Evidence heard in Public

Questions 1 - 185



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Oral Evidence

Taken before the Defence Committee

on Wednesday 12 December 2012

Members present:

Mr James Arbuthnot (Chair)

Thomas Docherty

Mr Dai Havard

Penny Mordaunt

Sandra Osborne

Sir Bob Russell

Ms Gisela Stuart

Examination of Witnesses

Witnesses: Jon Thompson, Permanent Under Secretary, Ministry of Defence, and David Williams, Acting Director General Finance, Ministry of Defence, gave evidence.

Chair: Welcome to this single evidence session on the Ministry of Defence annual report and accounts. You have been in front of us before in an earlier guise, Mr Thompson, but as PUS you are most welcome. Mr Williams, I don’t think you have been in front of us before.

David Williams: Not for a long time.

Q1 Chair: You, too, are most welcome.

Mr Thompson, the 2011-12 accounts came out on Thursday. It says a lot for our staff that we have been able to go through them and work out some things to ask about them. Since they have been delayed six months beyond the time suggested as being best practice by the Treasury, since they are qualified yet again, and since you were in charge of the finances, one does have to ask what on earth is going on.

Jon Thompson: You will be familiar from previous hearings with the fact that our aspiration is to reduce the overall number of qualifications. Indeed, the number is down. When the issue of the accruals was brought to our attention by the National Audit Office in June, it was my recommendation to the Secretary of State that we properly bottom out that particular issue. That took some considerable time. We brought in KPMG to resolve that issue, which took some time to resolve and map out. It was then necessary to restate the accounts to the standard that was necessary to give back to the NAO.

The overall result of that is that it did indeed take longer than we would ideally want, but it reduced the number of qualifications from four to two. We have been on a trajectory with five qualifications the year before, four last year and two this year. Undoubtedly, you will ask me some questions about where we go from here.

Chair: We will.

Jon Thompson: We traded time for, if you like, having a further improvement in the quality of the accounts.

Q2 Chair: Why did it take the NAO to bring to your attention the need to get the accruals right?

Jon Thompson: That is also a regrettable matter. They conducted a very small sample of accruals, and on the basis of a sample of, I think, 20 transactions-you will forgive me for not exactly understanding how many they did-they indicated to us that they did not think they were robust. We decided-going back, it was my recommendation to the Secretary of State-that we do a full review of all accruals that were in the MOD’s accounts for that year with an independent party to provide the necessary assurance to myself and the accounting officer at the time, and subsequently the Secretary of State, that we had mapped all the problems on the basis of the NAO’s small sample. That review did indeed map out the scale of the issue, which is commented on by the NAO, and we made appropriate adjustments.

Q3 Chair: This accruals issue came out of the blue, didn’t it?

Jon Thompson: Yes.

Q4 Chair: What is going to come out of the blue next year? You cannot tell, because it will be out of the blue, won’t it? What have you done this year, over the last few months, to ensure that you try to get the accounts out on time-in other words, before the summer recess next year?

Jon Thompson: In terms of next year?

Chair: Yes.

Jon Thompson: We had a timetable this year that would have resulted in them being laid in June. It was somewhat unfortunate that that issue was brought up in June and then that led to the delay. It remains our intention to do that. We have all the necessary systems and processes agreed with the NAO, within the MOD and so on to deliver them in June. If the action that we have been able to take on stock and accruals and the general increase in terms of the performance of the finance function of defence equipment and support continues along the route that we have mapped out, one would expect that we could lay the accounts in June.

Q5 Chair: You make it sound as though it was bad luck that you did not get the accounts right.

Jon Thompson: No. I am absolutely not trying to do that. If that is the impression that I am giving, I apologise. The incident is regrettable. As soon as it was brought to our attention by the NAO, we stopped the external audit, brought in appropriate experts, rectified the issue and then brought the auditors back in again.

Q6 Chair: You do not have the appropriate expertise, do you? You have got rid of them all.

Jon Thompson: No, I do not think that that is quite right.

Q7 Chair: You say: "The accounting consequences of changes made in the SDSR and subsequent planning rounds may have diverted attention away from the accurate reporting of accruals and compounded acknowledged issues arising from skills shortages in the finance area." You do not have the necessary expertise, do you?

Jon Thompson: There are a series of areas where the finance function needs to be significantly strengthened. We mapped those out with the National Audit Office in a Report in 2010, a financial management review of the Ministry of Defence, which drew a number of conclusions. We drew up a plan of how we would increase the capacity and capability of the finance function. We have struck a number of alliances with organisations, such as PricewaterhouseCoopers on internal audit, KPMG on costing the equipment programme and so on. Over time, we need to resolve as many of the issues as we can.

I have been very transparent with the Committee over the past three years, and there are some deep and systemic issues in some of these areas that will take a long time to resolve. As I said to the Public Accounts Committee two weeks ago, there is evidence that the stock issues have been there for several decades. In fact, if you dig back far enough, there is an NAO Report on that issue from 1991, which was, to be open with you, not particularly actioned until 2008. So I am not underestimating the challenge; I am trying to be as open with you as I possibly can be. There remain some deep-rooted issues that we are trying to resolve by adding to capacity through appropriate third parties.

Q8 Chair: But those deep-rooted issues involve you not having the necessary expertise.

Jon Thompson: I suppose, yes, you could argue that it was necessary for us to involve PricewaterhouseCoopers and KPMG to various degrees, and Deloitte’s to some extent-

Q9 Chair: I am not arguing it, you are saying it, as far as I can gather from your accounts.

Jon Thompson: Yes.

Q10 Mr Havard: Putting it right diverted your attention away from doing other things-that is what it says here.

Jon Thompson: Yes. If you go back to when I first appeared before this Committee, I set out some landscape about the nature of the challenge that we were trying to face and how long it would take to deal with. To speed that up we have added some external resources to our internal resources. The task continues to be complex, and the SDSR added a further layer of complexity to the financial challenge, yes.

Q11 Mr Havard: You also say in here that your staff will receive training in the year ahead-clearly they require training. You identify a couple of areas and particularly single out, as do others of course, defence equipment support and the accounting problems with that. On the "longer term", what is the longer term? From 1991 to 2008 was 17 years, so what does the "longer term" mean here? Is this step change going to come within 18 months, or is it another 18 years?

Jon Thompson: When I first came here, I said that it was my estimate that the stock problems would take approximately five years to resolve-

Q12 Mr Havard: Five years.

Jon Thompson: That is what I said three years ago.

Q13 Mr Havard: Five years, three years ago.

Jon Thompson: I think at the time you commented on that, but if a problem has arisen over a number of decades, it takes some considerable time and effort to resolve all of the necessary issues that arise from it. As the NAO Report comments, we have begun to clear some of those issues. In relation to stock, there remains one qualification, but if you go back two years there were four. The direction of travel is there, and there is evidence to say that we are improving. There has been a very in-depth report by the National Audit Office on inventory management, spares and so on, and it commented on our plan to improve.

Q14 Chair: You mentioned the scale of the problems about accruals. What is the scale of the problems about accruals?

Jon Thompson: The KPMG review of accruals estimated that we have under-accrued and over-accrued by approximately £425 million both ways. It actually netted out to almost zero.

Q15 Chair: I see. That is very helpful to know. What is the scale of the problem about skills shortages?

Jon Thompson: We have enough people but they do not have the necessary higher-level finance skills that are required to cost the equipment programme to the level of accuracy we need. We have, therefore, struck a long-term partnership with KPMG to do that.

Q16 Chair: Can you quantify that?

Jon Thompson: Can I quantify the number of people?

Q17 Chair: No. Can you quantify the level of skills that you need to acquire and that you do not currently have?

Jon Thompson: It is my belief that there is an appropriate balance to be struck between what is the permanent civil service and what is the necessary higher-level skill that you need to supplement that with from the best of the private sector. To give you some sense of scale, in relation to the finance function, there are approximately 1,000 qualified accountants-or thereabouts-and we have around 100 KPMG colleagues; that number will reduce over time. Does that give you a sense of the scale of the injection that we require? It is about a 10% supplement; we would expect that, over three years with KPMG, there would be enough skills transfer and we would grow enough of our own people that we would reduce that to the minimum necessary.

Chair: That gives me an idea. We will have to think about that in relation to what we say in our Report as a result of this.

Q18 Mr Havard: I want to be clear about what you are saying here. Are you simply saying that you are on this trajectory, but you have been slightly knocked off it now because of the SDSR complications and so on? Is that the burden of the argument?

Jon Thompson: Yes, that we were, but I believe that we are back on track. My evidence for that would be the NAO’s Report to the PAC.

Q19 Mr Havard: I would be tempted to say to you, if you are going to get the skill transfers and so on in two years, then that is a deal, is it? Can I write this down, that you are definitely going to have everybody trained up and competent to do this? We are going to agree that this afternoon, are we? Can I take you down the bank and cash that cheque?

Jon Thompson: By all means ask me in 2014.

Q20 Mr Havard: In 2040?

Jon Thompson: In 2014-that will be two years.

Mr Havard: Oh. I am going deaf.

Q21 Chair: Do you expect to be able to lay next year’s accounts by the summer recess next year?

David Williams: Yes.

Jon Thompson: Yes. I believe that is the answer I gave you before. Mr Williams says the answer is yes, and he is the finance director.

Q22 Chair: Well, we look forward to seeing that. What about the overall expertise that you have, Mr Thompson? From the time you spent at the Ministry of Defence, you clearly have expertise in relation to finance. What is your expertise in relation to defence?

Jon Thompson: I joined the Ministry of Defence in January 2009, with no previous history or experience of defence. I have been with the Department for almost four years.

Q23 Chair: You have a huge Department, which is undergoing serious change and which is crucial to the defence of the country. How have you managed to build up any expertise on defence?

Jon Thompson: Over that period of time?

Chair: Yes.

Jon Thompson: Well, when I started in 2009, I sat down with the three Service Chiefs at the time, and we mapped out a plan of engagement for me in the defence business, if you like to put it like that. In the last four years, I have spent more than 100 days out and about in the defence estate or on the front line, talking to military personnel. I have been in Afghanistan twice, and I have visited more than 100 sites, to sit and talk to military personnel about how their services work, and so on and so forth, because, as I guess you are pointing out, I do not have a 30-year history with the Ministry of Defence, and I cannot fill that knowledge gap. Therefore, I have been on the front foot in going as far as I can, as many times as I can, to understand the business as much as I can.

Q24 Chair: It would be fair, I think, to point out that the greatest challenge that the Ministry of Defence currently faces is probably a financial one.

Jon Thompson: Yes.

Q25 Chair: So it is helpful to have someone with financial expertise doing the job that you are doing. However, given the various problems there have been with the accounts over the years, would you say that the Ministry of Defence itself has the capacity for competent financial control?

Jon Thompson: I do not believe that we have yet reached the point where I could confidently say to you that it had reached the level of financial control that either of us would be totally satisfied with. It is better than it was in 2009. Clearly, what we managed to do on 14 May was to clear down the really big issue, which was whether the budget was balanced or not. I am sure that members of the Committee are familiar with Dr Fox’s statements about the black hole and so on.

On 14 May we announced a long-term balanced budget. That was a major financial issue that was complicating the situation, so, having cleared that issue down and made some progress on balance sheet management and inventory management and so on, we are making a lot of progress. But, as you rightly point out, the Ministry of Defence is a very complicated Department; it is equivalent to a FTSE top five company in terms of annualised spend and balance sheet size, and there are many issues that we have to resolve in terms of financial control. Are we satisfied? No.

Q26 Chair: We are just about to get on to balancing the budget and stuff like that, but you will understand people’s scepticism about balancing the budget if the accounts are qualified for seven years in a row and turn up six months late.

Jon Thompson: Yes, I totally appreciate that, and I can understand. I have been attempting to be as transparent as possible with the Committee about the scale and nature of the problem, and the length of time it will take to resolve. My evidence that we are improving is that the number of qualifications has reduced. There has recently been a very positive National Audit Office Report on our scrutiny and approvals process for equipment projects. The recent NAO report on inventory management has some complimentary features about how far we have come, but it also states what else we need to do. So there is some evidence in the public domain that we are improving. The ultimate test will be whether we can produce a clean set of accounts before the summer recess. It remains our aspiration to do that.

Q27 Chair: A clean set of accounts?

Jon Thompson: Yes, absolutely.

Chair: You are not talking about an unqualified set of accounts?

Jon Thompson: My apologies; that is my shorthand for an unqualified set of accounts.

Q28 Chair: Are you suggesting that next year’s accounts will not be qualified?

Jon Thompson: No, no; I didn’t say that. I said that it remained our aspiration to reach that.

Chair: An aspiration.

Jon Thompson: I believe that the accounts for 2012-13 will be qualified in at least one respect, which is that of IFRIC 4.

Q29 Chair: We will come to that in due course, along with some of the other issues. Before I pass you on to the tender embrace of Thomas Docherty, I would like to ask you, looking overall at your role as Permanent Under Secretary, what you would say are the main challenges you face.

Jon Thompson: There are three. One is to-this is our shorthand for it-deliver battle-winning armed forces. The best manifestation of that is to deliver the strategic defence and security review, which for us is Future Force 2020. That is aspiration No. 1. Aspiration No. 2 is that we need to turn the Ministry of Defence into the kind of professional organisation that it needs to be. You are examining a number of aspects of that here, but we clearly need to improve things such as financial management. Equally, we need to improve other aspects, such as project management, commercial negotiation, and so on and so forth. Thirdly, we need to continue to be hard-headed about the use of resources in the Ministry of Defence and keep a balanced budget, because, having reached a kind of historic high of balancing strategy and finances, I wouldn’t want to lose that in exchange for the other aspects. So there are three things, really: battle-winning armed forces, a professional Ministry of Defence and hard-headedness about resources.

Q30 Chair: Whose role is it to look out for emerging threats? Is it yours, CDS’s, or someone else’s?

Jon Thompson: In the wake of Lord Levene’s report, we set up a departmental strategy group that looks specifically at that and a number of other issues. The group is jointly chaired by the Chief of the Defence Staff and myself, and includes the vice-chief and a number of three-star military and civilian officers, including the Director General of Security Policy. There are eight of us, and we sit and talk on a monthly basis in order to advise the Secretary of State on those issues. There are also the arrangements made within the Cabinet Office in terms of the national security apparatus, the National Security Adviser and that function too. There is also a weekly meeting of officials around the National Security Council on an officials basis, and there is a Permanent Secretary equivalent of the National Security Council that also considers those kinds of issues, which also includes the Chief of the Defence Staff and myself.

Q31 Chair: Given your relatively recent arrival as PUS and your concentration on finance before that, presumably your input into the question of strategy and emerging threats is fairly limited, even though you are part-time chairman of that group.

Jon Thompson: Yes, but I have many people who work for me. I can’t be an expert in all the things that we do. They advise me incredibly well. When we need a subject matter expert, I can use those and take them along to the relevant areas to discuss. I am on a learning curve.

What you are highlighting is that the role of Permanent Secretary, in any given Department, has to be a balance between being the chief executive officer of that organisation and being the principal policy adviser. Whether you can be an expert in both those domains is a question that has to be considered on the appointment of every Permanent Secretary.

Q32 Thomas Docherty: There is a term that we are familiar with, called the white board. Could you, for our benefit, clarify what the proper title is of the white board?

Jon Thompson: As is the way with our military colleagues, it is now called the single integrated capability priority list, but the white board is much easier. If I might carry on this conversation with white board?

Thomas Docherty: Yes. That’s up to you.

Chair: It is commonly known as what?

Jon Thompson: The white board.

Chair: The single-

Jon Thompson: The single integrated capability priority list, or, as I believe they call it, the SICPL. It is easier if we carry on this conversation using "white board."

Thomas Docherty: Yes, absolutely. Believe me, that would make my life easier.

Chair: So the white board and the SICPL are the same thing?

Jon Thompson: Yes.

Q33 Thomas Docherty: My understanding, Mr Thompson-please tell me if I have misunderstood this-is that there are a number of items that the MOD, with the services and the Secretary of State, has identified as being committed to. To give an example, you are committed to build the aircraft carriers-the actual construction of them. Is that an item that would be on the white board?

Jon Thompson: No. The equipment programme broadly splits into two parts. There is the core equipment programme and there is the white board. The core equipment programme is those things that we are contractually committed to, or where there is a public political commitment that will eventually feed into the signing of a contract. When the Secretary of State announced the budget on 14 May, the core equipment programme over 10 years was approximately £153 billion. The white board was over and above that.

Q34 Thomas Docherty: And the approximate value of the white board is?

Jon Thompson: It depends on where exactly you cut it, but it is between £7 billion and £12 billion over a period of time; the number continues to reduce.

Q35 Thomas Docherty: It is probably easier and quicker to ask what is on the white board than on the core equipment programme, so can you give us the types of item in the white board list?

Jon Thompson: Yes. The white board are those things that we would like to do over time in order to fully deliver all the public aspects of Future Force 2020, which were announced in the SDSR. We have 10 years to do that. That, if you like, is the list of the things that we would like to do in that period of time. As the Secretary of State also said on 14 May, we have £8 billion of financial headroom over that 10-year period. Our funding assumption at that time was that we had £161 billion to spend, but the core programme was £153 billion, and therefore you have £8 billion of headroom.

On the other side of that equation, you have the white board of things that you want to do over that period. As we enter the annual budgeting process, we can see how much of the headroom is available and what we would like to pull off the white board and commit ourselves to, so that over the 10-year period, you would spend the £161 billion and deliver all the items on the white board. That is the conceptual framework.

Q36 Thomas Docherty: Just to clarify this in my head, effectively, your £8 billion of headroom is an underspend. You have £153 billion committed spend-touch wood. You then have this £8 billion headroom. So if you don’t spend the full £161 billion, it is an £8 billion underspend.

Jon Thompson: Yes. If we did not spend it, it would result in an underspend, but obviously our plan is to spend it in the future.

Q37 Thomas Docherty: Okay. I will come back to that in a second. I am fascinated as to which of our programmes are on the white board. For example, the Type 26 frigate-is that a white board item?

David Williams: No.

Q38 Thomas Docherty: So that is in the core equipment programme?

David Williams: Yes.

Q39 Chair: How many?

David Williams: The planning assumption is as set out in the SDSR. I do not know whether we have said the number publicly.

Jon Thompson: I do not think we have said how many. Our planning assumption remains that which is stated in the strategic defence and security review. I am sorry, but I am not clear about whether we have publicly said how many.

Thomas Docherty: I thought we were talking about 13.

Q40 Chair: But if it is publicly stated in the SDSR?

Jon Thompson: If I could remember what that number was, I would tell you. I am just not clear about whether it is public information. I am sure somebody has a piece of technology that can advise us.

Q41 Thomas Docherty: I am sure somebody is getting that number. So the 13 in the SDSR are the 13 in the core equipment programme?

Jon Thompson: Yes. If the SDSR said 13, then 13 is our assumption.

Mr Havard: That is the assumption.

Jon Thompson: All I said was if that is what the SDSR said, that would be the assumption.

Q42 Thomas Docherty: I understand. Astute class-there are seven Astute classes in the core equipment programme.

David Williams: Yes.

Jon Thompson: It remains our assumption that there are seven, yes.

Q43 Thomas Docherty: Joint Strike Fighter-F35?

Jon Thompson: The Joint Strike Fighter has a very long tail. It is more than 10 years. Our commitment over the first 10 years is for 48, which was part of the announcements on 10 May in relation to the reversion to STOVL. Over time, we would expect the number to rise to beyond three figures, but that would be in the second decade.

Q44 Thomas Docherty: So there are 48 in the core equipment programme, and any beyond that would be effectively on the white board.

Jon Thompson: No; because it goes beyond the decade, that is an issue that can be considered in the next SDSR, and then you would think about it in longer terms. We are only talking here about the 10-year period.

Q45 Thomas Docherty: That is fine. What about the deterrent?

Jon Thompson: We have made the assumption that the Government would proceed in accordance with its policy statement, and therefore that is in the core equipment programme-again, the first 10 years. The bigger costs are in the second decade.

Thomas Docherty: That is comforting. So what are the items that are on-

Q46 Chair: Before you get on to that, is the assumption of four or three?

Jon Thompson: I think our assumption remains that we are replacing the deterrent in accordance with the 2007 White Paper.

Q47 Chair: Yes, but in order to get something into your core budget, presumably you have got to make some assumptions about how much money you are going to spend, which presumably has some bearing on how many submarines you are going to order, doesn’t it?

Jon Thompson: I believe this is a decision to be made at the main gate, which is due in 2015-16, so it is for the next Government to make a decision about exactly how many and on what profile.

David Williams: If it helps in terms of the content of the core equipment programme, the way in which we built the content of that programme up over the 10-year period was to start off with everything that was contractually committed, to add in the deterrent and wider nuclear submarine enterprise costs, and then to add in as the next layer other projects to which there had been a ministerial commitment. The most recent set of those, at the time, was the announcements that Liam Fox had made in July 2011 around carrier, Type 26, aspects of the armoured fighting programme, Chinook and Air Seeker. We then added in a degree of contingency or financial realism on top, took stock of how much headroom we had against the forecast budget over the period and decided how much of that we wanted to allocate out and how much we wanted to retain as unallocated provision or headroom for the future.

Q48 Thomas Docherty: Forgive me-I understand everything that you have put into the core equipment programme and that is very good, but what is on the white board? What are the items that are great to have, that we would like to have but we do not yet have either the money or a contract to do?

Jon Thompson: Just to correct your question, we do have the money because if I have £8 billion of headroom and a list of £7 billion-worth of things to do, as long as that funding remains beyond the current spending review, Ministers can then say, at that time-you can make up whichever financial year you want in the next 10 years-that they would like to do that programme on the list and there is this amount of money, so we can do it. But the important thing is, having committed £153 billion of £161 billion, to deliver that £153 billion successfully. Then you have room for manoeuvre to adapt to the circumstances that you face.

It is my contention-I think the Secretary of State said this-that we do not have to commit fully to every single thing, and when we are going to start it, in all of the next 10 years. It is not an adaptable approach for us to say, "In 2019 we are going to start programme X and spend this amount of money." We think that it is right to do that in a more adaptable way.

Q49 Thomas Docherty: Hang on-I am going to end up down a cul-de-sac if I am not too careful. Let us take one single item, the Joint Strike Fighter. We are buying 48 of them.

Jon Thompson: Yes.

Q50 Thomas Docherty: But you do not know how much they are going to cost? Because the US Air Force do not know much they are going to cost, the Chief of Defence Materiel does not know, and the US Congress do not know. It is going to cost you more than you think because the cost keeps going in the wrong direction. So you do not have £8 billion to play with because you are going to have to use some of that £8 billion if you have committed to buying 48.

Jon Thompson: As David said, the way in which we have approached that is that we have used the best information we have about what the programme is currently estimated to cost, and that is in the core assumption, the £153 billion. Then we added in £4.9 billion of risk provision within the core programme on the assumption that, as some of these programmes mature, the cost will rise. Then, rather than having to cancel a project that you have already committed to, you can use some of that risk provision, which is built into the £153 billion.

Q51 Thomas Docherty: Is that £4.9 billion out of your £8 billion?

David Williams: No, it is in addition.

Jon Thompson: It is in addition.

Q52 Thomas Docherty: So you have got £8 billion, then you have got another £4.9 billion?

Jon Thompson: Yes.

Q53 Thomas Docherty: Is that £4.9 billion within your £153 billion?

Jon Thompson: Yes.

Q54 Thomas Docherty: So you have effectively got two sets of headroom; you have got £148 billion, then another £5 billion, and then another £8 billion?

Jon Thompson: Yes. We think that that is prudent, because in the past, if you go back two or three years, the way in which the Ministry of Defence approached this was to say, "We have a cost increase on a programme-what shall we do now? Everything is committed, so we will have to cancel something else." Or, as in the most extreme version, the carrier decisions in 2009, "We will stretch out that programme over a longer period of time," which leads to a sub-optimal value for money solution.

Q55 Thomas Docherty: I will try again: what are the items on the white board? At risk of setting you off again, are they all equipment, or are there some non-equipment items, such as pension provision and pay rises?

Jon Thompson: We are here having a conversation only on the equipment plan-that is the equipment procurement plan and the equipment support plan. Issues such as pensions and pay are dealt with outside of the equipment plan.

Q56 Thomas Docherty: So they are not on the white board?

Jon Thompson: No.

Q57 Thomas Docherty: Okay, so what are-

Jon Thompson: The reason why I am hedging around the question, as you can see, is because I do not think that we are saying what is on the board and I do not think we are publishing what is on the board.

Q58 Thomas Docherty: Why not?

David Williams: It is difficult to be precise in project terms because part of the reason why, in some of these areas, we do not need to make a firm commitment now is because as technology matures and we refine our requirements, look at operational lessons and how we fight in the future, views of particular equipment project solutions that we had last year may or may not be appropriate for where we are in five years’ time, so we might choose to meet a capability need in a different way. We are trying to be careful about implying that there is a definite list of specific projects that are coming down the track in due course. We allocate money to them partly around preserving that flexibility.

It would be helpful to give an idea of the areas that are high priorities on the white board. Within our core programme, we have funding for an armoured fighting vehicle pipeline, but investment in the next generation of battlefield support-combat logistic support-is an area from which we would look to draw about £8 billion of headroom and potential projects on the white board. That is one area.

There are potential capability developments beyond those that we already have funded in the core programme. Typhoon is an example; the next generation of support shipping for the Royal Navy beyond the contracts that we placed earlier this year for the MARS tankers is another. Precisely how we meet the requirement and what the kit will actually look like are issues that we do not need to close with now. That list will change over time as our priorities develop to reflect both the delivery of the core programme and lessons from Afghanistan and other operations.

Q59 Thomas Docherty: So things such as Rivet Joint and ISTAR would be on the white board?

Jon Thompson: ISTAR would certainly be a component of the white board, yes. Armoured flying vehicles and ISTAR would be the two biggest things. After that you are getting into very bespoke programmes.

Q60 Thomas Docherty: If it is helpful, we would be happy to go into private session at the end so you could walk us through some of the concepts. If you have security concerns about the Defence Committee, we would be happy to sit in private.

Jon Thompson: One of the difficulties about this conversation in general-I guess you might get to this in relation to performance management-is the way in which we manage the performance of the organisation and the way in which we predict our future are currently classified at the top secret level for the defence board. Therefore it is quite difficult sometimes to have a conversation with you in an open session about, for example, all of the moving parts of Future Force 2020 and how we predict them, given that classification, which Dave and I are party to.

Q61Thomas Docherty: We will come back later to the issue of information sharing. Let’s move on a bit. Let’s talk about underspends. By what amount are you expecting to underspend in the financial years 2012-13 and 2013-14?

Jon Thompson: In relation to 2012-13, the current financial year, we are currently in negotiation to transfer £1.5 billion of the defence budget from the current year into the next two financial years. If we are successful in those conversations with the Treasury, that will be appropriately disclosed to Parliament in supplementary estimates in January.

Q62 Thomas Docherty: Forgive me, that sounded like an answer to a different question. That sounded like, "What are you hoping to carry over?" I asked what you think you have underspent by.

Jon Thompson: There are three areas that give rise to the sum. First, we have established an unallocated provision in every single year. In the current year, that is approximately £500 million. Secondly, although we think that we have improved the overall costing of the equipment programme, and we have a more stable programme, the programme delivery profile moves slightly back in every financial year. We are therefore looking to transfer half a billion pounds from the current year to future years because the programmes have moved back slightly. Then we have made £500 million of provisions in the wake of the SDSR, either for industrial liabilities or for redundancy payments that we do not think we need in the current financial year. So there are three reasons for it. It depends on how you like to define an underspend.

David Williams: We have been negotiating with the Treasury because we are looking to carry our full underspend forward so that we will not be capped.

Q63 Thomas Docherty: Is the underspend the reason behind-

Jon Thompson: To be very clear, when we have done that, it is highly likely that you will sit here next year and there will be a small underspend. It will never be zero because we have to make a prediction in January and then you still have two months of the financial year to run.

Q64 Thomas Docherty: Looking back at last week, was the underspend the reason behind the reduction in your resource DEL from the Treasury?

Jon Thompson: No. My understanding is that we were treated in exactly the same way as every other Department. The reduction in our resource DEL of 1% for 2013-14 and 2% for 2014-15 is the methodology that was adopted for all Departments with three exceptions. Everyone else was treated in exactly the same way as we were.

Chair: Just in case anybody without your knowledge is reading or watching this, DEL means departmental expenditure limit.

Q65 Thomas Docherty: Were you hoping to keep some or all of that money to fund the white board items?

Jon Thompson: Clearly our previous plan was based on not having that adjustment. I am getting round to your question. Would we otherwise spend it? Yes. I am fairly sure that we would have spent it on appropriate things in accordance with what the defence board decided it should spend that budget on.

Q66 Thomas Docherty: Forgive me, Mr Thompson, I would not expect you to say it would be spent on inappropriate things. So I am going to take that as a yes.

Jon Thompson: Okay.

Q67 Thomas Docherty: Given the resource cut announced by the Chancellor, will you still be able to maintain a balanced budget?

Jon Thompson: Over those two years, yes.

Q68 Thomas Docherty: And beyond?

Jon Thompson: Beyond is for the spending review that was also announced by the Chancellor in the autumn statement and that process will unfold in 2013 and we will engage in that in an appropriate way. It is not possible for me to speculate on what might happen in the future. There is a spending review that will be undertaken by the Government.

Q69 Thomas Docherty: Forgive me for not always being the fastest on the uptake. You are telling me there will be no requirement for any additional redundancies or cuts to planned programmes or programmes pushed, to use the phrase, to the right because of the 1% and 2% cuts?

Jon Thompson: The short answer to that question is yes. I will give you my version of it: yes, but as a result of the autumn statement we will not be either cancelling or moving any equipment projects or announcing any additional redundancies on either the military or the civilian side over those two years.

Q70 Thomas Docherty: So how do you plan to achieve these reductions?

Jon Thompson: As I said in my explanation of what we are trying to carry forward, we have £500 million of departmental unallocated provision in the current year which, if the supplementary estimates agree, we will carry forward into those two years. We also, in those two years, have further unallocated provisions, the combination of what we are carrying forward and what we have already planned for. We should be able to deal with the £250 million and £500 million respectively. That is why I gave you the previous answer: yes, there would be no further reductions necessary.

David Williams: We spoke earlier about, within the equipment plan across the 10-year period, £4.9 billion-worth of contingency and then £8 billion-worth of headroom, as a second layer. As the third layer in balancing the budget last year, we have put across the entire programme, so not specifically for equipment issues, further unallocated provision, which was £500 million this year and it is about £200 million a year, or thereabouts, across the 10-year period. What the reduction means is that we will draw down that risk provision to meet this reduction, so our ability to meet other unforeseen circumstances will clearly be reduced, but it means that we are able to protect the underlying programme and there is value in that of stability.

Q71 Thomas Docherty: I meant to ask, is the rebasing programme, building new barracks and so on, coming out of your existing budget or were you planning to ask the Treasury to fund that separately?

Jon Thompson: We had planned to do it from our existing budget. Infrastructure funding is over and above the equipment plan. Our conversation has been about the equipment plan; there is then the infrastructure budget; then there are the four military commands; and then there is the running of the head office. The infrastructure budget planned on meeting the SDSR commitment to withdraw from Germany by 2020. There is an aspiration from the Secretary of State to make an announcement to clarify this matter early in 2013.

Thomas Docherty: That is helpful. Thank you very much.

Q72 Chair: Mr Thompson, there is a little confabulation going on here, because we know that there is this £8 billion headroom for you to allocate money so that there is a bit of adaptability in the future. That is after the next SDSR, isn’t it?

Jon Thompson: Very largely, yes.

Q73 Chair: We know that there is £4.9 billion, which I think has been pretty much validated by the National Audit Office as being the appropriate amount to have in reserve in case there is overspend on the others. That is two items of almost headroom. We now discover that there is this extra £500 million, which has just been swallowed up by the autumn statement, taking it away from you. Where did that come from?

Jon Thompson: When we made the announcement of that balanced budget, there were indeed three layers. There was the £8 billion of headroom, the £4.9 billion of risk and the £2 billion of departmental unallocated provision that was built into a 10-year assumption approaching £400 billion.

Q74 Chair: Are there any more unallocated things that we have not heard of?

Jon Thompson: No. Those are the three. If one went back two or three years, none of those existed. Therefore, in answer to your earlier questions about whether we are making any progress, it seems to me that that is making progress in terms of getting the budget to balance, being appropriately prudent and having risk provisions that you can release and move forward.

Q75 Chair: I entirely agree. It seems to me that the point of these items of unallocated money is to stop the Ministry of Defence behaving badly.

Jon Thompson: Correct.

Q76 Chair: Yet the more you use them up because the Chancellor grabs them in some autumn statement, the more likely the Ministry of Defence is to behave badly in future. Isn’t that right?

Jon Thompson: Certainly, one way the Ministry could react would be to go back to previous behaviour, but not under my tenure as Permanent Secretary.

Q77 Mr Havard: I listened very carefully, and I understand your various allocations. We are currently in Afghanistan, and as we withdraw, the recuperation-there are assets on the ground, they are part way through programmes, there were UORs, and they will have to be reconciled at some point or another with the core budget or with something. Did they come into this first iteration with your equipment programme and the white board, or whatever you call it-all of that little ritual dance? Is that where they fit? If they do fit there, how are you allocating them?

Again, there are unknowns here. I do not want to start sounding like Rumsfeld, but you can disappear up your own equipment plan. The point I am trying to get to is how you are going to manage that process. My concern is very simply with the Treasury, because it giveth with one hand and taketh away with the other. It just finds a series of very convoluted runic devices to enable it to do so, which makes the whole thing even more opaque for boys from the valleys like me to understand, so I do not know what is going on. Are the Treasury going to win back from you in other ways things that you thought you had?

Do you see the point I am making? It is all very well having a 10-year plan, which we have argued about, but if you have annual cash limits, you are in handcuffs now. How does that relationship work? Are you simply winning money, having it as a discipline tool that you can use for good behaviour, but having it eroded in other ways by the Treasury because it claws it back for some grand plan that the Chancellor requires to make some debt clarity statement on a Wednesday?

Jon Thompson: Let me respond to two of the points that you are raising on UORs and on the annuality issue. David may wish to add to this. Our assumption about UORs into core is that we need to do an evaluation of all those urgent operational requirements and whether we should bring them into the core equipment programme. In answer to Mr Docherty’s question, we made some assumptions about introducing some of those. There are some of them that we may not introduce; it rather depends on the individual UORs. Some will undoubtedly have a long term and some will not. We have not fully completed that evaluation, but it is ongoing now. There have been some early conversations with Ministers about that. That work is being undertaken by the Deputy Chief of Defence Staff for military capability, who works closely with David. Under the Levene model, those two roles are closely joined-military capability and finance. Work on the UOR is ongoing.

In relation to annuality, one of the freedoms that we have managed to win through prolonged engagement with the Treasury on the balanced budget is that we have access to budget exchange. That was not available to the Department up to this particular point. If there were underspends in any particular year, we were not able to try to transfer that from one year to another. Given that there is a confidence in the long-term plan, because it adds up to less than the amount of money that would be available under the assumptions, the Treasury is more comfortable to have negotiations with us about budget exchange and moving money from one year to another. I explained what we are currently attempting to do with the underspend in the current year and how that might land in the next two financial years. So that helps us. The equipment programme is a long-term and complicated programme. If that programme moves back, and you have an annual budget, you need to move the funding back. That is exactly what we are currently in negotiation with the Treasury to do.

Q78 Mr Havard: So your ability to vire, as I would understand it, is a good thing. It is the question of the periods of time that bothers me. All of a sudden, you have these risk pools of money that you can presumably use for the other things to play this game of cards and vire things across these architectures that you have described. But does any of that have to go back somewhere at some point, other than a claim that was made last Wednesday about 1% cuts and some of it has to go back, because, "We have equality of suffering and you have to give us 1% as well"?

Jon Thompson: You are putting the risk the Chairman put in a slightly different way. That is exactly the risk that we are in. If we do not commit the budget to 100%-in the past, we have committed it beyond 100%-it opens up the risk that the Treasury will say, "You have underspent. We will return that money to the Exchequer."

It is my absolute belief that, in accordance with Mr Micawber, it is better not to be fully committed than it is over-committed. That gives you some room to manoeuvre, because the counter-factual here is, if you have an overheated programme, that leads you to make very poor decisions about individual programmes and the budget overall. It leads you to knee-jerk cancelling of things, stretching them out, laying people off at very short notice and so on, because you do not have any room to manoeuvre. It is worth understanding both those strategies.

Chair: Getting back to the qualification of the accounts, Sandra Osborne.

Q79 Sandra Osborne: Can I ask you something that should, at least on the surface, be quite a simple matter? The Chief of Defence Matériel has a full-year equivalent salary in the range of £240,000 to £245,000, which requires the approval of the Cabinet Office and the Treasury. The Comptroller and Auditor General gave a qualified opinion on regularity, as the MOD had not obtained the requisite approval. Why was that?

Jon Thompson: The approval is in relation to one aspect of the overall package, which is that of contribution towards a London flat. The salary was approved by the necessary authorities on appointment. The aspect of the use of a current driver, which was inherited from the CDM’s predecessor, was also agreed at that particular point. But the question of switching from the use of hotels to a contribution towards housing allowance, when that was agreed with the then Second Permanent Under Secretary at the end of 2010, was not brought to the attention of the necessary decision makers, and it was not regularised. The National Audit Office has brought that to our attention. That is the aspect that was highlighted in its Report and which we are currently trying to regularise. It is a regrettable situation that happened in 2010. The salary is fine and the car is fine. The issue is about the contribution towards housing. I understand that the second PUS at the time made the decision that it was better value for money for the taxpayer to switch and that is what led to this situation.

Q80 Sandra Osborne: Switch to a rented flat?

Jon Thompson: Switch to a contribution towards a rented flat, rather than the use of hotels.

Q81 Sandra Osborne: But that still has not been approved.

Jon Thompson: Yes. Well, as I tried to explain, these events occurred in 2010. I was unaware of those events at that particular time. They were made between the then Second Permanent Secretary at the time and the Chief of Defence Matériel, who-I must be clear-is a completely innocent party in this regard. It is not something that he could possibly have been sighted on either. As it turned out, it is regrettable and we are trying to rectify it.

Q82 Sandra Osborne: It is still more than two years, so when will you receive the approval?

Jon Thompson: As soon as it was brought to my attention, we put in the request for the necessary approval. But I think that it was brought to my attention only three weeks ago.

Q83 Sandra Osborne: Is it normal for people to have rented flats, rather than stay in hotels, at that level? Is that the norm now?

Jon Thompson: It is normal for military officers. It is worth remembering that the CDM’s predecessor was indeed a military officer. The job of CDM is very complicated, and its centre is essentially in Bristol, but it clearly requires a significant amount of time with Ministers. Therefore, it is split between two different places, and the value-for-money judgment, as I said, made by the then Second Permanent Secretary was that it was better value for money for the taxpayer to make a contribution towards a flat than it was to pay towards significant nights in hotels.

Q84 Sandra Osborne: But if it is not a one-off, should there not be a process in place to ensure that the necessary approval is given?

Jon Thompson: Yes, absolutely. That should have happened in 2010, but it did not. I have read back through the file, because, as I said, I was not personally party to that transaction at the time. I think that it was made with the best intent that it was the best value for money for the taxpayer. As it has turned out, however, the NAO’s view is that that aspect of the package was irregular. So I am trying to rectify as fast as I can a situation that I have inherited.

Q85 Chair: What was it that made such a large salary value for money?

Jon Thompson: Sorry, it is not the salary. It is the question of the interplay between the use of a hotel and a contribution towards housing.

Q86 Chair: The total package.

Jon Thompson: Sorry, I am not clear what the question is.

Q87 Chair: So the total package is £240,000 to £245,000 plus the car plus the house. What was it that made that value for money?

Jon Thompson: Those numbers include the contribution towards the flat and the car.

Q88 Mr Havard: So the £245,000 is the total remuneration package, including these elements that you have just described. It is not just simply straight wages and then the others are additional.

Jon Thompson: That is correct.

Q89 Ms Stuart: Is the flat rented or mortgaged?

Jon Thompson: Rented. That is my understanding. However, that is clearly a private arrangement between-

Q90 Ms Stuart: If it is mortgaged, will you write to us?

Jon Thompson: I am happy to double check, but I am fairly clear that it is an annual lease.

Q91 Thomas Docherty: Why is it a private matter?

Jon Thompson: We do not rent the flat for the CDM. He rents a flat and we make a contribution to him.

Q92 Thomas Docherty: Our arrangements, as public servants, are not private matters if we have a flat that we rent or own and receive mortgage interest payments for. I am sorry, but given that it is the taxpayers’ penny, why is whether he is personally benefiting from this arrangement a private matter? Whether he has a mortgage and we are paying towards it or whether he is taking a sum of money to pay rent to a third party, that is entirely a public matter.

Jon Thompson: I think I was fairly clear in saying that that was my understanding, but I was asked if I would check and I said that I would.

Q93 Thomas Docherty: But you also said that it was a private matter.

Jon Thompson: I am saying that we-the MOD-are not party to a subsequent transaction between one of my employees and another party, but I am very happy to clarify the question from Ms Stuart.

Sandra Osborne: Maybe we should involve IPSA and get some advice from them.

Q94 Chair: One thing that I would say is that, although you were not party to the arrangement with the CDM, you were the director general of finance.

Jon Thompson: Yes.

Q95 Chair: Would it not have been appropriate for you to have checked, as director general of finance, that the appropriate checks had been made?

Jon Thompson: If I had any awareness of the transaction at all, yes.

Q96 Chair: And you had no awareness of the transaction at all.

Jon Thompson: No.

Q97 Thomas Docherty: Who did in the MOD?

Chair: It was the second Permanent Secretary, was it?

Jon Thompson: That is my reading of the file, yes. There are two separate streams here. One is: can we regularise it? The second is: how did this occur in the first place, can you make sure it does not happen again and that there are not any other cases? I have to do both of those at the same time. We are taking some action in that area and we are looking at that question specifically.

Q98 Mr Havard: Can I move on to the business about accounting for contracts that may contain leases-that whole activity? This is part of the whole business about why things have been stopped, delayed, moved to the side in terms of timing and the qualification of the accounts. I do not want to go too far into this jargon, but there is this IFRIC 4 and accounting standard 17 and all of that. Can I be very clear? The notion that you had to suspend these things-I find it interesting that what you said, or what it is reported that you said, is that because of this clear line of sight budgeting regime that came in, some of these things have now come within the scope of external audit in a way that perhaps they did not before. You then say, "Look, if we are going to do this properly we had better have a complete exercise here." A complete exercise is being undertaken, including this business of what is leased, as I understand it.

We now have a problem in a sense that some disclosure of what is really going on cannot now be made until all of this contract renegotiation that has come from the SDSR is completed. I understood that while you were doing that you were making commitments that by September 2013 you would at least have been in a position to do an initial review of those things, and have been part way through that process. I am coming back to that question earlier about how you therefore are going to come out with a set of accounts if these processes are still running. They clearly are not going to be able to be done. Have you started that initial review? Is that on track to finish in September or is it now accelerated and it is going to be June or April? Where is it?

Jon Thompson: We have started it and I would expect it to conclude in the second half of 2013. That is why I was clear with the Chairman that I believe that that qualification will remain for at least 2012-13.

Q99 Mr Havard: This is stuff that you promised to the NAO?

Jon Thompson: No. I think I have been completely consistent on the issue of the application of International Financial Reporting Interpretations Committee standard No. 4.

Q100 Mr Havard: That’s the boy.

Jon Thompson: Thank you very much. That is whether an arrangement contains a lease or not. We face a unique set of circumstances. I am happy to set those out if you would like me to explain how they apply to the Ministry of Defence.

Chair: I think you have done that before.

Jon Thompson: Thank you. So the difficulty is that in the world we are in-in a monopoly-monopsony situation the Yellow Book applies-that accounting standard applies, probably, to whether or not by entering into that contract we really are leasing the assets. The best example of this is: in relation to the submarine enterprise, should the assets that are deployed in Barrow be recorded on the Ministry of Defence’s accounts under that accounting standard? That is quite complicated territory to work your way through.

Q101 Mr Havard: The recent revision of the Yellow Book has not helped you in that regard?

Jon Thompson: It may help us, subject to the passage of the necessary legislation, to create a single sourcing regulation office, I believe it is called. That would help us to gather further information. So it may take us forward.

Q102 Mr Havard: Are there still residual problems coming from the old resource accounting and budgeting regime, or has that been subsumed?

Jon Thompson: I do not think so, in this particular regard.

David Williams: But I think, Mr Havard, on your point about "wholly or partly" in PUS’s example, even if we conclude in that example that we should recognise part of the value of Barrow on our books, is it whole or part, and how do we value it? The company will use different accounting standards from ours. There must be a material prospect that what we will do is to trade a qualification for not having it on our books for a qualification for having it on our books but being unable to satisfy the NAO about the quality of the valuation of the asset. We should not assume, therefore, that this will be a simple transition to a clean set of accounts. Clearly, we need to see where the review comes out next year. It seems to me that that opens up a new set of complexities.

Q103 Mr Havard: So none of these things is going to stop the NAO making its publication about where they think they are. We had the whole thing with the equipment, and all the rest of it, about how the NAO would make a number of declarations about what they had studied and the Secretary of State would come and an evaluation-

Jon Thompson: No, this will not stop our absolute intent-the Secretary of State’s intent-to publish the equipment plan and for the National Audit Office to give an opinion on that plan. The stage we have reached is that we have a draft of the CAG’s view on what we gave him earlier in the year.

Q104 Mr Havard: Okay. Can I ask you a cheeky question? If the interim thing is going on, what is the timeline for the partial description that you have given of maybe some qualified and some not? If that is the summer of this year, a lot of it will still not be determined for some time. How indefinite will that period of time be? Do you have a view of when that might be, realistically? Does this go back to your original five years of three years ago, or is there now some slightly different description? In other words, we are going to have a new SDSR in 2015, aren’t we? Is that the end date? Are we going to see it then, or is it going to drift over into 2018? What is your prognosis of when you might have been able to drive the efficiencies in to come up with the right result?

Jon Thompson: I would expect us to be able to clear down the remaining qualification on stock, because it is logically the last one. By the time you have cleared everything up, is it worth what you say it is worth in the books? That is essentially what the remaining qualification is about-the impairment.

That leaves us with the rather tricky question of the application of this accounting standard. It is quite difficult to speculate how long it will take until we see the outcome of that piece of work, and then you have got the very practical issues that David has set out. If we do decide that we want to try to capture the value of the Barrow submarine enterprise on our accounts, there is still a significant amount of work to be done with the relevant contractors on valuation. Is that valuation any good? Is it sufficiently robust for the National Audit Office to say it is clean?

It is quite difficult to speculate about how long that might take, and whether or not the standard that is necessary to have unqualified accounts would be reached in that respect. As Mr Williams said, we may trade a qualification for not doing it at all for a qualification because we do not have the quality of data. It is a very unusual accounting standard, which we believe only applies to the Ministry of Defence, because of the unique circumstances of the monopoly-monopsony situation.

Q105 Mr Havard: You anticipate everybody’s question, which is: why are you allowed to step outside the rules? Maybe you will claim good reason for that, and maybe there is some exception process that needs to be done. If it needs to be done, however, it needs to be adequately described so people can understand it and understand why it exists. At the moment, neither of those things seems to be happening.

Jon Thompson: Sure, and I am not claiming that we should have an exemption. The result of that is that we have a qualification, and therefore we are having this conversation about, "Will you do something about it?" I am simply trying to explain that the scale of the challenge is so significant that I cannot, at this point, speculate clearly to you how long it will take and what the outcome will be.

Mr Havard: I would rather you accounted for it rather than making it opaque, so thank you very much for that.

Q106 Thomas Docherty: I just want to go back to two earlier issues, which are very different from each other. Looking forward to 2015, first of all, can you clarify the baseline for me? My understanding is that there is a commitment from the Prime Minister that there will be a 1% uplift in the equipment budget from 2015. Has anything in the autumn statement moved that baseline-has it changed at all, for 2015, as a result of the autumn statement?

Jon Thompson: No.

Q107 Thomas Docherty: So there is no change at all, and the figures you are working from are unchanged?

Jon Thompson: There are no changes in the autumn statement that give rise to that. The spending review may consider changes to the baseline but I would need to speculate on that, and I can’t. There will be a spending review. That may change, or it may not.

Q108 Mr Havard: You wouldn’t like to give us a date for that, would you?

Jon Thompson: I am sorry, I don’t think I can really speak for the Chancellor of the Exchequer.

Q109 Thomas Docherty: I want to get this absolutely clear. Our understanding is that the Prime Minister has promised a minimum 1% increase in the defence equipment budget from 2015, so, regardless of what the spending statement may or may not say, you have an assumption that that is what you can lift from, and that the baseline that you are using has not moved.

Jon Thompson: That remains our assumption. To be absolutely crystal clear, your question was, "Has the autumn statement changed anything about our assumptions?" No, but the spending review questions all departmental spending and therefore it may change our baseline. I do not know.

Q110 Thomas Docherty: Okay. On the CDM, his salary and other senior officials’ salaries, you will be familiar with the issue around the Student Loans Company chief executive, where he was being classed as self-employed for tax purposes. I am sure that, both as financial director and as Permanent Secretary, you have checked that there are no civil servants working in MOD main building who would fall into that category. Am I correct in making that assumption?

Jon Thompson: I would have to give you a written answer. I am inclined to say no, but, given the nature of your question, it is better for me to be 100% sure. At the time that the Student Loans Company events took place, we did a full review. I need to go back and refresh my memory of what that review concluded, and then I can give you a written response.

Q111 Thomas Docherty: That is a reasonable answer. Is it now the MOD policy that no appointment made since that time would have that quirky little employment status? That is now prohibited, is it?

Jon Thompson: I think it has always been our policy, but, again, I need to be absolutely clear, so I will give you a written response.

Q112 Thomas Docherty: Mr Williams, you are clear that, as director of finance, you would not sign off on any such package?

David Williams: Yes.

Chair: Still on the Chief of Defence Matériel, do you find it strange that he is paid more than you, more than the Secretary of State for Defence and more than the Prime Minister?

Thomas Docherty: And the CDS?

Chair: I am not sure about the CDS.

Sir Bob Russell: But less than John Terry.

Q113 Chair: Do you find that strange, or is that beyond your pay grade?

Jon Thompson: I don’t think I would be very good as a centre-half for Chelsea, but I would be happy to take Mr Terry’s wages. There are a number of individuals within the Ministry of Defence who are on bespoke contracts, which are fixed term. Their remuneration reflects their previous remuneration outside the public service, so when they enter the public service they are on very bespoke contracts, which can be higher than my own and those of other individuals. We have four of those, from memory, all of whom earn more than I do. Those are the arrangements for drawing particular skills.

Q114 Chair: I have to say that, when he has come in front of us, we have been extremely impressed by what he has done and said. The issue for you, presumably, is how you work out whether the contract gives value for money. How do you do that?

Jon Thompson: I was not party to the appointment of any of the four specific individuals. As I have said before, there are some special arrangements, provided you have the necessary clearance from the Chief Secretary. There are a limited number of posts where the skill set that you need requires you to have a very bespoke arrangement on remuneration. There are four of those individuals within the Ministry of Defence. The evaluation is that we are bringing into the Ministry of Defence individuals who previously earned significantly more than they do in the public sector, and therefore those arrangements applied. Provided you have the necessary approval, evidence is provided that somebody earns significantly more, possibly a significant multiple of what they then get working for us, but they join the Ministry of Defence for whatever reason and they are paid on a bespoke arrangement.

Q115 Chair: And I suppose one would also say, in defence of the point that you are making, that this is one of the driving forces behind the move towards a Government-owned contractor-operated system for the defence equipment and supply.

Jon Thompson: Yes, that may well be. There are particular niche skills in particular areas where, if one might be frank, the public servant is not paid at market rate, and there are alternative solutions to that. One of those might well be a Government-owned contractor-operated company in order to pull those skills in that are necessary to deliver the programme that you need to deliver.

Q116 Thomas Docherty: Are SpAds-special advisers-paid more than the senior civil servants in the Department?

Jon Thompson: There is a particular pay scale for SpAds. I think there are four different arrangements. It depends upon the nature of their appointment. That pay scale, I believe, is in the public domain. They are paid at a senior civil service band 1 equivalent.

Q117 Thomas Docherty: So, in English?

Jon Thompson: Sorry, their salary is broadly equivalent to that of the deputy director of the civil service.

David Williams: It is a senior level of the senior civil service.

Q118 Sir Bob Russell: For much of the 90 minutes, we have had talk of billions of pounds sloshing around. Sadly, not enough to be spent to upgrade the houses in which the families of our brave soldiers live, so I hope that perhaps when the billions are sloshing around next year, some of it could end up in modernising those homes.

The Comptroller and Auditor General has not been very complimentary. He says that the Department has inadequate processes. He states: "Due to the lack of a systematic assessment the Department has been unable to provide me with sufficient evidence to support the valuation of these balances." That was to do with the non-current assets of £10 billion, of which £7 billion was capital spares. How concerned are you that the processes are so inadequate that they cannot assess the impact of the impairment of those non-current assets of £10 billion?

Jon Thompson: Clearly, I am concerned. As I have tried to explain in answer to some of the previous questions, if you go back two years, the qualifications included: there was no reconciliation between the stock on a shelf to the stock systems, and between the stock systems and the finance systems, and then between the finance systems and the accounts. You have to start from being able to reconcile the stock that you have got against the stock systems and then the finance systems, and then you clear down those qualifications, which we have done, and which is reflected in the National Audit Office Report.

Then you are left with the fundamental of what is essentially the last question. By the time you have done all of that, are capital spares and stock worth £16.8 billion net, because that is the number that is in the balance sheet? And the answer to that question is that at the moment we cannot give the National Audit Office the necessary assurance that they are, and that leaves us with the remaining qualification.

Q119 Sir Bob Russell: So have you undertaken a systematic review as recommended, or are you doing it?

Jon Thompson: My reading of his recommendation was that we should carry on doing what we are already doing. He continues to recommend that "the Department delivers against its planned approach to undertake a systematic review", so that review has been ongoing. It is, if you like, the last leg of rectifying all those problems. It is ongoing. I would expect us to be able to resolve that issue to the National Audit Office’s satisfaction.

Q120 Sir Bob Russell: So in a year’s time the journey will have been reached, will it?

Jon Thompson: I hope so.

Q121 Sir Bob Russell: Have you made any estimate of the impact of that review? What about the likely level of write-downs and write-offs to the nearest nought?

Jon Thompson: If I could give you an estimate, the accounts would not have the qualifications. The gross value of capital spares and stock is the other side of £40 billion. The net value is, I think, £16.8 billion. Interestingly, those figures move in opposite directions over time. The NAO is querying whether the £16.8 billion figure is right. I cannot tell you how much it needs to adjusted by; if I could, I would make that adjustment, and the accounts would not have the qualifications.

Q122 Sir Bob Russell: So army surplus stores around the country and MOD auctions can look forward to a bumper year?

Jon Thompson: As Mr Gray famously may have said, there is a reason for army surplus stores: in general, we buy too much and do not use what we buy, so we build up too much and then dispose of it. We have got to resolve that. The Public Accounts Committee asked me extensively about that two weeks ago. We continue to buy more than we use, so we have too much. There is a very detailed report on this, and I will happily give you more information.

Q123 Sir Bob Russell: On the defence inventory, I am told that the Department holds £4.2 billion worth of inventory that has not moved in over two years, and a further £2.4 billion of holdings sufficient to cover five years’ use, and that in the financial years 2009-10 and 2010-11 a further £1.5 billion was spent on consumable inventory that has not been used. Tesco would never do that, would they?

Jon Thompson: Absolutely not, but Tesco do not run 900,000 lines of stock. The biggest retailer in the UK runs, I believe, about 200,000 lines of stock. That is not an excuse in any way. Contextually, as I said in answer to earlier questions, the issue has been there for several decades. We have to stop buying more than we are consuming. We introduced a series of controls from 1 April 2012 that have already reduced the current year’s expenditure in this area by half a billion pounds-we are half a billion pounds down on the year before, on an annual spend of roughly £2 billion.

Sir Bob Russell: Moving in the right direction.

Jon Thompson: You have to turn off the tap, review what you have got, right-size that, and then move on to how it is stored and managed. We are doing all those things in a plan, which was the subject of a separate NAO report.

Q124 Sir Bob Russell: The National Audit Office report focused particularly on reducing the amount spent-as I indicated, you already hold sufficient stock. How are you progressing on implementing the recommendations to deal with that?

Jon Thompson: In relation to the defence inventory value-for-money study, the NAO report compliments us on the progress made and then makes five further recommendations, which we have accepted. The report was made on the basis of data in February 2012. We made some changes in April 2012, and by the time of the hearing the week before last, we were able to describe some of the impact that we have made. We are already spending £500 million less, cash-let us be clear that that is not departmental expenditure limit; we can get into the accounting if you want-than we did last year. Turning off the tap, we are a quarter down this year on last year, so it is beginning to have an impact.

Q125 Sir Bob Russell: Is £500 million your predicted saving in the coming year?

Jon Thompson: No; that is why I made the point that it is not departmental expenditure limit. If you spend money on stock, it is a balance sheet transaction. You translate cash into stock. That only hits your departmental spending when you use the stock. If you build up too much stock, it makes no difference to your departmental spending under the Treasury rules. You just have too much stock, because you are translating one piece of the balance sheet to another piece of the balance sheet. It is a very strange arrangement, and one we have questioned.

Q126 Sir Bob Russell: It sounds like creative accountancy.

Jon Thompson: Absolutely not. We are fully applying the international financial reporting standards, apart from the one that Mr Havard asked me about.

Q127 Sir Bob Russell: So what are your predicted savings from better inventory management?

Jon Thompson: The savings will come from not needing so much warehousing and stock management. We spend around £275 million or thereabouts on warehousing, distribution and so on. That is the number where you can make an annual recurring saving because you are not buying so much stock, you are not storing so much stock and then you are not ultimately disposing of it. That is where you can save money for the taxpayer.

Q128 Sir Bob Russell: What was the figure you gave?

Jon Thompson: I think £277 million is our annual spend on stock management.

Q129 Sir Bob Russell: What will happen to that £275 million?

Jon Thompson: We would expect that to reduce fairly significantly. It can never be zero, because we will always have to manage some stock, but I would expect it to be in the high tens.

Q130 Sir Bob Russell: It would be nice if that money could be reallocated to a certain project that I mentioned earlier.

Mr Havard: He’s making bids now.

Jon Thompson: I registered the interest.

Q131 Mr Havard: This is partly why I asked you about resource account budgeting earlier, because it was meant to deal with this, but I have always argued that it did not seem to fit with the MOD, precisely because it is not Tesco, which can shift beans off the shelf. I am interested in the processes. It seems to me that you are taking best advantage of some of these pressures that are on you, as you obviously would, in the sense that they come along. I am talking about a clear line of sight, which seems, first of all, to have driven certain aspects of the process out for external examination, so that people from outside are now shining torches into certain areas. That has exposed things that might be inconvenient for some, but the process is very useful in terms of exposing and developing a discipline that might be able to help you solve your problem, I would guess.

Could you say something about what that conceptual and practical shift is, in terms of how you are now changing the processes? Given that clear line of sight and the role of the Comptroller and Auditor General and the National Audit Office, different actors are now involved. It is disappointing to me in the sense that these people have had to come in in order to liberate the process, so that you are now imposing these disciplines. Perhaps that is an unfair description of it, given the international financial crisis and so on, but is that essentially what is happening here?

Jon Thompson: Not quite. The Comptroller and Auditor General and I knew each other before I took up the post of director general of finance, because at the time, he was working at the Ministry of Defence. The way in which we have approached this is to try and have a debate between the finance function of the accounting officer and the National Audit Office on the basis that it is more of a partnership, because there are certain things that the NAO can do to get us to drive to higher standards, and there are things that we can do that they can report which enable us to do it. Some of the qualifications in relation to stock, for example, we discovered and they reported, but in relation to accruals, they identified that and then we dealt with it, so it is a question of how you get the right kind of balance between ourselves and the external auditors.

I am trying to avoid the traditional adversarial relationship with the CAG. I do not think that it is particularly about line of sight; it is that we are both maturing our understanding. We have made some big steps forward in relation to the internal audit function, for example. So up to that point, the National Audit Office has not been able to rely on our internal audit function at all. We have been taking some big steps to change that and to work with the auditors. Now, they are just beginning to rely on some of that work, and that means that the NAO are looking at different things and working with us on-"Well, shall we look at that particular area?", and so on and so forth. That does not really answer your question. It is how I think about it with Mr Morse.

Q132 Ms Stuart: I still imagine I am a finance officer trying to decide whether I buy shares in you, and so far, I am not really inclined to do so. So let me try and give you the opportunity for positive notes. There are some areas where you were previously qualified, but you were not qualified this time. I want to press you a bit more as to how that came about. For example, on inventory, you made some progress. How can you make sure that that progress is maintained, or that you don’t run up against the same problems in terms of the completeness of the inventory and capital spares, and it happens again?

Jon Thompson: If one might quote the Comptroller and Auditor General at the PAC two weeks ago, the Defence Secretary, myself, the finance director and the Chief of Defence Matériel are aligned in the space where we want to try to resolve the problem. I cannot really comment on whether there has ever been that alignment in the past, but we are making some significant progress on resolving these financial issues, because everyone is in the same place in wanting to resolve them.

Q133 Ms Stuart: But you are not a new Department. What you’re doing isn’t something you’re doing for the first time. If you have venture capital-you’ve been doing this for a number of years. Last year, you seemed to have got it right. I am trying to be helpful here. I’m trying to give you a chance to reassure me that you think you can maintain the progress you made last year; or do you think you’re just going back into the old abyss, where you don’t know what you’ve got and where it is?

Jon Thompson: My apologies. I don’t think we’ll return to how it was. We made some progress and we can bank that progress. We have a further development plan, and the NAO have had a look at that. That plan involves further investment in information systems, which has begun to be deployed. We introduced the first of the new IT systems in the last financial year, but there are three more coming in the next two financial years, in relation to stock management, for example. We have a project looking at how we more efficiently do logistics, and we have seen the business case for that. So there is a plan; it is owned by the Chief of Defence Matériel. We have transparency. It’s banked some gains and it’s got some further progress to make. So I don’t see us going backwards.

Q134 Ms Stuart: But from what I gather from the note, you had a major exercise to ensure that all stock is recorded on the warehouse system. Are you saying you are still working on that? You are saying you have further IT and further investment. Are you hoping to be even better next year?

Jon Thompson: Yes. If you go far enough back-it is not that far back-there are some 78 IT systems involved in stock and logistics management. We are trying to rationalise that to four.

Q135 Ms Stuart: How many is it now?

Jon Thompson: I am sorry, I can’t give you the number we have now, but it is certainly significantly less than 78. The plan is to get to four by 2015. The first of the major systems is the management of the joint deployed inventory-that is one system that covers all inventory in Afghanistan.

Q136 Ms Stuart: So you’ve got 78. The new ones-are they off-the-shelf systems, or are you designing them yourself?

Jon Thompson: Off the shelf, and we are doing it in partnership with Boeing. We have struck a long-term deal with Boeing.

Q137 Ms Stuart: Good. That is reassuring. Where do you think you are on getting down from 78 to four: down to half, a third, a quarter?

Jon Thompson: I’m sorry, I don’t know the answer to that question off the top of my head. It is certainly significantly lower.

Q138 Ms Stuart: Could you give us a note?

Jon Thompson: Yes. Happy to do that.

Q139 Ms Stuart: That would be helpful.

In terms of changing that, that must have been quite a significant investment in man hours. How much staff time?

Jon Thompson: I’m sorry, we don’t record staff time in that way.

Q140 Ms Stuart: Okay. How much do you think it’s going to cost you: an extra 1% on your staff costs? You must have some calculation.

Jon Thompson: I can give you the capital investment. The capital investment necessary to sort out an enormous history of underinvestment is just over £1.1 billion.

Q141 Ms Stuart: If you’ve made an assessment of the capital investment, I’m sure you must have made some rough calculation of the human resources implications of that.

Jon Thompson: Because it’s so inefficient, actually, the overall effect is that the cost of running it should go down. So I am sorry, I can’t give you the estimate of-we are definitely not going up and then down; we are going down.

Q142 Ms Stuart: Have you got that somewhere? Can you send us a note?

Jon Thompson: I can give you that information about how far we’ve come in relation to this kind of administration costs, yes.

Q143 Ms Stuart: Can I now turn to some specific examples? The Bowman radios-do you think you can keep a proper track of them now, or not?

Jon Thompson: I think we can. I think we’ve bar-coded the vast majority of them. Excuse me if I can’t remember exactly how many-

Ms Stuart: At the moment, you think you’ve got 84% of them serially tracked and recorded.

Jon Thompson: Thank you.

Q144 Ms Stuart: So what do you intend to do with the other 16%? Are you catching up with them? Do you think you’re going to keep track of them?

Jon Thompson: I am fairly clear that we will do that, yes.

Q145 Ms Stuart: Are you aiming for 100%?

Jon Thompson: It would be my intention to get to 100%, yes.

Q146 Ms Stuart: By when?

Jon Thompson: I’m sorry, I don’t know what my plan is in terms of when we will get to 100%, but in a world where zero were tracked two years ago, it seems that 84% is a significant way forward, and we have to drive on to 100%

Q147 Ms Stuart: Yes, but surely you must accept that 84% isn’t yet quite where you want to be.

Jon Thompson: No, indeed not. I believe that the qualification was withdrawn because the NAO had sufficient visibility of approximately 100%. Whether they are all serially numbered and tracked doesn’t mean that you can’t necessarily find them all. The number is stable in the accounts now, and now we have to make sure we drive on from 84% to 100% so that we have visibility of every single asset.

Q148 Ms Stuart: So, if you were to come before us next year and were asked about Bowman radios, how would I measure success? What figure would I be reasonably looking for?

Jon Thompson: Whether we were closing in on 100% or had reached it would be a reasonable test.

Q149 Ms Stuart: Okay, we will make a note and ask you next year where the Bowmans are.

Jon Thompson: I am sure that somebody behind me is making that note, too.

Q150 Ms Stuart: Just a practical example in terms of ordnance, HMS Westminster didn’t carry ordnance when it ended up in Libya. We now hear that, in Afghanistan, we have piles of unreconditioned Brimstone. Do you think that that will be better in the future? What is your plan of ensuring that we don’t have a repeat of that?

Jon Thompson: The capital spares and inventory management problems manifest themselves in many different ways and you have highlighted some. The process of actually getting inventory to Afghanistan was the subject of a National Audit Office report, and it was rated highly successful. It is managing capital spares and inventory that is not in Afghanistan-which is the vast majority of the inventory-that is not good enough. Therefore, you have to have a plan of how you manage that.

Q151 Ms Stuart: What is that plan?

Jon Thompson: We have an inventory management plan and strategy. There is a group that oversees it at the three-star level at DE&S. There is a specific full-time two-star military officer who runs this, who appeared in front of the Public Accounts Committee. There is a significant amount of work going on in terms of people, time, investment, training, IT systems and so on in order to improve the situation.

Q152 Ms Stuart: Presumably, you will tell me that the plan itself is part of classified information.

Jon Thompson: No, we could probably provide that to you if you were interested.

Q153 Ms Stuart: Given that there is a mismatch of available ordnance in some places where we need it and in other places there is too much, that would be quite helpful. I am particularly interested in Brimstone. Why is so much of that stuff in Afghanistan?

Jon Thompson: I’m sorry. I couldn’t possibly respond to that question right here and now.

Ms Stuart: Again, if you could write to us.

Q154 Chair: Before we leave that question, since we are normally extremely rude about the Ministry of Defence report and accounts, when there is the dropping of a qualification about Bowman radios, for example, I think that it ought to be cause for singing and rejoicing in our streets. Shall we pass that on?

Jon Thompson: Yes. Good progress.

Q155 Ms Stuart: I said that I was trying to be helpful, but you didn’t quite believe me, did you?

Now I am not trying to be helpful. In the past, we have been quite unhappy about the degree of quantifiable data that would allow us to assess the MOD’s performance. You now have a list of input and impact indicators. How did you decide on those?

Jon Thompson: They arose from the application of the Government-wide business planning process run by the Cabinet Office. We were required to define a set of input and impact indicators, and those were agreed on. As I said in relation to an earlier question, actually what the board looks at is a significantly different set. These are the ones that, in the end, you can make public statements about, but actually the real set-those which really are important-are at the defence board level, which we don’t publish, because of the nature of what they are about.

Q156 Ms Stuart: Are you saying that these ones are interesting, but irrelevant?

Jon Thompson: I am saying that these are the ones which are appropriate to be disclosed on a public basis. What we actually use in terms of the monthly board meeting and quarterly review of progress towards the SDSR, Future Force 2020 and so on is a somewhat different set, because of the nature of what you can consider when you are not in open session. That is the space in which the board operates.

Q157 Ms Stuart: But, presumably, there is a kind of footprint matching between the wider set of things, which you say that you consider at the board level, and this is a kind of reduction. We are not talking about the taxable accounts and the black economy. You are not running parallel books, are you?

Jon Thompson: I would never keep two sets of books.

Q158 Mr Havard: There is one very complicated one, and nobody can understand that.

Jon Thompson: These are a subset of the ones that the board use. The ones that the board use are much more focused on the primary military outputs, which are success on operations, the standing military commitments and whether we are ready for contingent operations. Those are the so-called military tasks one, two and three. That is what we are more focused on, and this is a narrow subset of a bigger set.

Q159 Ms Stuart: So if I were inside the system, I could pick up one of those and could drill down in a wider context to explain the context of those figures, and it would continue to take me along that path to make those figures more relevant.

Jon Thompson: Yes. We did a lot of work on the so-called defence performance framework, which is the one that the board uses and which we largely copied from Shell. The way in which the defence board approaches this question is pretty much a model of how it would be done by a big FTSE company, but, as you said, the difficulty is that these are the ones that you can do publicly, but they are a subset of what we would actually do at the defence board level.

Q160 Ms Stuart: In previous years, the Committee has actually looked for the context of these figures. If I were in the FTSE 100, my investors would look for trends and where things are going. Is your hope that, year on year, you will be able to draw comparisons of the trends in those figures? Even with the information that you provide and that is available to Joe Public, it is not quite as extensive as it should be, but it will allow me to make judgments on where your performance is going, because there would be consistency. Do you intend to have a consistent set of indicators, so that comparisons can be made?

Jon Thompson: Yes. I can try to give you as much information as is possible in the public arena, but at some point-

Q161 Ms Stuart: It is not a question of the public arena. If I were to accept that you continue not to have certain things in the public arena, with the bits that you now have will the new set of rules allow me to make year-on-year comparisons on the trends of the MOD’s performance within those limitations?

Jon Thompson: Yes. That is probably the easiest way of saying it.

Q162 Ms Stuart: So you do not intend to keep changing the definitions of what you are declaring. Mr Williams seems to be on the verge of saying something.

Jon Thompson: Subject to the fact that this, as I said, was a manifestation of a broader Government business-planning process. So if that business-planning process changes, we have to change our own business plan, which would be reflected here.

David Williams: I can certainly see the value of reporting overtime on a consistent basis, so that the observer can see trend analysis. My only hesitation is about the extent to which some of the information that we publish is in a prescribed format, and we are not necessarily in charge of that format.

Q163 Ms Stuart: But presumably, in future years, you will tell us whether there have been changes on the format.

Jon Thompson: Sure. I am happy to do that.

Q164 Ms Stuart: Can I take you to two particular areas in the results that you published, because they are striking in really being not terribly encouraging? One is in the input indicators under "Average percentage by which the cost of the MOD equipment programme varies compared to forecasts in year". In 2010-11, it seems to be 0.15%, and it is 1.41% in 2011-12. That is quite a jump in your not being terribly accurate in forecasting. Any offers as to why that has happened?

Jon Thompson: I do not have anything off the top of my head. The major projects review report for the current year indicates that the position is actually improving, so I am afraid that I will have to give you a written answer as to why it has changed. The MPR report says that we are going in the right direction. I appreciate that you have not seen that, because only we have seen it. It is yet to be published.

David Williams: I think the distinction in the metric is on the major projects report, which looks at variation in cost over the life cycle of a project, whereas this is about how well, three months into the year, we forecast the costs at the year end.

It is an issue where I think we need to get better. Actually, the percentage variation is still relatively low, but it is an issue where I am in conversation with my opposite number in DE&S about how me might set a harder baseline earlier in the year and make DE&S project teams and operating centres feel a bit more performance pain if they do not get close to those early forecasts.

Q165 Ms Stuart: Presumably this is for all the projects, not just the top 20. Because I think that the improvement was for the top 20-

Jon Thompson: I am genuinely sorry. Because we measure the top 20 on the board on a monthly basis, I am not sighted on that particular indictor.

Q166 Ms Stuart: Again, do you think you would like to drop us a note? The other one is the impact indicators, which is the average number of months by which the MoD equipment programme is delayed in a year. In 2010-11 it was 0.46 and in 2011-12 it was 5.5.

Jon Thompson: Yes, that is because we decided to baseline a number of programmes. Having got the costs stable, we decided to re-baseline some programmes in relation to time, so you ended up with a stable performance, cost and time envelope that you could measure us against from thereon. The NPR report, again, will highlight that.

Q167 Ms Stuart: Could you translate that into language that I understand? When you baselined this, what did you do-did you change the dates when you expect it?

Jon Thompson: If you go back to the earlier questions on cost, if you think that something is going to cost £5 and you have a risk provision of £50, the way in which we currently estimate time is as just £5-we have no risk provision for time slippage.

Q168 Ms Stuart: I am talking about the average number of months, so where does £5 come in?

Jon Thompson: Indeed, I am just drawing an analogy. Because you cannot have a risk provision on time, what we have done is say, "It’s not going to take five, it is going to take five and a half," and we are declaring that all in one financial year. That will be reflected in the major projects review report this time. The programme cost is stable, but the programme time has been re-baselined; we put in a new baseline.

Q169 Mr Havard: So that would fall out of the accounts next year then, in the way in which inflation works? I mean, petrol goes up in one month and then, in the course of a year, it drops out again.

Jon Thompson: Yes. The practical manifestation of this in financial terms is that it is taking us longer to do a project to budget. Therefore, in any particular year, because of the annuality, you end up with the situation that Mr Docherty and you asked me about.

Q170 Ms Stuart: But surely you could give that kind of explanation as part of these tables-unless I’m really missing something-without endangering national security?

Jon Thompson: That is a very helpful suggestion. We could put some narrative with some of these tables to show how they are moving and what it is that we are doing.

Q171 Chair: We have asked for that before.

Jon Thompson: Okay. How about if I take on board the fact that we will change the report next time to provide some narrative, then next time you can respond to that?

Chair: Thank you very much.

Q172 Sandra Osborne: Again in that regard, on current operations you have put on the impact indicators that 105% progress has been made towards a stable and secure Afghanistan. How are we supposed to know what that means?

Jon Thompson: I can explain that one-one out of three. It is the percentage of the Afghan national security forces that we have trained. There was a target to train a certain number and we are above that target. If we had put that in an explanation, it would have more straightforward to understand. My apologies.

Q173 Sandra Osborne: And we would have been able to celebrate the fact that greater progress has been made than was planned for, which we have seen for ourselves, actually. The additional cost of the operation in Afghanistan fell from £3.777 billion in 2010-11 to £3.458 billion in 2011-12. How do you see the trajectory for additional cost in Afghanistan over the next four years?

Jon Thompson: Over the next four years? In the current year, it will fall to under £2.5 billion, or something around that-unless David has better information in front of him?

David Williams: No.

Jon Thompson: Under £2.5 billion in the current year. Then, in relation to the next two financial years, it depends on the draw down of forces towards the end of combat operations, which is a matter currently being considered by the National Security Council. I can tell you about the current financial year, but I cannot tell you about the next two financial years because that matter is being considered right now, but it will be necessary for us to state that before the beginning of the next financial year, but that will be after Christmas.

Q174 Mr Havard: I understand the second part of that. Those things will not become clear until February or March next year because it is in concert with allies and others. Do those numbers include the costs of bringing things back and withdrawing? Are they computed in there?

Jon Thompson: The cost of bringing them back?

Q175 Mr Havard: We are having to regroup. There are 500 troops coming home. We are starting to filter equipment back.

Jon Thompson: The cost of bringing equipment back is included in the estimates.

Q176 Thomas Docherty: Is or isn’t?

Jon Thompson: It is included, yes. We have to bring it back. That is part of the operation. Getting it out there, using it and bringing it back is part of the claim.

Q177 Thomas Docherty: And how much have you allocated within that envelope for bringing equipment back? What is your budget?

Jon Thompson: The next two financial years are part of a conversation about what we would estimate. That is currently under consideration by Ministers. It would be included as part of the estimate.

Q178 Sandra Osborne: So we would get detailed information about that at some point?

Jon Thompson: I presume you would, yes.

Q179 Sandra Osborne: Why is our outturn for the cost of Afghanistan so much lower than the allocation, at 17%?

Jon Thompson: Because we know that the end of combat operations is 31 December 2014, planning ahead for what you need in terms of equipment can begin to tail off. I mean, there wouldn’t be much point in having an urgent operational requirement at this point if by the time you have got it and it has gone out to the theatre and so on, you would not be able to put it into use. Those big elements of spend are falling off fairly rapidly, and I would expect the number for next year to continue to go down.

David Williams: The allocations that have been put in each year’s main estimates reflect estimates that were made at the time of the 2010 SDSR comprehensive spending review, so they do not reflect the latest assumptions. They have been adjusted through the supplementary estimate, and I think we will see an adjustment down for this financial year in the figure work for January.

Q180 Mr Havard: Most of that is reflected in those supplementary provisions, presumably. We have had a bit of a go about how you are going to relate them back to the core, and we will come back to that again. Can I just ask you about savings in other parts of your budget? What is happening with the 25% cut in front-line organisational spending, the one-third reduction in administrative costs and the £800 million? This is general administrative support to your specialist people who are doing all these things we have been discussing. Is that on track? What is happening with that reduction process?

Jon Thompson: We committed ourselves over the spending review to cashable savings of £4.3 billion, I think. We are two years into that, and we are on track. It is necessary to balance the budget.

Q181 Mr Havard: Is there a shape to that? Do you have a particular prediction of what it will look like in the next financial year? Is there a pace and a trajectory to it? What is your provision for this in the next set of accounts, the next accounting period?

Jon Thompson: We have a plan that sets out all of the aspects of where we are making savings and profiles over the four years, which enables me to tell you whether we are on track on individual programmes and overall. We know what that number is in order to ultimately achieve the £4.3 billion.

Q182 Mr Havard: Do you have any concerns about what that does for your capacity to do these change processes you are talking about, not only in terms of skills, but numbers of people. Your administrative support is eroding quite dramatically in terms of its size. What is that doing for you in terms of your capacity to deliver the extra challenges that are in front of you at the same time that the size reduction is taking place?

Jon Thompson: To go back to your first question, am I concerned about what the reduction in personnel means for our delivery, yes I am concerned. We have reduced the number of civilians by over 20% in the past two years and our plan, over the 10 years is to reduce that number of civilians by 35%. We have reached the point where I think you do have ponder whether you can fully drive towards 35% or not. The budget requires us to do that, but we need to understand the impact of it. The board has considered this matter on two occasions in the last four months, because we need to understand the relationship between the number of civilians and the output of the Department. The board has been doing a lot of work in that particular area so that we understand it, so that if we do make the plan to proceed, we understand exactly what it means in terms of delivery.

Q183 Mr Havard: Is part of that discussion about transference? If the non-front line stuff is coming down there is danger of a blowback into a reducing armed services component that has to take on tasks that were otherwise done by non-military people. It can transfer a capacity problem from one place to another-presumably that is also part of an assessment? It is interesting, because, however well the plan moves on, the individual heads of services are going to have to deal with some of this budgeting activity. There is already a transfer of the mechanism, but what is going to happen in terms of the transfer of the capacity to support that mechanism?

Jon Thompson: Yes, there has been some excellent work over the summer on the so-called whole force concept. That asks, how do we look at the totality of our work force-military, civilian, contractors and supply chain-and what is the best lay-down between those? A 19% reduction in military personnel was also part of the SDSR, so we need to be clear about whether, as you reduce one set or the other, at different speeds, work is shifting between the two. We are keeping a very close eye on that.

David and I have begun a series of processes called "holding to account" with each of the seven budget holders that make up the Ministry of Defence to talk about the interplay between outputs, finances, headcount, various different work forces, and so on. We have pulled that together and it has been presented to the board so that we understand some of the interplay.

Q184 Mr Havard: Presumably in that you are looking at possibly helping the military side when they take on these tasks-giving assistance to them in being able to drive their own quality processes, in terms of training, mentoring, working together, joint teams, or whatever you’re going to do.

Jon Thompson: We have been looking at that, but the major move due to take place in April 2013 is to take significant numbers of staff who work in the main building and delegate them down into the command. At the moment, the equipment plan is planned entirely within the main building, by domain. We are removing those functions entirely and passing them over to the relevant commands. We are retaining a small number of strategic programmes in head office. Carrier, strike and the deterrent are remaining within head office in terms of planning, because of how significant they are, but all other aspects of equipment planning we are delegating down to the line. There is a process of transferring those functions and those people-transferring the existing plans and so on. David chairs a board that oversees that process, which also includes a series of senior military officers, so if you want to understand more about it, I am sure he would be happy to answer.

Q185 Chair: I have one final question that has nothing to do with the report and accounts; it is just a question to you as Permanent Under Secretary. When a Member of Parliament visits a defence establishment in somebody else’s constituency, it is the established convention of the House of Commons that he writes to inform that Member of Parliament that he will be in his constituency. That is not to ask permission, but to inform them. I understand that in recent weeks there has been a suggestion from the Ministry of Defence that the constituency Member of Parliament have to give permission before another MP can come to a defence establishment. I would be grateful if you could please remove that requirement, because it is a convention of the House, rather than a requirement that ought to be imposed by the Ministry of Defence.

Jon Thompson: I will happily look at that, Chairman.

Chair: Subject to that, we have finished. We are grateful to you for your stamina and your good humour in what has been a quite difficult evidence session, which has now come to an end. Thank you to both of you.

Prepared 21st December 2012