people we expect to go.

Ms Stuart: I am happy for you to drop us a note on the budget line for that.

Q85 Chair: I have two final questions. Are you concerned about today’s reports on morale in the Armed Forces? What are you going to do about it?

Ursula Brennan: I am concerned about those reports on morale. There is a twin-track on that subject. Some of the concerns among the Armed Forces are about things that, frankly, affect the whole of the public sector and we need to have a dialogue with the Armed Forces about that-I have had such a dialogue with staff, both civilian and military. We need to recognise that the Government’s top priorities are to resolve the fiscal problems and to reduce the deficit. Across the whole public sector, since such a large amount of public sector cost lies in people, personnel costs will have to play some part in that. One thing that the Armed Forces need to recognise is that they cannot be exempt from that broader picture. One sometimes needs to get that rather tough message across to members of the Armed Forces.

The second thing is to make it clear to the Armed Forces that, yes, some of the things we are doing will be tough for them, but, as a whole, we have a programme that still provides for the Armed Forces a challenging and exciting career with a regime of pay and reward that offers a good level of pay, a good level of allowances and a good level of pension. We need to get our narrative clear about what the offer is, as well as about the tough times that we are going through at present.

Q86 Chair: But, from the look of things, that message is simply not getting through.

Ursula Brennan: How people feel about the changes is a classic change curve. When you say to people that we are reducing numbers, we are freezing public sector pay and so on, there will be a period in which they look at that and say that things aren’t the same as they were a few years ago and that they are unhappy about it. You inevitably go through that before you get to a point at which you are able to say more clearly what the picture is for the future.

When we have completed our planning round, we will be better placed to be more precise about what the future holds in terms of jobs and the nature of those jobs. We recognise that we are in a difficult period at the moment, that people are hearing more of the tough message and that they are not yet hearing the more positive message about the things we will still be able to do.

Q87 Chair: That would be fine if they believed the message about the future, but they don’t, do they? The reason they don’t is because of what we were talking about earlier in relation to the black hole. They then hear that money is to be increased, perhaps from 2015, just at the moment when we will be withdrawing from Afghanistan. Do you think we will be able to persuade the public to increase defence spending at that moment?

Ursula Brennan: Whether we can persuade the public about defence spending will depend on the extent to which we have a coherent narrative that says why we should spend. We attempted to do that in the SDSR. We said that we need to reshape our forces, because the future force structure needs to look different from the one we have had in recent years. We think that Future Force 2020 sets out a compelling vision for what a good future force would look like. It is just hard to keep your eyes on that if you are facing a pay freeze, cuts to your allowances and so on. I recognise that everyone who works in the public sector at the moment cannot help but focus on the short term. Our job, particularly once we finish the planning round, is to give people a clearer picture of how defence will be a smaller organisation designed to meet a different set of objectives.

Chair: I am not sure that someone fighting in a forward-operating base in Nad-e-Ali, which is where we were a couple of weeks ago, would necessarily regard themselves as working in the public sector.

Mr Hancock: I just want to ask one question.

Chair: We have covered a lot during the course of the morning. I said we were going to finish by 11.30, and I am afraid we are already late.

Thank you very much indeed to both of you for your evidence this morning. We will return to this.