Thank you for your letter of 12 March requesting on behalf of the Committee explanations for a number of the significant changes contained in the Department's 1998-99 Spring Supplementary Estimates. I am sorry to have been unable to meet your original deadline.

  In broad terms, the purpose of the Department's Spring Supplementary Estimates was to:

—  realign provision, both within and across the three Defence Votes, to reflect (a) changes in the pattern of anticipated expenditure (principally in respect of transfers of management responsibility between TLBs and the PE Business Units); and (b) decisions to aggregate estate disposals receipts in 2nd PUS's TLB and provision for Telecommunications Services in VCDS's TLB;

—  reflect the net additional costs of the implementation of Strategic Defence Review decisions;

—  draw onto Vote the Department's entitlement to End Year Flexibility in respect of its underspend of £225.2 million against the 1997-98 Defence budget cash limit;

—  draw on to Vote the additional funding of £85 million from the Reserve agreed by the Treasury as a contribution towards the unprogrammed costs of ongoing military operations in the Balkans and over Iraq.

  A number of these changes are, of course, linked. In particular, increases in provision for the PAOs and underspend in the PE business units reflect the transfer of responsibility, and hence financial provision, to the PAOs from the PE for particular items of equipment.

  The trend to underspend on the equipment budget also reflects the Department's determination to protect cash limits, against the background of previous overspends and related criticism. As a result, particular care has been taken so as not to incur additional expenditure to fill the gaps left by slippage in the equipment programme. Effective end-year expenditure control measures were also implemented. Thus reducing the risk of overspend inevitably leads to a degree of underspend. The specific aspects on which the Committee has requested further explanation are addressed below, in the order raised in your letter.

SECOND SEA LORD

  The 8 per cent increase in expenditure provision (some £40 million) in Second Sea Lord's TLB was mainly due to the following: additonal provision to compensate the TLB for the aggregation of land disposal receipts into 2nd PUS's TLB (£15 million); the transfer of management responsibility from Commander in Chief Fleet's TLB in respect of Royal Marines' Training (£7 million); the implementation of SDR measures(£5 million); and some £14 million for the additional costs of allowances, training, and the implementation of Resource Accounting and Budgeting.

2ND PUS

  The 10 per cent increase (£60 million) in 2nd PUS's provision for Other Current expenditure was made to cover the inherent risk in corporate expenditure for which 2nd PUS is responsible, principally in respect of claims against the Department, the timing and size of which are beyond the Department's effective control. The 250 per cent increase in Appropriations in Aid provision (£187 million) reflects the reaggregation of all land disposal receipts to the DEO Agency within 2nd PUS's TLB. This follows from the SDR recommendation that the Chief Executive of the Defence Estate Organisation should assume managerial and financial responsibility for all property assets after their release by TLBs.

VCDS

  The 12 per cent increase (£185 million) in expenditure provision within VCDS's TLB had two main components. The main element related to the aggregation of all funding (£81 million) for Defence Fixed Telecommunications Service provision into the Defence Communications Service Agency within VCDS's TLB. This reflects a Public Private Partnership arrangement by which the return on the capital investment made by the contractor (BT Inca) is secured through payment by the Department for usage and service charges. A large element of the funding was transferred from the Procurement Executive, whose funding for the procurement of telecommunications equipment was no longer required following the move to a service only contract. The second component of the increase, amounting to some £65 million, was additional funding to cover the unprogrammed costs of overseas operations, £60 million of which related to ongoing military operations in the Balkans.

THE PRINCIPAL ADMINISTRATIVE OFFICER (PAO) TLBS

  The respective increases in provision were CFS 9 per cent (£175 million), QMG 11 per cent (£108 million), and Logistics Command 5 per cent (£76 million). The main element of these increases was the transfer of some £198 million from the PE Business Units to the PAOs, parallel with the transfer of responsibility for certain equipments. The further increases to the PAOs' provision included: provision for the unprogrammed costs of support to military operations in the Balkans and the Gulf (£85 million); the implementation of SDR measures (£17 million); and risk in the programme associated with uncertainities over the performance of industry and the timing of its billing (£59 million).

COST OF OVERSEAS OPERATIONS

  The £310 million increase in the Defence budget cash limit (comprising an EYF entitlement of £225 million plus a further £85 million) reflected, inter alia, the Government's contribution towards the unprogrammed cost of overseas operations. Although these operations were forecast to cost some £200 million, at the time of the Supplementary Estimates it was the Department's judgement that around £115 million of this could be met from funds held centrally against contingencies. The total forecast of unprogrammed overseas operations this year, excluding the costs of the current air operations, breaks down as follows:

PE EXPENDITURE

  The HCDC has commented that despite the fact that Vote 3 was underspent by some £203 million on 1997-98, its 1998-99 cash limit has nevertheless been reduced. There is, however, no simple correlation between last year's Vote 3 underspend and this year's PE equipment programme. For example, the relationship is masked by transfers of responsibility between the PE and the PAOs and the consequent transfer of funding from Vote 3 to Vote 2. There was an unusually high level of transfers this year (£198 million). In strategic terms, natural slippages in the PE programme this year have enabled the Department to protect its overall cash limit through avoiding backfill. This was also the case in 1997-98.

  Another factor contributing to the reduced funding requirement on Vote 3 in the current year was the very late stage at which the Department's claim on the Reserve for EYF and funding relief for overseas operations was approved. The effect of this was to leave the Department with little opportunity to reverse the deliberate and prudent management action taken earlier in the year to constrain Vote 3 expenditure against the prospect of a failure to secure the full level of additional funding sought in the Supplementary Estimates. Unlike the slippage from 1997-98 into 1998-99, this year's anticipated underspend on Vote 3 is not currently expected to flow through in 2000-01, but to add to FY 1999-2000 expenditure.

  In respect of the PE business units specified, the reasons for the individual underspends cited are consistent with the overall underspends on the procurement budget described in the preceeding paragraphs.

1 April 1999