CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 745-i

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

PUBLIC ACCOUNTS COMMITTEE

MANAGING THE DEFENCE INVENTORY

JON THOMPSON, BERNARD GRAY and MAJOR GENERAL IAN COPELAND

Evidence heard in Public

Questions 1 - 132

USE OF THE TRANSCRIPT

1.    

This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2.

The transcript is an approved formal record of these proceedings, it will be printed in due course.

Oral Evidence

Taken before the Public Accounts Committee

on Wednesday 21 November 2012

Members present:

Mr Richard Bacon (Chair)

Guto Bebb

Chris Heaton-Harris

Meg Hillier

Mr Stewart Jackson

Austin Mitchell

Ian Swales

Justin Tomlinson

Amyas Morse, Comptroller and Auditor General, National Audit Office, Gabrielle Cohen, Assistant Auditor General, NAO, Lee Summerfield, Director, NAO, and Marius Gallaher, Alternate Treasury Officer of Accounts, were in attendance.

In the absence of the Chair, Mr Bacon was called to the Chair.

REPORT BY THE COMPTROLLER AND AUDITOR GENERAL

Managing the defence inventory (HC 190)

Examination of Witnesses

Witnesses: Jon Thompson, Permanent Secretary, Ministry of Defence, Bernard Gray, Chief of Defence Matériel, and Major General Ian Copeland, Director, Joint Support Chain, gave evidence.

Q1 Chair: Welcome to the hearing. We are looking at the National Audit Office Report, Managing the defence inventory. We are joined by Mr Jon Thompson, the new permanent secretary of the Ministry of Defence-many congratulations to you. This is your first hearing in front of us since becoming permanent secretary, although we have seen you a number of times. It is not widely enough known that Mr Thompson began his career in Norfolk county council’s finance department, and is therefore necessarily good news. He is joined by Bernard Gray, the Chief of Defence Matériel, and Major General Copeland, the Director of Joint Supply, neither of whom has any connection with Norfolk-[Interruption.] You have been on holiday. Well, that’s something.

Mr Thompson, paragraph 10 of the National Audit Office Report states that the Ministry of Defence "has not consistently disposed of inventory it no longer requires...as of March 2011 significant amounts of non-explosive inventory held in central depots were not being issued and consumed regularly." Why are you keeping things that you are not using?

Jon Thompson: That is a very interesting question indeed. We totally accept that this is a problem. We think it is a problem of some long standing. There was originally a Report on this from the National Audit Office in 1991, so it is a long-standing problem that is probably measured in decades. Since 2009, we have been striving to improve, and it has been helpful to have the NAO’s further recommendations to add into our improvement plan. We have taken further action to stop the flow and increase the pace of removing surplus stock, but why has the situation occurred? There are a number of reasons, primarily because the incentive and behavioural arrangements are such that everything is geared towards having enough to supply the demand, and there are really very few incentives to stop you having too much. The flow in, as the Report says, significantly outstrips the demand, and therefore there is a substantial increase over a long period of time.

Q2 Chair: The Report makes it very clear that you have prioritised effectiveness over efficiency. You would agree with that, I take it.

Jon Thompson: I think I would, yes.

Q3 Chair: You sent us a very helpful note, which is supplementary to the NAO’s Report-thank you very much for that; it is very clear. One of the things you say about this area on page 2 of the note is, "For the first time, the Department will have a genuine strategy". When I first saw that we were holding this hearing, I naturally scratched my head, because it sounded like a familiar subject. I immediately turned not to last year’s Report that we did on the use of information to manage the logistics supply chain, but to a Report that we did on progress and reducing stocks, which I remember quite well. I had not realised that it was actually 10 years ago-it was 2002. I will invite you to guess how many times the word "strategic" was used in that report from 2002.

Jon Thompson: It would be difficult for me to speculate, but I guess it is substantial.

Q4 Chair: It is. In fact, it is 18. If you strip out the words "strategic defence review," it is still nine, and the word "strategy" appears five times. It is full of glowing stuff. It really is terrific. Some of it sounds like it was written by management consultants, but it is all pretty glowing and it sounds like things are finally going to change. And yet here we are 10 years later, and you are saying, very candidly, "For the first time, the Department will have a genuine strategy." Why has nothing happened, given all that previous work?

Jon Thompson: It is quite difficult for me to speculate on what happened in the past not to address this, but what I can talk about-in fact, all three of us can talk about this-is what we have done in the past three years, since the first qualification of the accounts in 2009, and how much progress we have made. We can talk about it on a tactical level, if you like. In April 2012, for example, we introduced a control-it is in the Report-so that all purchases over £500,000 have to be approved by the Director General, Resources at Defence Equipment and Support. The impact of that has been a 15% reduction in the current year in purchases. So we can talk about it on the strategic level, or we can talk about it on the tactical level. Quite how we got to here is something on which all of us will have a view.

Q5 Chair: I am interested in your view.

Jon Thompson: The incentives are such that everything is geared towards having enough to supply the demand, not towards having the "optimum"-that is the word referred to by the NAO-amount. Naturally, what we do is we have too much.

Q6 Chair: So you can have all the strategy you like, but if the incentives are not aligned, you are saying that it essentially will not make any difference.

Jon Thompson: Correct.

Bernard Gray: I have an observation. I don’t think any of us know what the facts are because we were not there, but I would say that this is a subset of an overall lack of financial control regime within the Ministry of Defence over much of the past decade. There are other examples, such as the ballooning size of the proposed forward equipment programme, as well as issues such as this, which show that the Ministry was not seized of its financial position in the way it should have been.

Q7 Chair: You are a financially qualified permanent secretary-I think, perhaps, the first ever. Do you happen to know whether that is true?

Jon Thompson: The first to have been promoted from director general, yes.

Q8 Chair: Well, certainly it is welcome to have a permanent secretary who is a former finance director and is financially qualified. Can we take from that that you are not only seized of this issue in the way that Mr Gray suggested, but that it will be front-centre for you always, from now on? I do not merely mean infantry, but the financial position of the Department.

Jon Thompson: Yes, absolutely. As you know, the Secretary of State announced on 14 May that we had finally balanced the budget for the first time in 30 years. We had to solve that problem and then move on to a whole series of other problems. This is one of three qualifications of the accounts in this respect. This year, we hope that we will get that down to one, and there is then further action to be taken through the financial lens. One of the issues that is apparent in the system is that the Treasury’s Managing Public Money arrangements do not incentivise us to take action in this space because what you are essentially doing is swapping one form of working capital, cash, for another form-stock. None of that hits your annual spending in Defence Expenditure Limit terms, which is where the focus of Managing Public Money is.

Q9 Chair: So you are saying that, in that respect, the way in which Managing Public Money is written presents a problem, or a lack of incentives.

Jon Thompson: It absolutely does. Therefore, we have had to try to devise a system over and above Managing Public Money to control the inflow of stock from April 2012, and then reduce the amount that we hold.

Q10 Chair: There is another thing you could do: get the Treasury to adopt a more sensible attitude. Mr Gallaher, what are you going to do about this?

Marius Gallaher: Certainly we will listen to the Ministry of Defence and its proposals. If it comes up with something that fits in with proprietary regularity and value for money, we will look at it seriously.

Q11 Chair: The qualification was principally because of the 44% of the non-explosive central depot stock that was not available for immediate use. When do you think that you are going to have a non-qualified set of accounts? Do you think you will manage it next time?

Jon Thompson: Actually, there are five qualifications of the accounts.

Q12 Chair: In total?

Jon Thompson: In total. Three relate to this area. We believe that two of those will be removed in the 2011-12 accounts-we have still not yet published our 2011-12 accounts.

Q13 Chair: Can you remind us what the other qualifications are for?

Jon Thompson: The other qualifications are in relation to the application of IFRIC 4, which is an aspect of international financial reporting standards about whether a contract contains a lease or not, where we are in a unique government situation.

Q14 Chair: That sounds very recherché, but can you explain why this affects you?

Jon Thompson: Do you mean IFRIC 4?

Chair: Whether a contract contains a lease.

Jon Thompson: That is because we are now the only Government Department that still uses the Yellow Book in a monopoly-monopsony situation. So we now effectively have control of the Yellow Book. Lord Currie did a review of how that works, which has been published. In a monopoly-monopsony situation, the contract can infer upon us the ownership of the supplier’s assets. IFRIC 4 requires us to value those assets and put them on our balance sheet.

Q15 Chair: Even if you are a monopsonist, that does not mean that you have to buy; it just means that you are the only buyer.

Jon Thompson: No, it does not mean that we have to, but if we-

Q16 Chair: Okay. So why are the assets conferred to you?

Jon Thompson: Indeed. That is a good question. We have struggled with how IFRIC 4 applies to us and how you quantify it in such a way that you can have unqualified accounts. That remains an issue. The other issue that I think will remain is: what’s the value of the stock? The Report refers to gross values of £40 billion, and the net value is £16.8 billion. I think that the NAO will leave us with a qualification about the impairment value of the £16 billion.

Q17 Chair: Perhaps the NAO could just explain this briefly, and then I know that Mr Mitchell wants to come in. You chose to use gross values all the way through, but that was for a reason-you felt you could not do anything else. Can you just explain why to the Committee?

Lee Summerfield: The accounting systems and the inventory systems at warehouses do not reconcile, so we took a bottom-up approach from the inventory systems, as well as the top-down global figure. That was why we had to use both.

Chair: I should say-I should have done so at the beginning, for which I apologise-that the chair next to Mr Summerfield is empty because the Comptroller and Auditor General apologises that he is flying back from Scotland, the land of his fathers. He will join us as soon as he can.

Q18 Austin Mitchell: I accept the good intentions in the letter that you have written to us, but I am interested in how this stuff came to be accumulated-why has there been so much over-ordering? Why are you still ordering things that you have enough of in store already? Paragraph 2.10 of the Report suggests that the services want to over-order, saying: "A review of munitions in August 2011 recognised that army units deliberately over-order to provide a margin for error." Is there competition between the services to over-order? Is it to insure themselves? Are they setting something by for a rainy day? Why is there this over-ordering?

Jon Thompson: Essentially, as I tried to explain to Mr Bacon, it is a free good. You can order as much stock as you like and it does not affect your financial situation. That is essentially how it is, because it is a balance sheet transaction.

Bernard Gray: Just in accounting terms, to express it in a slightly different way, we do not charge the front-line commands-the armed services-when they order something for stock. We charge them only when they draw down that stock, according to the rules as they apply at the moment. So from their perspective, they may as well order as much as they ever think they might need-and then some-because it affects them only when they actually take it down and use it. We absolutely agree with one of the main thrusts of the Report, which is that the incentives are wrong.

I would add that in some senses we are trying to act as good public servants in the wider good, because as far as the Ministry of Defence’s accounts are concerned, this does not actually hit us. But we recognise absolutely that these are significant amounts of public money, which are being spent on something that ultimately we are probably going to write off. From an overall Government point of view, we are saying that, regardless of whether the Treasury changes its rules or not, we are going to change our internal rules to stop people buying too much. There are several causes for it, one of which is that the armed forces usually assume that they will do more training than they actually do, and usually they make sure that they have a margin on top, for example for ammunition for training. In the case of spares for armoured vehicles, they assume the vehicles will need a certain amount of maintenance depending on how much they drive them during the year. They assume that they drive them more, by a significant margin, than they actually turn out to do. So, in ammunition, spares, maintenance, consumables such as oil, and fuel, they are all setting the bar high hoping to achieve all that, falling short of it, and then leaving us with excess stock, because it does not affect their books.

Q19 Chair: On that point, if you are buying a Type 45 frigate, say, it might be sensible to buy all the propellers you will need for its entire life, right at the front, and then store them.

Bernard Gray: Yes. So, there are two groups here. One is capital spares, which is the kind of thing you are describing. We have very significant sums, on a gross book value of around £30 billion, of the kind of thing you are describing. The main problem we have had over the past few years is not in that category, however. It has been in consumables, which wear out from time to time. You can imagine shock absorbers and that kind of thing, or consumables such as ammunition, where effectively people have been planning more activity than has been real and then not consuming all the stocks associated with that. From their point of view, that doesn’t matter, because they never see a bill for it. It has just come out of Government funds and sits on our shelves.

Q20 Austin Mitchell: I am amazed by the amount of stuff you have got just sitting around. The Report says that you have got £4.2 billion of non-explosive stuff that has not been touched for two years. What happens to that? Do you write it down each year? Do you eventually sell it off, or does it just sit there for ever?

Bernard Gray: It is a mixture. Some of it will be spares that we have for long-term and older equipment that we don’t use that much. There is a question about at what point you dispose of it. We have, for example, significant spares associated with the Tornado aircraft. That Tornado aircraft will go out of service by the end of the decade. Do we throw some of it away now and, with life being what it is, suddenly then require a whole bunch of it and have to go and buy it again? Or do we throw it away at the end of the decade when we throw away the aeroplane? There is some calculation around that.

We are making significant efforts to drive down the total amount of stock and a lot of activity is going on with that. The thing I would draw everybody’s attention to is that, both from the NAO’s perspective and ours, the focus for the past couple of years has been around reducing the total level of stock. If you look at the PowerPoint slides that we sent you, actually the main way of saving substantial amounts of public money on this-I am not saying we should not get rid of stock-is to stop buying more things.

Q21 Chair: Turning off the tap.

Bernard Gray: We think there is a potential saving of £500 million a year on a recurring basis within three years by doing that, whereas reducing the warehouse inventory might save in the order of £50 million a year. It is definitely worth reducing the stock but, in a sense, once we’ve bought it, the problem has happened. We have spent all the public money on buying whatever it is, and we have then got only the storage cost. That is not nothing, but it is a tenth of the value effectively of buying it. The best way to get us to save public money, which we are trying to do, is to stop buying it in the first place.

Jon Thompson: Just to expand, let me give you one fact: in the current financial year, because of what we did on 1 April, we are £300 million down this year on last year. As Bernard said, our aim is to get that down by £500 million.

Q22 Austin Mitchell: You must be spending an enormous amount on storage-for both facilities and the rent. Are you going to have a big clear out? There must now be a lot of stuff. I don’t know how much is in Germany and how much is in Afghanistan, but there must be a lot of stuff that has to come home from Germany. Will that produce a big clear out in the storage facilities, or is it going to be left in Germany?

Major General Copeland: Can I take that in two parts? The first part is the disposal of stock, which is our second priority, beyond turning off the taps. We have a programme that has been going since 2010 that is attempting to reduce the volume of our stock by 35% by 2015. That gets us ready for the sort of shocks that we know are going to come from Afghanistan redeployment and Germany withdrawal. That programme, alongside an air environment-focused programme, has already delivered in the past two years £3.4 billion of stock. Going forward into the next three years, we are going to review all our non-moving stock and our slow-moving stock. Non-moving stock is things that have not moved in four years, and slow-moving stock is things that have moved between one and four times in four years. Against that, £6.9 billion-worth of the inventory will be reviewed in the next three years. We have set ourselves targets against value and volume. The value target is £2.9 billion, with a stretch target of £4.4 billion, and the volume target is 83,000 metric cubes, with a stretch target of 123,000 metric cubes. It is important to note that the Department is already doing something about reducing the stock that, as you said, is not moving.

Q23 Austin Mitchell: Having spent the enormous amount of money necessary to get stuff out to Afghanistan, are you then going to spend the money necessary to bring it back, or will it just be left there? You can leave lots of nice warm socks and there is no great damage.

Major General Copeland: It is an element of both. Having pushed everything out to Afghanistan, we will absolutely have to bring a lot of it back, because a lot of the equipment that we have pushed out to Afghanistan will be required in our core equipment going forward. At the moment, our estimate is that about 6,000 20-foot equivalent units-that is a fully-packed container-will have to be either consumed or disposed of in Afghanistan, and nearly 7,000 20-foot equivalent units will be brought back to the UK.

Q24 Chair: What does "disposed of in Afghanistan" mean? What sort of stuff are you talking about that might end up staying in Afghanistan?

Major General Copeland: The generic answer is anything that we do not need to bring back to the UK. We are conscious of the cost of aircraft, rail and liner service, so we will not bring anything back to the UK that we absolutely do not need back in the UK.

Bernard Gray: And then there is safety.

Major General Copeland: And then it will be tempered by safety, obviously. We have just set up a contract in theatre with a private sector company to help us through that disposal process.

Q25 Meg Hillier: I have a number of questions. When the NAO began its work, you had identified, over two years, £1.4 billion of item disposals yourself. Since the NAO began to look at this, you have identified £3.4 billion for disposals. That is a bit of a change of pace. I wonder what has happened and what has changed so that you have suddenly discovered all these extra items that can be disposed of.

Major General Copeland: The discrepancy that we are talking about is that at the time of the Report, there was £1.4 billion that was going through the disposal services account. On top of that, not counted within the Report was Project Hercules, the air environment programme, which had, at the same time, already delivered £1.6 billion. The £1.4 billion, if we extrapolate forward to June this year, has delivered £1.8 billion. The £1.4 billion is now £1.8 billion and the £1.6 billion that was delivered by Project Hercules was not counted, hence the £3.4 billion.

Q26 Meg Hillier: Okay. It is perhaps not as bad as it sounds, if we are charitable. I am not a military woman, but I am a housekeeper. I am puzzled; if you have all these items in there, how do you know that they are being used in the right order? Some of them will be perishable. I imagine that even boots and socks will perish. They may not hold their elasticity, and rubber goes. It is partly about store management, but if this over-ordering is going on, there must be the equivalent of things going mouldy at the back of the fridge. Are they still as valuable? Going back to the accounting point, if there is no disincentive to having the stock, at what point does anyone have to bear the cost of deteriorated stock that has gone off?

Jon Thompson: Ian can answer the first question.

Major General Copeland: In terms of sequence, I absolutely get the point. You should be using the older stuff first. The project team should dictate the sequence in which stock is used, and it should do that through its inventory plan, which it produces on an annual basis. It should do it in consultation with the front-line commands.

Q27 Meg Hillier: "Should". Does it do it?

Major General Copeland: Should. I cannot, hand on heart, say that that absolutely happens, because the logistic information systems do not give us adequate visibility over stock, which is part of the problem here, and probably part of this purchasing conundrum, because project teams are purchasing while stock is already held. Until such time as the new logistic information systems are delivered, which is not until March 2015 or just beyond that, we will not have true end-to-end visibility of our supply chain. At that stage, we could take a more sophisticated approach to the sequence in which stuff is used; I absolutely agree.

Q28 Meg Hillier: So it is entirely possible-this goes for a whole load of things-that, when you are ordering new boots, and you want the newer version, because the older ones are horrible, heavier or whatever, someone is always shoving them further and further back into the warehouse.

Major General Copeland: I think that is possible.

Bernard Gray: I am sure it is happening.

Q29 Meg Hillier: That is a surprise. I love this honesty, Chairman. It is a bit disturbing, too.

Bernard Gray: Part of the problem is how you reach into the system in order to identify it. If the management information is not there, the risk-in some cases, the certainty, because it is a statistical exercise-is that that will be happening.

To take your first point about what has changed, there is a like-for-like comparison, but absolutely, things have changed. If we look at the Ministry of Defence overall, there is a dramatic increase in the focus on financial control within the Department, which we have already debated somewhat. What has changed? Well, we are here and focused on these issues, not just when it affects the Department’s accounts, but in some cases, such as this, when it does not even affect the Department’s accounts but is not good use of public money. We are absolutely focused on this in the same way that you are focused on it, so things have changed.

You pointed at the accounting issue. We have, in my view, two additional accounting policy issues in addition to the "You can buy it, and you only get billed for it when you use it" approach. The first is that we have a revaluation policy, so that when we have bought things, some significant amount of the increase in the value of our stocks is associated with the fact that we increase the value of stocks held in line with inflation. I am basically a private-sector person, and that is fundamentally contrary to "the lower of cost or net realisable value", which I would recognise as an accounting policy from the private sector.

Q30 Meg Hillier: This is amazing.

Bernard Gray: That is the situation today; therefore some of the stock we have is actually held at higher book value than it would cost us if we went out and bought it new today.

Meg Hillier: Certainly more than you could sell it for at Army surplus.

Q31 Chair: Have you thought of selling these accounting techniques to the NHS?

Bernard Gray: The NHS is certainly beyond my ken. The second component of all this is the question about whether our depreciation policies in general are appropriately aggressive, as it were, in order to write down the value of stocks as quickly as we should-some of them have long depreciation periods, when their genuine value decreases that much more quickly-and how that depreciation is recognised. What we are saying is that there are a whole bunch of accounting policy issues which, to answer the point that the NAO makes, are definitely driving the wrong behaviours at the moment. We need to change those policies, hopefully with the agreement of the Treasury, in order to drive the right incentives into the system. That is a big component.

Q32 Chair: Mr Summerfield wants to comment on this.

Lee Summerfield: The analysis in our Report excludes the revaluation point. The only figure that it would come up in is figure 1, which is the gross value. All the other figures strip out the revaluation. I do not disagree with the point; that is just for clarity.

Jon Thompson: The answer to your final question-is it worth £16.8 billion net, which is in figure 1 on page 12 of the NAO Report?-is that we do not know. That will be the subject of a qualification. That will be the remaining qualification.

Q33 Meg Hillier: Is there any disincentive for the person who purchases it to have it destroyed or taken out of commission? There is a depreciation assumed, but who bears the cost, central MOD or the front-line unit that has done the ordering?

Bernard Gray: I do not think that, locally, there is any incentive or disincentive to remove it from inventory, because it is not hitting them in either direction. The issue is more around getting people to focus on it. I want to stress, taking the high-value targets first, that stopping buying things is a much more significant thing than either the cost of warehousing or the benefit of rationalisation. We definitely need to make space-I am not saying otherwise-but the cost of buying too much in the first place is 10 times the cost of keeping or disposing of old stuff, so we need to focus on that.

Q34 Chair: When Mr Heseltine wanted to stop money draining out of his business, he ordained that any expenditure over 50p had to go through him. Expenditure stopped. Why do you not just have a rule that every expenditure has to come through you?

Bernard Gray: We do have such a rule. It is not quite 50p, but inflation has had its way with us over 30 years. We instituted one rule at the beginning of this financial year, whereby my finance director has precisely that approval on any expenditure above £500,000. We have to balance the materiality of it with bogging down the finance director with everything every day on this point. We set the materiality level there, and that will save £300 million-worth of cash flowing out of the Treasury this year, which would otherwise be going into stock with us. That will accelerate to £500 million by 2015.

The second thing that we are doing as part of our strategy is treating this like a business that has gone into administration. We are just moving in. We are getting people from the outside, who are sitting down in the project teams; people will have purchase orders, and the person from outside is the aggressive person from the bank who sits there and says, "Why are you ordering that? I am interrogating that. Is it not in stock? Why aren’t we using an old one?" and so on. Only if you get past Torquemada do you get to order your thing.

Q35 Chair: And all that challenge was not going on before?

Bernard Gray: No, but it is a specific programme. We are going round the highest-value spenders with teams over the next 12 months, interrogating that, and turning off those taps in order to drive out massive amounts of money.

Q36 Meg Hillier: It is great that that is happening. We would probably all applaud that, but the problem partly is the people who put in the order in the first place. Is a cultural change going through? I can imagine the pressure if you are a front-line commander. You have a lot of pressure on you to have the kit, but where is the incentive coming in the military to reduce the demand?

Bernard Gray: A cultural shift is definitely required. The first thing to do is to stop the patient bleeding. We do not think that this is anything other than a gross intervention to prevent the waste of public money today, but then we have to move back from that and say, "How do we, on a systematic basis, educate people on how to do it? How do we change the incentives?" We have talked about the accounting systems and so on. How do we make sure that people are billed when they order things, rather than not? How do we change the software systems so as to stop people re-ordering from stock every time they draw something down?

You rightly also point to another dimension. Some of it is ordered by project teams that sit with me, and some of it is effectively mandated by the front-line Army, Air Force or Navy commands who are calling forward stock. We need to educate people and change the culture of ordering stock and what levels of stock are required. Part of that education is getting people to understand. Part of it is the information systems that Major General Copeland has talked about, and part of it is frankly making it hurt them if they order by changing the billing regimes.

Chair: I want to bring in Justin Tomlinson, but first, Guto Bebb-quickly, while we are still on accounting systems.

Q37 Guto Bebb: What you are saying, in effect, is that some of the stock is actually held at a value higher than the cost of purchasing it in the open market.

Bernard Gray: That is correct.

Q38 Guto Bebb: You also stated that some of the departments are charged for the stock when they throw it down from the depots.

Bernard Gray: Sorry, can you say that again?

Q39 Guto Bebb: Some of your departments actually charge for the stock when they throw it down. I am asking whether it is worth while for somebody to order stock new, rather than from your depots, if the valuation in the depot is actually higher than the cost of buying new.

Bernard Gray: No, it doesn’t work like that.

Q40 Guto Bebb: It doesn’t work like that?

Jon Thompson: It doesn’t make any difference. They don’t have any visibility of what it costs.

Q41 Chair: That is one of the things you want to change?

Jon Thompson: Yes, absolutely.

Q42 Chair: So that they feel some pain, so to speak.

Jon Thompson: Correct.

Q43 Justin Tomlinson: We are all appreciating your candid approach. It is fair to say that anybody who comes to this panel always say that things are going to get better, but there certainly seem to be some tangibles. Turning to paragraph 1.25, and the example of the Nimrod maritime patrol aircraft, for which stock was ordered after it had been decommissioned, what safety checks are now in place to make sure that that sort of excessive waste will not happen again?

Major General Copeland: That sort of behaviour is crass and absolutely unacceptable. In terms of safeguards for the future, the intervention approach that has been discussed by the CDM and PUS is one of those approaches; it is about working much more closely with the product teams to make sure that the buying behaviour and the purchasing is very strict and subject to very vigorous controls. I do not believe that that has happened before. The Nimrod is an example, but I think that there have probably been others. We are going to try to bring a discipline to project teams that just has not been there before.

Bernard Gray: Paragraph 1.25 does not say that we bought equipment after it was cancelled; it said we continued to hold stock.

Major General Copeland: And to be clear on this particular point, this was more cock-up than deliberate, because these Nimrod spares were attributed to Tornado aircraft. Again, probably because of the poor information systems, that did not become clear. When it became clear that they were Nimrod spares and not Tornado spares, they were disposed of.

Q44 Chair: It is slightly worrying if somebody was waiting for something in theatre, and what you sent them turned out to be for the wrong aircraft.

Major General Copeland: I don’t think that they would have been sent, because they are subjected to quality assurance and checking at the purple gate in the UK before they are sent out-

Q45 Chair: The purple gate?

Major General Copeland: The purple gate is how we describe our exit point from UK-the line of communication from the UK to Afghanistan. Everything that goes out to Afghanistan, or indeed any operational theatre, is checked through the purple gate.

Q46 Chair: So it is a quality gate as it goes out.

Major General Copeland: Absolutely.

Q47 Chair: But there is not a quality gate as it goes into storage?

Bernard Gray: There is. In any statistical system, human beings will make errors about what is recorded in it. No database is perfect. What this is saying is that we held on to Nimrod spares after the aircraft were disposed of because those spares were misclassified. We have an accounting system. Any accounting system is a statistical exercise; it is not a definitive fact. Any set of company accounts is a view and any audit will be a percentage of the totality. You are looking at a statistical database here where somebody has misclassified something. The point the general is making is that it may be misclassified on a database account. When you draw it down and it is clearly the wrong object, you go and get the right one.

Q48 Meg Hillier: Just to be absolutely clear, is it always obvious it was the wrong object? I imagine that they are a bit more than stores men at the purple gate, but you will not have people who are trained in every aircraft and every facility that is coming through. What if you have a pack of nuts and bolts that are designed for the Nimrod but were labelled for the Tornado or vice versa? Can that be picked up at the purple gate?

Major General Copeland: I do not have any statistical evidence to hand, but I cannot recall in my three years of delivering matériel to Afghanistan any evidence of things being badly wrong.

Q49 Meg Hillier: So the people at the purple gate are doing a good job-that is what you are saying-and making sure that that does not happen?

Major General Copeland: I think they are, but the resources that we have in our depots have been absolutely focused on operations. What has suffered, perhaps, is some of the routine activity, because we have had to prioritise, but for operations we will absolutely prioritise the effort.

Jon Thompson: There are two other reforms in the pipeline that are worth noting. They are referred to obliquely in this Report. One is the matériel strategy and what difference that will make to the relationships; Bernard can talk about that. The other is the delegation of the budget from head office down to front-line commands. That will move the capital budget down to the front-line command, so that when you purchase capital spares, it will hit your DEL in the Army, Navy or Air Force, and so on. Therefore the incentive will be on the front-line command to stop doing it, because it is immediately hitting their budget. That is one reform that will make a difference to this. That should start in April 2013.

Bernard Gray: We have a multiple strength, part of which is the importing of private sector skills and understanding of some of these issues. As I soon as I said, "We revalue stock," there was a frisson round the table as everybody recognises that that is not the right thing to do. Anybody who has spent any time in a private company will understand that. We have not yet had a policy inside the Department for the thick end of 10 years that has done that. So that is just one example of the way in which we need more finance professionals who have spent time working out there in private sector accounting firms and/or private sector industry to be able to understand what it is we need to track.

Finance is a key skill. My finance director came to us from the private sector 12 months ago, and he is trying to recruit more skill into the Department in order to be able to do that. Across a wide range of things, including supply chain management, which affects what we are doing here-inventory management-we are importing skill, so that we can get to the bottom of what is a pretty murky situation. One of the difficulties that we will face in our new information systems, for example, is making sure that the data that we transfer from the old systems to the new systems are accurate. We need to avoid the kinds of problems that we are talking about with the Nimrod. We need skills and tools to be imported from the private sector in order to be able to get a grip around this problem.

Q50 Chair: I want to come back to Mr Tomlinson, but while you are on the subject of skills, the Report says in paragraph 2.19 on page 33 that there is a "lack of qualified staff", and I understand from the NAO that you have some 1,100 infantry management staff, although the establishment that you are able to fund and are expecting is some 400 or 500 higher than that. To my surprise, the Report also says: "To hold an inventory management post, staff must obtain an appropriate qualification within six months of taking up post." In many areas of life, you are expected to have a qualification before you start the job, rather than getting it within six months afterwards and, as it turns out, not actually succeeding in getting it six months afterwards. The Report states that "173 staff (13 per cent of those in post) had not obtained a qualification despite being in post more than six months." What are you going to do about this, because this is plainly critical?

Bernard Gray: I agree, and it is only a subset of the wider problems that I face in the other areas that I have already mentioned, such as commercial skills and finance and so on, so there are half a dozen disciplines in which this is true. To agree with you and perhaps go slightly beyond your point in the same direction, for my money, someone who is newly qualified in something is not as experienced as somebody who has been doing it for 20 years, and there is an understanding that comes from experience that you just do not get out of studying a textbook and passing an exam.

Part of the whole thrust of what I am trying to do with the matériel strategy is get people in who have significant experience in all of these relevant areas, including inventory management. One of the difficulties that I sometimes have in discussing this within Whitehall is that there is an assumption that somebody who has just got a qualification in something is the same as somebody who has been doing it for 20 years. That is not true. For my money, I need to be able to make substantial changes to the composition and competencies of the organisation in order to be genuinely effective not only in inventory management, but in engineering, supply chain management, systems engineering, programme management and finance.

Q51 Chair: That is quite a list, and it makes me wonder whether the NAO might consider examining at some point the whole question of skills in the defence sector. It is a subset of skills in Government, and the lack of the right professional skills in Government is something that the NAO has drawn our interest to on many occasions, but you do have people who go off and do degrees and become masters of defence administration, and I have met such people. Do you think that the set-up for achieving that is insufficient to meet the requirement?

Bernard Gray: My personal opinion is that it is insufficient. Those qualifications are a good thing to do, and we need to upskill the work force that we have, but we also need to inject significant skills from people who have been doing this for their professional lives, rather than moving people from one general appointment to another around the system. People spend their entire lives in finance outside of Government. They should spend their entire lives on finance inside Government. It is a specialist sport.

Chair: This is music to our ears, and I am sure that we will return to it.

Q52 Justin Tomlinson: Turning to paragraph 1.23 of the Report, if I heard rightly earlier on, your plans are to cut the volumes of stock held by some 35%.

Major General Copeland: That is correct.

Q53 Justin Tomlinson: I have two questions on that. First, what made you choose 35% and not 40% or 30% or whatever? Secondly, if we look in paragraph 1.23 at the example of the air conditioning units, 12 of which could not even be used if they were called upon, to what extent will depreciation of the stock be taken into account when deciding which to dispose of?

Major General Copeland: I missed the last part of your question, but, on the first part, we felt that 35% was a good stretch target. Looking forward to the logistics commodities and services transformation programme, which is designed to potentially outsource some of our logistics services, particularly the warehouse operation, and bring in new infrastructure, we felt that that was a target that would match the LCST ambition. It could have been 40% or it could have been 50%, but we felt that 35% was sufficiently stretched.

Q54 Justin Tomlinson: So on the specific point of the air conditioning, which is a good example, 12 now cannot be used, so presumably their resale value is considerably less. With an ideal utopian system, you would have identified that. They were clearly not needed, but before they were surplus and able to be resold, the system could have flagged that up. Is that something that you are trying to build into the new system?

Major General Copeland: Looking ahead of the game, it is absolutely important. In the case of the air conditioning units, they are specialist air conditioning units that were part of a chemical, biological, radiological and nuclear suite of inventory, and not the sort of air conditioning unit that you might imagine in a hotel. It made sense to group those air conditioning units together and sell them as part of a CBRN lot, if you like. That is the approach that we took with those.

Q55 Justin Tomlinson: Turning to paragraph 2.17 on the information systems, there are two points that I want to link together. If I am right, we have currently got 10 stock control computer systems. The idea is to get to one that is comprehensive and has everything. It seems that the nub of all the problems is that you can have as many professionals with as much experience and expertise as you like, but you might not know what is really going on. What is the time frame for having that single system whereby all of your wonderful experts with their experience can get in and actually find out what on earth is going on?

Bernard Gray: I do not think it is an either/or, because you need the databases set up appropriately in the first place, and that has to be done by people who know how to do it. Then you need the report-writing tools to be written over the top of them, which analyse the data in the appropriate way that allows you to abstract the information. Then you need people who know what you are doing with that. You need a level of expertise in setting up the systems in the first place. Data migration is a substantial challenge in that-understanding the quality of the data. I do not see this as an either/or. I think you need both.

Q56 Justin Tomlinson: But the point is that I suspect you have those people for the second part. If you had all the information, you would probably have the expertise. Coming specifically to the point about professional people, you keep referring to the private sector and saying you need to bring in private sector experience, but the private sector does not always get it right. A good example is Tesco and-dare I say it after last week’s performance?-Amazon. One of the reasons why they do so well is because they know where every last bit of their stock is, and they make sure that they clear it if it is not needed and that they are getting the maximum return for their stock.

Sainsbury’s was struggling. When their latest chief executive came in, the one thing he sorted out was all of that stock control. Is it somebody from that type of world that you are chasing? Admittedly, the products are different, but the principles of logistic stock control and everything being barcoded and put on to the system so that the experts can analyse it are the same. Is that the professional that you are chasing down now to fix things?

Bernard Gray: We do have a professional from a logistics background running that activity today. The problem is that it is not star footballer territory. You need to be able to change the rest of the people. One of the things that is underlying that point about some of the other private sector examples is that Justin King would have been able to change not only the person at the top of that organisation, but the people straight down through the system, and that is significantly more difficult to do inside the public sector.

Q57 Chair: Are they military people or civil servants?

Bernard Gray: Mostly civil servants.

Q58 Chair: So you are saying that really what you need and have not had is a wholesale clear-out.

Bernard Gray: We have significant vacancies right now. Partly what you do is bring in enough expertise from the outside: a critical mass of people who can teach other people. At the moment, there are many good, worthy people down there who simply do not know what to do.

Q59 Chair: But if they were taught properly and had a software kit that worked, maybe they could do a better job.

Bernard Gray: They could, and if they understood why it was important as well, they could do a better job.

Q60 Chair: And if they were trained properly, maybe they would understand. While we are on this point, General Copeland mentioned earlier that it would be 2015 before you had what you described as an end-to-end logistics system. We had an exchange on this point. Mr Gray was there. I think you were at the same hearing, General Copeland, when we looked at the logistics supply chain last year. It was not clear to me what an end-to-end supply chain was. The failure to have proper asset tracking, or matériel tracking or logistics tracking-whatever you call it-was identified in 1991 after the first gulf war. This Committee and the NAO identified it again after Operation Telic in 2003, and last year I quoted a 2004 document-a seven-year-old document-about developing an end-to-end control process for consignment management. You are telling us now, in 2012, that it is going to be 2015, which will be 24 years since the first gulf war, before we have an end-to-end logistics system. Why should we believe that it is going to work this time-what is different? It keeps on getting pushed further and further into the future.

Major General Copeland: What is different is that we have invested the money now. We have got-

Q61 Chair: Is this the £75 million, by the way, or is that something different?

Major General Copeland: That is part of it. We are on an £803 million contract with a delivery partner, Boeing Defence UK. That contract started in 2010 and runs through to 2021. The first part of that contract is to deliver a deployed inventory system for the management of the deployed inventory. That has already gone out to Afghanistan and, indeed, it was also used during the air campaign for Libya, where it was very successful. So, we have a deployed system now that is in Afghanistan and making a difference. It will help us do redeployment over the next-

Q62 Chair: But it is not yet end-to-end?

Major General Copeland: It is not end-to-end because it needs to be joined up with the base inventory system-what we have described as the base inventory and warehouse management system. That is going to be a commercial, off-the-shelf buy. Again, part of that is within the £803 million contract that is to service the air environment and replace the very old air system. Part of it-the £75 million that you mentioned-is to replace the munitions, land and maritime systems which, again, need replacing urgently but, frankly, just after the RAF system. That £75 million will go forward as a review note early next year when the Department will decide whether that is enough money or not.

Jon Thompson: Just so you understand the full landscape here, the Department is investing more than £1.1 billion in information systems in this particular area. We have struck a long-term partnership with Boeing. We are looking at outsourcing and what strategic partner we can bring in on the logistics and commodity services side of that. We have Ernst and Young involved in a partnership helping us to analyse where we are, how we can optimise the stock and so on. We are serious about doing this, and the board has invested significant funds.

My speculation is that part of the problem over the preceding 20 years is that this has not been a priority for investment. In the wake of the 2009 audit report, we have allocated significant funds and management effort to this in order to drive the necessary change.

Q63 Chair: You might be right, but when Sir Kevin Tebbit appeared in front of us to talk about progress from reducing stocks ten years ago, he pointed out-actually, the NAO Report pointed out-that £120 million had been spent on asset tracking software, but it did not work and, in fact, he said in front of this Committee that they had ended up trying to buy Rolls-Royce when what they really needed was a good, reliable Toyota. It sounds good when you say that we are now finally investing £1.1 billion in information systems, but after a few years on this Committee, frankly, the fact that you are now spending lots of extra money on IT is more inclined to make my blood run cold, because I want to know that it is going to work. What evidence should we be looking at that it is going to work, and when will it be working by?

Jon Thompson: As Ian said, the first of those systems is the management of the joint deployed inventory. That costs £183 million. I was in Bastion in Afghanistan recently and it is deployed in the field, working and well regarded out there. That is the first of the changes that we see in the information system space. There are three further systems that we are bringing in: the base inventory system, the vehicle and management system, and then the overall arrangements with Boeing. So we have made the first step and it is deployed and being used right now in Afghanistan.

Q64 Ian Swales: I am beginning to learn why magazines are always full of these MOD auction events, but, seriously, I want to ask a bit more about the accountancy for this. I understand that there is capital and revenue stock involved here. At what point does the Department book the spending opposite the Treasury? Is it done on a cash basis, or when you do large stock write-offs, are you effectively going to have a spending requirement opposite the Treasury? The second way would be the proper way to do the accounting, but just tell me how it works. In other words, when does the cost of all this purchasing hit you in the Department?

Jon Thompson: Bernard and I have been discussing this for some time. On the revenue side of this, if you like-the consumables element in figure 1 in the NAO Report, "Raw materials and consumables"-when there is a purchase, it does not hit DEL at all: it is a straight switch between cash and stock. If you then do not use that stock and write that off, it hits DEL as a non-cash item.

Q65 Ian Swales: I am talking about the envelope round the Department.

Jon Thompson: At no point does purchasing stock that you subsequently write off and do not use hit your annual spending control regime in a cash way. It is a non-cash transaction.

Bernard Gray: It only hits your annual target if you actually use it. So if you buy it, it goes from Treasury cash to an item on our balance sheet. If you then write it off, it is a balance sheet write-off and is disposed off. So in private sector terms it does not go through the P&L.

Q66 Ian Swales: Exactly. That is really my point, because my background is in the private sector. Clearly if you have all this stock to write off, you have the enormous cost to hit your P and L account. That is how you would normally expect to see things happening, but it is not going to be like that for you.

Jon Thompson: It will hit our non-cash DEL, but the entire incentive architecture of managing public money is about cash DEL because that is the one that impacts on PSBR.

Q67 Ian Swales: So it is effectively accounted for on a cash basis, except that you don’t even see the effects of that?

Jon Thompson: It is very odd.

Q68 Ian Swales: So this is why you were saying earlier that managing public money needs to be updated in this respect?

Jon Thompson: Yes. If you look at it on a whole of Government accounts basis, looking at the balance sheet for the whole of Government accounts, stock is £12 billion, of which £8 billion is us. We are a major player on a whole of Government accounts basis, but, as we have all tried to explain, we are putting in the controls necessary to try to stem the flow and deal with the problem, outside and well beyond managing public money.

Q69 Ian Swales: I want to stay at macro level on this. What do you think ought to happen between your Department and the Treasury, in terms of a new regime that makes you more accountable as a Department for this activity? I am just talking about the accountancy, not about decision making. How do we need to change things?

Jon Thompson: What we have done, from April, is to agree our budget for the annual spend in this particular area. As Bernard has said already, we have reduced that by £300 million, and at the half-year point we are on target for that coming down by £300 million. So some of the figures that are quoted in the Report-for example, £2 billion of annual spend-will come down. That is an agreement that we have reached with the Treasury and is a sensible step forward. Then, we have put in the internal control of individual purchases of £500,000; that covers around 75% of what we are spending. We think we can stem the flow. But we are forging ahead with putting in internal controls that, really, are outside the scope of managing public money. I do not personally think that they should be outside the scope of that, as I think that managing public money should be significantly more balanced between, if you like, P and L and balance sheet management, whereas the focus is very heavily on P and L management in that sense.

Q70 Ian Swales: So, again, being simplistic about it, you as a Department do not actually see the effect of old stock being written off?

Bernard Gray: It would show up as a balance sheet write-off, so it would show up as an impairment charge. What will happen is that the Treasury will have bought a lot of stock, which sits on a shelf and is eventually written off, but never goes through our P and L in a meaningful way. It would be a good thing for us to have a conversation with the Treasury about how we move that forward to set the right incentives up. We have some thoughts about that, but one of the things we need to be careful to do is make sure that we do not, in rushing at that, set up a bunch of other inadvertent incentives that are the wrong thing. We need to sit down quietly and think about what the appropriate things are.

Q71 Ian Swales: Without waiting for the next NAO Report, it would be good for us to see what incentives you are thinking about putting in place. You have picked up the potential perverse incentive, and, actually, my blood ran slightly cold at one point, about 10 minutes ago, when you talked about the person in the field having an incentive as to whether to buy a spare or not for their equipment: I suddenly thought, "Hmm, do we really want to be right out there in the field saying we’re not sure we need a spare for this aircraft this week, because we have run out of budget?"

Bernard Gray: To be honest with you, that is not really our problem at a level where we have got £40 billion-worth of gross book value and we are buying more than we are using. We have a rough stock turn of-

Q72 Chair: You have 54 years’ worth of spares for Nimrod.

Bernard Gray: You can move a long way before you get there.

Chair: We have got some scope, I expect.

Q73 Ian Swales: Okay, great. Can I just ask that the Committee sees something on that? I don’t know if the NAO could make sure that happens. This is such a large amount of money and such a key issue. In your Department it is a major one. There are others with stock. It will be interesting to see how the Treasury modernises this relationship.

If I could move on to another area I want to touch on: the warehousing question. Some of the Committee, including me, had the opportunity to look round the warehouse in Scotland that is midway between the two dockyards building the new aircraft carriers. What an efficient operation it is; it is fantastic. I can’t remember the name of the company that runs it; it is a private sector company. It is terrific. It is sending out the pieces for the various stages of construction.

Can you say more about your strategy on warehousing? I notice in one of the footnotes that there is an estimate that your installed warehousing has a replacement cost of nearly £1.5 billion. Yet, we also hear rumours that once the German and Afghanistan situations are resolved you might even be looking for more warehousing. How are you going to bring all that strategy together, between the warehouses you already have, the need to bring more private sector expertise and the potential need for more space, but slashing the amount of matériel you’ve got? How is all that going to work in a value for money sense? That is what we are interested in.

Bernard Gray: We have a specific programme on change within logistics overall-the logistics commodities and services transformation programme is its kennel name-that is seeking to bring together all of those components. As Jon said, we are working with an internal team alongside Ernst and Young to map that out.

Taking it from the top, we are looking to reduce the amount held in stock by a third over the course of the next three or four years, which will create significant amounts of space. We are thinking about how we then map it-we have already talked about the rough divisions in the amount of matériel coming back from Afghanistan and about what we will dispose of locally versus what we will bring back. That is the shorter term repatriation, as it were, because that will come back by 2015, whereas rebasing from Germany will probably take a bit longer.

We haven’t really discussed this in detail but somebody asked a question about why 35%: that is a good first target. We will continue to sweat it. Having achieved 35%, we will then move on.

Q74 Ian Swales: My real question is: how is all of this relating to the warehouse capacity?

Bernard Gray: I am trying to describe it. What I am saying is, we have got a bunch of warehouses; we have to sweat a lot out of those warehouses. We have an initial target of 35% and then we will go beyond that. That 35% of additional capacity will allow us to move in the equipment from Afghanistan. When we sweat down beyond that, that will allow us to move in equipment from Germany. We then need to look at the whole footprint-in particular, in relation to the Army, which is the biggest single component in volume-of where they are going to be. We need to ensure that the warehousing capacity is appropriately placed to cut down on transportation costs. It depends exactly on what the footprint of the Army is within the UK.

We then need to look at the age and condition of the warehousing in order to retire the older warehouses and try to hang on to the new ones. Finally, in that set of jigsaws, we are looking at how we can outsource this activity. I note the comment by the NAO that we should not outsource until we are ready. For my money, there is a balance: what can you achieve within the public sector quickly versus what, having outsourced it, can the private sector do for us to accelerate that and where does value really lie? It is not immediately obvious to me that if it took us another 10 years to sort ourselves out internally and then we outsourced that that would represent better value for money.

Q75 Chair: Mr Gray, on that point, do you accept that if you have a problem and you outsource it, you relocate the problem rather than solving it?

Bernard Gray: It is certainly a well known aphorism.

Chair: I wish it were. We have seen people have all kinds of problems with all kinds of private sector contractual arrangements over many years, and I do not think it is an aphorism-I think it should be-but do you accept that it is true? How would you go about negotiating with outsourcers-contractors-when you do not know enough about what you have got, what you want or where it is? They would run rings around you and build in an enormous risk premium, wouldn’t they?

Ian Swales: That is the real problem-what you would pay at that point.

Q76 Chair: You would pay an enormous risk premium, wouldn’t you?

Bernard Gray: I do not think that it is as simple as that. The reality of the situation is that it is a balance, if we think about how we could apply a certain amount of expertise from the inside in the negotiation of these things and apply some 80:20 rules about understanding where the balance of risk and investment lies, so I will not accept the general problem. I would not accept that, universally, it is always the case that if there is still some problem in here you cannot outsource it. That is too general a statement. Clearly, we need to quantify this well in order to be able to outsource it. The problem that I am trying to put back to you is: what if the public sector is incapable of bringing sufficient expertise to bear on this problem in order to finally resolve it? The logic of your position, I suggest, is that you would therefore never get to outsourcing it. My point is that we need, as a set of practical-

Q77 Chair: The predicate of your position is that there are things that the public sector just cannot do, whereas we won the Second World War and, if we wanted to do something badly enough and placed enough value on it, we would surely find a way to do it.

Bernard Gray: I do not necessarily agree, because you made the point earlier on that the Ministry of Defence has failed to solve these problems for 20 years.

Chair: Yes.

Bernard Gray: So I would say that it is not that the public sector possibly cannot do it; my observation would be that the public sector has not done it. I am a practical manager; I am looking at the situation and asking to what extent I can squeeze down the uncertainty in the situation to some kind of acceptable level; and then I can run a competition to outsource something, rather than waiting for the perfection in the public sector that I then outsource.

Q78 Chair: Inasmuch as someone as august as a Comptroller and Auditor General can gag, the CAG is very keen to get in.

Amyas Morse: I apologise for being late, but I had a pretty interesting flight down from Edinburgh where I have been testifying before the Scottish Parliament. I am sorry; I thought I would be here quite a long time before now, but it has been very bumpy.

The only thing that I would say is this: there is a difference between now and the past 10 years. You now have much more alignment of will within the Parliament. It is quite noticeable to me how different that is. I do not take that to mean that, ergo, you should not outsource. I have been involved in outsourcing businesses, and it is not only true that if you outsource a problem you give someone else who is good at it a chance to make quite a lot of money over a long period of time. You will no doubt get a good service, but you will pay for it, so our recommendation is not to say, "Don’t outsource," but, "Be really hard-nosed at driving at it as far as you can."

I am not accusing you of not doing this, by the way, Bernard-if you will pardon me for using first names-but all I am saying is that it would be great to drive it as far as you possibly can, because sometimes you might drive it a lot further than you thought, before you go for that solution. That means you are giving less away to the contractors and what you are getting more of from them is what their core contribution will be, which is real expertise in running it.

I make the recommendation purely because, yes, we are waiting for systems-we waiting for this; we are waiting for that-but what the MOD will really benefit from and is already benefiting from in my view is a very determined and coherent approach by the leadership of the MOD that says, "We’re really going to change this. We are absolutely not going to accept that nothing happens-that we get a report, we listen to the discussion with interest, and nothing happens. That is an unacceptable result."

Do not think that I am telling you something that you do not already have in your appetite. It is not a criticism. I am just saying that, given that now you have Minister, a PUS, your finance director and your chief executive, DE and S, all wanting to get this done and really vigorously wanting to get it done, you will do rather well at it. You just need a little time-not a lot-to run at it and see what you can do.

Bernard Gray: My point is that it is a somewhat nuanced debate trying to have a discussion about the appropriate amount of progress to make. All I am saying is that the devil does not have all the best tunes. There is a reasonable balance here that says, "How well do you characterise the problem?" This is one of 10 problems that we have to address.

I absolutely agree that, if we have a problem and we outsource it-not that we boast to have an outsource problem, but we are paying somebody else to solve it-it is not immediately obvious to me that that is a more expensive solution than us dealing with it ourselves. That is the point I am contesting. Therefore, I am saying that you characterise it and then you go through a process. In outsourcing, you are also then making sure that you set up the incentives that further drive up costs from the system.

Amyas Morse: One thing to say about that and to bear in mind is that, once you have done the outsourcing, you are then relying on being better at negotiating your outsourcing contract than somebody who is in the business of outsourcing. You are moving from one sector of pressures to another. I am not saying that I do not agree that you can outsource it. I do not really disagree. I am just saying that, for taxpayers’ interests, the more that you can drive it with your coherent and much more united management approach, the better it will be for us. Right? You cannot really be wrong.

Bernard Gray: I get that. You have to look at the other counterfactual situation as well. Part of the conversation that you missed unfortunately-I am sorry, it just happened-was the fact that we are struggling to recruit under the civil service aegis the kind of people who we need to do this work.

Q79 Chair: Is that because you are not allowed to pay them enough?

Bernard Gray: Not allowed to pay them enough. It is not attractive in a whole bunch of ways. We don’t have the kind of agility that we would want in order to recruit those people. Half a dozen people at the top of the organisation being determined about this is a good thing, but it is not a sufficient thing.

I shall give you a different example around the data. We can spend as much as we like on information systems and as much as we like on management, but if people working in the warehouses do not use the barcode readers to log the equipment in and out, our database will corrupt immediately.

Amyas Morse: Yes, I agree.

Bernard Gray: You said that we have just been to this fantastic private sector warehouse, which is doing a great job because they are all aligned. All the way down that system, they will be financially incentivised to make that work well. That is something that the public sector finds it very difficult to do. We cannot recruit or incentivise people in those kinds of specialist areas because the civil service structure is basically formulated around recruiting policy people.

Q80 Chair: In that case, as well as talking to the Treasury about the silly accounting policies that are creating averse incentives, shouldn’t you also be talking to the Cabinet Office about the silly civil service recruitment structures?

Bernard Gray: Yes, we should. What do you think our chances of success on this are?

Chair: Well, you will be preaching to the converted here, I can tell you.

Q81 Ian Swales: Just building one last thing on that, one of the things we have seen in the Committee around IT systems, outsourcing and all that kind of thing is that, if we are critical, it is usually not so much of the private sector provider. It is the specification by the public sector. It is the contracting. It is the understanding. In this case, if you want to do that, the groundwork you have to do to set the kind of service standards that you would want-for example, what kind of stock availability and so on-will have to be done anyway, because they will not do it for you. You will have to say, "We need this type of spare, in this time, in this location." That is true of the NHS IT system and many others, and the real problem is failing to specify what we actually want.

If the work that Boeing and presumably others are doing is not getting into that area, I am not sure what we are getting for our billion pounds-designing those service standards and actually applying them inside, and doing it. The private sector might be the next step, for all sorts of reasons that you have gone into, but my worry is that the grunt work of saying what kind of system we want is not a private sector thing. It is specified by the MOD, because the MOD is the user of the system and, typically, we do not do that very well.

Bernard Gray: I absolutely agree. As a customer, in a whole bunch of areas, we need to be sharp about that, but part of getting people’s attention is putting the incentive in place. If you bill people when they order, it gets their attention. Do I really need this? How much am I spending on spares? Is my training requirement actually going to be 30% lower than I might put in? We need more skill, as well as the right incentives in place. To be frank, I am not sure I really agree with you, and I think this is something on which doctors could legitimately differ.

For my money, one way of saying what we have just said about the system is that, uninterrupted, the public sector has been spending at least £500 million a year on things it does not need in order to write them off. It is probably more than that, but that is the amount we can reach out and put our hand on. I am not so sure that the public sector is a brilliant place to start with this, bearing in mind the points you made about some outsourced logistics companies previously and the job that they are doing.

As I pointed out earlier in this conversation, much of the focus in the Report and the Committee, and the effort that the Ministry of Defence put in in the past was around removing stock from warehouses, which is only one tenth of the value of stopping buying it in the first place. I am out there saying that of course we need to adjust it, but what if, for argument’s sake, the delta between a good contract and a bad contract led to a £50 million-a-year additional profit to a company? I am just plucking a number out of the air, but what if it led to us reducing not just by the 500 that we have, but by a further 500, and halved the amount of stock we held, which gave you something of the order of £600 million of benefit? You need to look at it in the round, in that sort of way, rather than just focusing on the cost of the service.

Q82 Ian Swales: I think we are probably having a heated agreement. Investment in service standards is part of either case. That was my only point.

May I make one last point, which is a basic question? What are we getting for our billion pounds from Boeing? What are we buying?

Major General Copeland: You are buying a deployed inventory system for about £183 million; you are getting an engineer and asset management system for about £83 million; you are getting a replacement RAF base inventory and warehousing system-

Q83 Chair: How much for the third one? You did not put a number on it.

Major General Copeland: Sorry. I cannot specify the exact amount for the RAF system, because it is within the £803 million contract. Off the top of my head-

Q84 Chair: I understood that you were just breaking down the 803. You said 183, then 83, and then you mentioned the third thing. I was hoping it would all add up to 800, and I was busy adding it up in my head.

Major General Copeland: It won’t add up to 800, because it is an 11-year contract. It is a service contract. It is not specifically about delivering applications. It is also about delivering a service to us over a period. One final qualification is that it is also building new data centres for us, because the centres we have are very old indeed and at risk of catastrophic failure.

Q85 Ian Swales: Two supplementaries as a result of that: first, what proportion of the MOD’s activities does that cover; and, secondly, doesn’t this interact with the previous point that you cannot outsource something while you are in the middle of this type of massive investment in systems?

Major General Copeland: The answer to the first part of your question is that it is covering the totality of defence, less the bit that the Chief of Defence Matériel has just been talking about. For the non-explosive central depot warehousing, the plan at the moment is to centralise on to the Army inventory system, which is called BODMS, which is the best, most modern of the three inventory systems. That will take us forward to contract award, and at that stage we will discuss with the outsourced partner, if we go down that route, whether their system can integrate with BODMS, or can integrate with the new base inventory system.

Q86 Ian Swales: We are not spending all this money on systems only to find that a new private sector provider brings their own. I mean, they will know what they are doing.

Major General Copeland: They may well bring their own system, but it will have to integrate with the commercial, off-the-shelf system that we are developing.

Q87 Ian Swales: The Boeing one? Sorry, the commercial system?

Major General Copeland: The commercial, off-the-shelf system that we are going to adopt as the base inventory and warehousing solution.

Q88 Ian Swales: So that’s not the Boeing one, then?

Major General Copeland: It is an inventory system that Boeing uses, yes. It is based on GOLDesp. So yes, there is commonality there. As we go through the logistics commodities services transformation, and we go through the assessment phase, clearly that is one of the most important aspects that we will be discussing with our partners.

Q89 Ian Swales: When you have been on this Committee a couple of years, you get a nose for things. I am already worrying about the redundancy of some of the effort that we are putting in now if we go down another route. Are any of these things cutting across each other?

Bernard Gray: I’ve got to push back on that. On the one hand you are saying, "Until you know what the problem is, you cannot outsource it." On the other hand, you are saying, "You’re implementing a whole bunch of systems in order to better characterise the problem, and isn’t that going to be redundant because you are then going to outsource it?" Which crime would you like me to go with?

Q90 Ian Swales: Well, it is from your own mouth, really. You are saying, "Well, let’s just push it out."

Bernard Gray: No, I’m not saying that. What I am saying is: we have to go through a process of improving our management information and improving our stock control system such that we understand well what we have got. And then when we have that-it will take up to 2015 to deliver that in a phased way-we will have a much more investable proposition that we can then take out to the marketplace and use. I think that is a reasonable approach.

Q91 Chair: That is somewhat reassuring, because with one of the things you said earlier it was not obvious to me that the outsourcing you are proposing would necessarily be more expensive. My immediate thought was that it was not obvious to the people who let PFI contracts that they would end up paying £900 to change an electric light socket, but that is what they ended up doing in many cases. Of course, the MOD building is a PFI. I wonder how much it costs you to change sockets in your building. Do you happen to know?

Jon Thompson: I don’t know, sorry.

Q92 Chair: Well, if you could send us a note, I would be interested. How many sockets have been changed, and how much did they cost? I would like to know.

The real point is that, once the thing is signed originally, contractors, according to the NAO Report on the PFI contact, look to "develop" their income from the contract. And any outsourcing business that does a lot of outsourcing will be looking to develop its income from the contract. It will be looking to turn that 50 into 75 and that 75 into 95, won’t it?

Bernard Gray: I understand the point, but we have-

Q93 Chair: I’m sorry; am I wrong?

Bernard Gray: No, but you have to look at it as a comparison between two possible courses of action, one of which is to retain it within the public sector and the other of which is to outsource it.

Q94 Chair: But my constituents are paying either way. That is the point that concerns the Committee.

Bernard Gray: I understand that, but the point I am making is that you are not, in that description of it, looking at the problems that would apply if you retained it in the public sector. What we are saying here is that there is north of £500 million a year of the Treasury’s money going missing in the way that the public sector handles it right now. The advantage, at least, of a contractual relationship is that you can trap it. The controller general can look at it and ask, "Does that represent value? Are they driving down the cost of owning this relationship or not?", whereas when it is in a rather amorphous state within the public sector, where nobody is tied down to performance criteria in a meaningful way, it is at least plausible that that, as a total system cost, may be higher.

Q95 Chair: The CAG’s Report says quite explicitly that there are risks to value for money owing to the lack of a comprehensive, top-down strategy, a lack of robust information and a lack of skilled staff. Surely, unless those things have changed, we are opening ourselves up to considerable risk by going down the outsourcing route too soon. Is that not merely what the NAO is saying?

Amyas Morse: I do not think we are actually talking about very different courses of action at all. I do not think you are wrong to be looking at outsourcing. You can use outsourcing as a very powerful incentive. Some of you are determined that that is what you are definitely going to do-which I am not accusing you of, by the way. I think it provides a very powerful incentive on the existing non-outsourced, because people know what will happen when they are outsourced. So it provides a very powerful incentive, and I have seen, in practice, quite a few times that you end up not outsourcing because actually, under the pressure of the probability that something will be outsourced if rapid progress is not made, strangely enough, rapid progress is made. You have suddenly replaced financial incentives with a different sort of incentive, and it is a very powerful one, to be quite honest. I am sure that that is lurking in the back of your minds. I am not actually disagreeing with you. You will only ever let that work if you proceed with outsourcing as a real option-I am not suggesting you shouldn’t-but also keep alive the other option that if things really got good enough that you could not see a discernable benefit from outsourcing, obviously, quite clearly, it would not make any sense to do it.

Bernard Gray: We would not do that and the Treasury wouldn’t let us. If, against the public sector comparator, the outsourcing solution was fundamentally not good value for money, we would not be allowed to proceed.

Q96 Chair: Hang on a minute. We know from the National Audit Office from many years ago-

Amyas Morse: I do not think we are disagreeing about this very much. I am not attacking the idea of outsourcing; I am simply saying that even if you didn’t outsource, you might achieve a lot out of it, and if it doesn’t perform that well, okay, you’ve got the case made.

Q97 Chair: Mr Thompson, you are looking to come in. Are you about to tell us that you agree with the National Audit Office that the public sector comparator is pseudo-scientific mumbo-jumbo?

Jon Thompson: I am happy to agree with that. What I was going to say was that if we want to do this, we are going to have to construct a business case that will get through our investment approvals system, which the Comptroller and Auditor General has just written to me to say is probably the best practice in the public sector. We have screwed down how you make investment in this organisation to the ground. It is run by the FD, it includes Bernard on the committee, it is highly sceptical and it turns down business cases. If we cannot construct a value-for-money case, it will not fly and it will not get through our system.

Amyas Morse: But while that debate goes on, you will probably get a very considerable driver against these costs.

Bernard Gray: I absolutely agree with you, not that it had ever occurred to me, that it was a significant incentive.

Amyas Morse: I am not suggesting that it hadn’t.

Bernard Gray: The philosophical question I would leave is that, okay, at a moment in time we can definitely get a performance improvement out of it, but what worries me, debating this issue a bit further, is what happens over time beyond that point, when the public sector is not nailed down to a contractual standard performance. It is harder to track, harder to enforce and the basic incentives do not operate in the same way. I absolutely agree that we need to look at it rationally. I do not have a closed mind about all this, but I see benefits to a contractual relationship as well as negatives.

Chair: Mr Heaton-Harris, who has been very patient.

Q98 Chris Heaton-Harris: It has been an interesting debate. This is one of the most interesting National Audit Office papers that I have managed to read properly, and I congratulate you on your candid responses, because it is really refreshing to hear some honest answers-not that we don’t get honest answers in this Committee, but we do get a lot of stonewalling.

You will recall the passages that Mr Bacon read out earlier from a previous Report. I was concerned because, in logistics terms, I had seen the cannibalising of all sorts of different pieces of kit, including Typhoon aircraft, so I have always been interested since that day in how logistics work in the armed forces.

I have a handful of questions, some of which we have brushed over a tiny bit. I just want to know at the start whether this "order as much as you can when there are no consequences" was driven by us politicians. If there is not enough kit and people aren’t protected well enough by something or other, did we perversely incentivise this sort of mindset?

Jon Thompson: I am not sure that we could speculate on that. As we have been very clear, the system is geared towards making sure that you can always deliver the order and therefore you have too much. Is that driven by a policy issue? I don’t know.

Q99 Chris Heaton-Harris: How long have the rules which you are trying to change been the rules?

Jon Thompson: Managing Public Money and all those rules?

Q100 Chris Heaton-Harris: Yes. Have they evolved?

Jon Thompson: Managing Public Money was rewritten in 2009. My guess is that the preceding version of Managing Public Money did not address this either. My strategic point is that Managing Public Money is absolutely focused on annualised DEL because of the PSBR system, rather than the fact that we are trying to manage a £130 billion balance sheet. The system, it feels to me, is out of balance. Sorry, but I am being completely honest about it as the previous finance director. That is the way the system is; that is my observation.

Bernard Gray: We think that the incentive systems were changed as part of the introduction of resource accounting and budgeting in 2000-01, but I do not know that 100% for a fact.

Jon Thompson: If you wanted something to have a specific look at, there are aspects of Managing Public Money that could be changed. And in relation to your question about PFI, my view about the Green Book is that that there are definitely reforms that could be made to it in relation to value-for-money benchmarks, public sector comparators and so on, which would make the previous conversations seem a lot more transparent about what you compare against.

Q101 Chris Heaton-Harris: Fair enough. I personally would be interested in that, although I don’t know about the Committee.

Mr Gray, you said you wanted to change these internal rules. We had a bit of a debate about how that would work. What is your time line for this change? You are obviously already stopping ordering things you don’t require, but what about the rules behind that?

Bernard Gray: We are effectively imposing our own rules. I think they sit within Managing Public Money. I don’t think they are in any sense offensive to it, but we are just saying that the current Treasury rules are necessary but not sufficient. We are bounding it within that in order to track cash better. We have a programme that we started last April on those controls. Those controls are being increased in the way that we have described. We track through to 2015. I daresay that, before we get to that point, we will have the next round of how we will improve that from an internal point of view within our own power. It is really a matter for the permanent secretary. We will sit down internally and then have a conversation with the Treasury. It is not really for me to say, on a cross-Whitehall basis, when or if those rules should be changed.

Jon Thompson: Given what I said earlier about the whole of Government accounts, we are the major player in this space. The only other Department with any significant level of stock is the Department of Health, and essentially that is all fragmented in the system because of the way the whole system works. Beyond that, there are almost no other Departments with this kind of challenge.

Q102 Chris Heaton-Harris: I am very aware of what Mr Gray said-that it is fine having six people at the top driving this, but you’ve got to drive it through the system, which I guess is where paragraph 15 in this report comes in: "The Department has not successfully created incentives for project teams and the armed forces to consider the full impact of their decision-making." I am hoping this is a driving-through process and that you will be encouraging those teams to manage the inventory effectively right the way through the change.

Bernard Gray: So the short answer is yes. Within my direct organisation we have a whole set of activity that we have described. We need to have a conversation across the Department about how the other front line commands, as the generators of demand, behave. There is a significant amount we can do within our power to change our internal processes and rules about that, which we can do over the relatively short term. I do not want to make a mistake that somehow drives some other perverse incentive, so you need to think about it a little bit carefully, but that is a matter of months rather than anything else. Beyond that, whether that changes the formal rules across the system is a matter for others, really.

Q103 Chris Heaton-Harris: A possibly slightly flippant question, in a way. You have got £2.4 billion worth of stock, and you have already got five years worth of supplies for some things, so are you going to get rid of some of that stuff?

Bernard Gray: You have to look at it specifically, don’t you? Because there is nothing more annoying than throwing it away and then finding, five minutes later, that it would cost you a fortune to replace it. The process that the General has described, particularly looking at working through non-moving or very slow moving stock and figuring out how much of it we need to keep versus what we should dispose of is a systematic way of approaching the problem. Therefore, to my mind, the pace at which stock is moving is a better indicator than the depth of the stock because, as somebody said earlier on, when you buy a Type 45, it may well make sense to buy some capital spares for a whole-life buy-that certainly happens on our submarines for example-rather than buying them as you go along.

Q104 Chris Heaton-Harris: So you are not going to have an MOD-bay or something like that?

Bernard Gray: We already have one of those. If you want a destroyer, we’ve probably got one.

Q105 Chris Heaton-Harris: Now I am tempted.

Bernard Gray: It is very you-it is a statement. We could talk afterwards if there is anything specific-

Q106 Chris Heaton-Harris: I have cash.

Bernard Gray: Excellent. Well, we take cash.

Q107 Chair: I went to a depot in Leicestershire, I think it was, where I saw things like tanks, vehicles with tracks and all sorts of lorries and other military stuff for sale. You would hand over money and buy it.

Bernard Gray: If I may say so, off Yarmouth, a destroyer would look just so.

Chair: I need an amphibious vehicle, actually. I have got a lot of marshland in the east of my constituency.

Chris Heaton-Harris: Because it rains a lot.

Q108 Meg Hillier: We have discussed all the high-level stuff, but I was going to come in to ask about the disposal. As I represent east London, the Army and Navy surplus stores are probably champing at the bit, but there is a serious point. All the stock is overvalued, so how are you going to work out the price to sell everything from boots to tanks, and everything in between?

Major General Copeland: I do not know the specifics of how it is valued. We do it through an organisation called the Disposals Services Authority. They are skilled at what they do, but I cannot give you a specific answer about how they value it.

Q109 Meg Hillier: Okay. There must be some sort of market rate built in, but if you are going to dispose of a lot in one go, I can get some cheap boots down my local market. Whenever you do that, compared to doing it at a slower rate, presumably, there will be a flooding of the market-whether that be for ships, tanks or boots.

Jon Thompson: I think that essentially what we are saying is that we have a specialist organisation that takes responsibility for it. It is obliged to get the value that it can for us, and it can take the decision about how it goes about that. Our approach to selling individual items depends on what the items are.

Q110 Meg Hillier: You have also got to reduce your stock levels by 35%, so that is a driver. But which is the bigger driver? You talked, Mr Gray, about it being small fry compared with stock and purchases, I get that, but for my constituents, £50 million from getting rid of some stock is quite a lot of money-it would pay for a few schools and so on. It may be small fry for the MOD, but it is still a significant sum for the taxpayer.

Bernard Gray: No, I am just saying as a matter of practical management-

Meg Hillier: Absolutely. I agree with you on your-

Bernard Gray: Sure. Somebody made the point about the six people at the top of the organisation. We need to communicate to a large number of people, which requires it to be clear what the priorities are. In just getting out to the thousands of people involved in all of this that the priority is to stop buying things, that we are going save more public money for you than if we say that reducing excess stock is the main priority.

Q111 Meg Hillier: No, I do not disagree with your basic premise. Nevertheless, it seems to me that there has to be value for money in getting rid of it as well, and that is what I am asking about.

Jon Thompson: Sure. The DSA is charged with that responsibility, and we are not casual about £50 million-every penny counts.

Meg Hillier: I am glad to hear that.

Major General Copeland: Further to reassure you, when we created the logistic commodities and services operating centre, which is run by somebody who we brought in from the private sector, we put it in an organisation that is significantly more commercially focused than, perhaps, the joint support chain that I run. Hopefully that should give you the assurance that we are not just giving this away; we are trying to get the very best price for everything.

Q112 Meg Hillier: And for accounting purposes it has been overvalued, because of this inflationary approach. So on your books, how will it show?

Jon Thompson: It might be undervalued. We do not know. Sorry-

Q113 Meg Hillier: Oh, okay. That is very candid. And alarming.

Jon Thompson: The point about revaluation is that the gross value is rising but the net value is falling. So there are some strange accounting practices in how you gross something up, but then you have to-[Interruption.] Sorry.

Chair: You haven’t got any new microphones in storage, have you?

Jon Thompson: I am sure we could do you a good deal on microphones.

Then you have to go backwards. It is set out in figure 1 that, although the gross value is going up, the net value is going down. But as I said earlier, I believe there will still be a qualification on the accounts this year about whether £16.8bn is an appropriate valuation or not, or whether we have further impairments to make. That is still work that we have to do.

Q114 Meg Hillier: Finally, some bits of this kit are presumably things you cannot just sell to anybody, because there will be certain of our allies that use that type of equipment. What sort of deals are you looking at there? Are you looking at value for the taxpayer as a priority, or are you going to be looking at our defence arrangements with other countries?

Jon Thompson: When it comes to bigger pieces of kit, we do international tenders and still go for value for money.

Meg Hillier: Thank you.

Q115 Chair: Have you sold the Ark Royal yet, by the way?

Jon Thompson: Which one?

Q116 Chair: The original one. When this Committee had a defence landscape seminar, there was a chap there with a business card with a picture of the Ark Royal on it. I think he was trying to raise the money to buy it. Paul Beaver?

Bernard Gray: We were just looking at each other to see whether the answer is yes.

Q117 Chair: Has he bought it from you?

Bernard Gray: We believe it is yes.

Q118 Chair: We think it was to save it for the nation, rather than to-

Bernard Gray: We will check and come back to you. We think the answer is yes.

Q119 Chair: Yes, you have sold it?

Bernard Gray: We think. We will check and come back to you.

Q120 Chair: It’s quite big. It’s hard to lose.

Bernard Gray: Sure, but it is scrap.

Q121 Chair: Yes, I understand. But I think he thought it had an emotional and historic value for the nation.

Bernard Gray: And if he wishes to pay us a premium for that, then I am delighted.

Q122 Chair: It should not end up in Paraguay, I think was his point.

Jon Thompson: Actually, Bernard, that reminds me. I think we have sold it to a company in the north-east, specifically for that purpose-for it to be broken up.

Q123 Chair: Broken up?

Jon Thompson: For scrap, yes.

Q124 Chair: Really? So he did not raise the money. The price of scrap metal, of course, is shooting through the roof.

Bernard Gray: To answer the question about how the accounting shows up, what would happen to anything that was sold-obviously, aggregated up-is that, effectively, we would have the net between whatever it was at in the books and whatever we sold it for. That would be a write-down in the annual accounts, so it would say that we have written off x that year as a result of disposals at below the level at which we held them in the accounts. That is how it would technically show up.

Q125 Chair: I’ve just been told that you only got £3 million for the Ark Royal. Is that true?

Jon Thompson: If that is what you have just been told, yes. You have the advantage on us.

Q126 Chair: I have been told by the Clerk of our Committee, who, among his many talents, is not a Ministry of Defence official, so if you could just send us a little note, that would be helpful.

Jon Thompson: I will happily give you a note.

Bernard Gray: He has access to the internet and we don’t.

Q127 Chair: Yes, but you cannot always rely on what you read on the internet.

Bernard Gray: That is also true.

Q128 Chair: I have a couple of wash-and-brush-up questions. You mentioned that there are a range of accounting policies that are potentially causing problems or present issues, or that are just strange. Could you write us a short note setting them all out? That might help us in our recommendations and in our eventual response in the Treasury minute.

Jon Thompson: Certainly.

Q129 Chair: The NAO was unable to estimate the cost of armed forces storage: the stuff that is not in central depots, but is now out there, which as you identified in figure 2 has been going up. Do you know what that cost is?

Major General Copeland: I think the figures that I have are that the front-line commands hold about £10.8 billion worth of stock. Just to clarify that-

Q130 Chair: That is spread between which theatres?

Major General Copeland: Between the three front-line commands. Of that, the most significant chunk is £4.7 billion, which is held forward in air main operating bases.

Q131 Chair: Right. The only question I had was, who is going to be responsible for delivering all of this?

Bernard Gray: I guess me, which may or may not be a good thing for you, from your perspective. But working for me, Michael Bradley, my finance director general-

Q132 Chair: He is the three star who was mentioned in the note.

Bernard Gray: Yes. And then a team including Major General Copeland and the logistics team and a two-star civilian working for that, called Neil Firth.

Chair: This has been an interesting hearing and an unusually candid one. So despite the appalling track record over many years at getting this sorted, I think you have begun to convince us that, actually, this time, maybe you are serious. I cannot help thinking of that remark of Groucho Marx’s, that sincerity makes the world go round and if you can fake that you’ve got it made. But for the purposes of this hearing, we will give you the benefit of the doubt.

I am sure we will return to this subject and we will want to know about your progress, but in the mean time, thank you very much all for attending.

Prepared 4th December 2012