1. (Recommendation 1) It was unhelpful of the MoD to provide the written evidence we had requested only a day before the evidence session we had scheduled. We expect better cooperation from the Department in future, and accept the Permanent Secretary's assurance that lessons have been learned and that such failings will not happen again. This is essential if Parliament is to undertake its role of scrutinising the work of the MoD effectively. (Paragraph 4)

The Permanent Secretary has made clear that maintaining a good relationship with the Committee to facilitate its scrutiny of defence on behalf of Parliament and the public is very important to us. As the Committee has recognised, we have reviewed what went wrong on this occasion and have undertaken to ensure that it does not happen again.

Public Service Agreement Targets

2. (Recommendation 2) We are very concerned to learn that the MoD's assessment of its expected achievements against its six 2004 Spending Review Public Service Agreement (PSA) targets, which run until March 2008, has started to travel in the wrong direction. In its previous Annual Report and Accounts published in July 2006, the MoD reported that it was on course to achieve all six PSA targets. However, at the end of 2007, the MoD did not expect to achieve the PSA target relating to force readiness, and expected "only partly" to meet the PSA targets relating to recruitment and retention, and defence equipment procurement. We note that the MoD considers that not achieving the force readiness target is a consequence of the "high levels of deployment ". We recommend that, in its response to our report, the MoD identifies the key factors which have led to the deterioration in its expected achievements against its PSA targets and sets out what action it is taking as a result. (Paragraph 12)

Readiness

It is simply not possible for the Armed Forces to operate at the level and intensity they have sustained for some years while simultaneously being prepared for the full range of potential additional hypothetical contingent operations underpinning Defence Planning Assumptions. We have therefore made clear for some time that it is highly unlikely we will meet our readiness targets. As we have made clear, success on current operations in Iraq and Afghanistan is our overriding priority. We have therefore deliberately prioritised resources to support current operations over the preparation of force elements for scenarios much less likely to be faced in the short-term. Examples include:

• the employment of personnel outside their primary role in order to meet operational capability gaps inevitably reduces their readiness in that primary role. For example, we have recently re-roled tank squadrons to drive Mastiff and Warrior; protected mobility is a high priority in both Iraq and Afghanistan, but there is a very limited requirement for main battle tanks;
• some specialist equipment (such as 16 Air Assault Brigade's WMIK and 3 Commando Brigade's Viking) has proved well-suited for a particular operation or environment. In these cases, the requirement to support current operations has been accorded priority over equipping forces at readiness;
• where training has been compressed, it has necessarily concentrated on the skills needed for current operations and taken risk against (for example) the high-end tactical manoeuvre of an armoured brigade;
• reprioritisation of resources away from areas of Defence with less practical application for current campaigns, such as anti-submarine warfare, has inevitably reduced readiness in these areas. The process of recuperation, which will require significant time and resources, will aim to restore expertise in these more general, but currently under-utilised, war-fighting skills; and
• in some cases, niche capabilities have become entirely committed to preparing for, conducting or recovering from current operations. Their readiness for general war-fighting has consequently inevitably deteriorated.

We are well aware of the risks and underlying issues and are mitigating them where feasible. We continue routinely to work within the resources available to improve current readiness levels and controlling risks to readiness through contingency planning, revising training patterns and manning plots, and working with industry partners to address delivery challenges. Examples include:

• Personnel: Financial retention initiatives have proved a useful and focused tool to improve retention of pinchpoint trades;
• Equipment: We are making 14 additional support helicopters available for current operations (albeit not all could be available simultaneously) with six Merlin (from Spring 2008) and eight Chinook (from 2009). Additionally, the procurement of two further C-17 aircraft will also address readiness gaps as well as providing additional capability for current operations;
• Training: A future training programme for all types of military operations is being developed to ameliorate the longer-term impact of focusing training for current operations over the short term; and
• Logistic Support: We continue to invest in the required spares and munitions to support operations.

Readiness profiles provide a clear and relatively objective assessment of the impact of the pressure under which the Force Structure is operating. They are not a measure of the ability of the Armed Forces to sustain current operations, but a reflection of performance against the readiness profile we would expect to see if the Armed Forces were operating within routine concurrency levels. We expect them to start to improve (with about a 6 month lag time) as commitments start to reduce.

Recruitment and Retention

Overall, recruitment is broadly satisfactory. Selection standards have not been reduced and the quality of those joining remains high. In 2006-07 we recruited 1,210 more people than the previous year. But the recruitment market is challenging. We face stiff competition from other employers, and more young people are now opting for further education.

Sustaining current operations has made it impossible to meet harmony guidelines across the Army and Royal Air Force, but the recent National Audit Office study into Recruitment and Retention in the Armed Forces confirmed our judgment that "it is difficult to identify any one factor that leads people to leave the Services". Each Service conducts its own exit interviews or surveys to determine why people leave, and the results show broadly similar trends.

• Royal Navy: The main reason for leaving the Royal Navy given by personnel in Exit Interview Reports since these began in 2003 is "separation and domestic issues";
• Army: The most appropriate assessment of the factors that influence officers and soldiers to leave is the Army's Leavers survey. The most recent version of this was published in March 2007, covering responses given between November 2005 and October 2006. For Soldiers, the top five retention-negative factors were the impact of Army lifestyle on personal and domestic life; the amount of separation from spouse/partner; job satisfaction; own morale; and civilian career prospects. The top five reasons cited by officers were: own morale; the impact of Army lifestyle on personal and domestic life; opportunities outside; civilian career prospects; and the effect of operational commitment and rates of stretch; and
• Royal Air Force: All personnel who voluntarily leave the RAF, either through taking Premature Voluntary Release or at a point where they had the option to extend their service, are sent a survey. Over June 2005 to April 2007 the five factors rated as the most influential and important by Airmen and non-commissioned Aircrew were: expected future job satisfaction; future of RAF; opportunities to spend time with family; current job satisfaction; and Service morale. For Officers from September 2005 to September 2006 the five main factors were: If I stayed longer it would have been difficult to start a second career; employment opportunities outside RAF; direction and strategy of RAF; future of RAF; and future job satisfaction.

We have a wide range of focused initiatives in place to improve recruitment and, especially, retention. These include:

• Commitment Bonuses: £5,500 is currently available to Other Ranks in all three Services for a return of an additional two years service. On 19 March 2008 the Government announced that this would be significantly increased from 2009 to a maximum of £15,000 for those who deliver nine years service in total;
• Financial Retention Incentives: the RAF for example runs a continuation package that is designed to encourage individuals to continue service beyond their Option Point with a five year Return of Service;
• Targeted recruitment initiatives such as the "One Army" Recruiting campaign;
• Initiatives to improve work/life balance and working conditions as the front line;
• Operational bonus of £2,320; and
• Prioritised investment in accommodation.

Equipment Procurement

The Department met this target in full in 2005-06 and 2006-07. But while we expect to meet the targets for delivery of Key User Requirements and in-year variation on forecast costs in 2007-08, in each case with an improved performance on 2006-07, we do not expect to meet the target for in-year variation of In Service Dates. As set out in the Autumn Performance Report, this in part reflects a deliberate decision to delay deployment of the Beyond Visual Range Air-to-Air Missile on Typhoon. Technical difficulties have also emerged on a number of other programmes, including the Next Generation Light Anti-Armour Weapon, Terrier Engineer Tractor, the Airborne Stand-Off Radar and General Service Respirator. We have taken mitigation action to minimise associated slippage, but with varying degrees of success.

3. (Recommendation 3) The MoD does not expect to meet the PSA Target relating to generating forces by the end of March 2008. The performance on both of the performance indicators underpinning PSA Target 3 has continued to deteriorate. We note that the MoD considers that this reflects the pressure on the Armed Forces which have been operating above the level of concurrent operations they are resourced and structured to deliver. This causes us deep concern. We fully acknowledge the pressures on our Armed Forces and the commitment they have demonstrated. We recommend that, in its response to our report, the MoD and the three Service chiefs set out how they plan to reduce the pressures on our Armed Forces and why they expect to see improvements relating to generating forces. (Paragraph 20)

We welcome the Committee's recognition of the pressure on the Armed Forces and the commitment they have demonstrated. Operating above routine Defence Planning Assumptions over such a long period has been demanding, but it is self-evident that our people have more than risen to the challenge. Although we have been heavily engaged in both Iraq and Afghanistan, their performance has been outstanding.

We have noted and understand the Committee's concern. Our priority has to be achieving success on current operations. As we have made clear, this has required the Armed Forces to operate in excess of the established planning assumptions for which they are routinely resourced and structured. While this is undesirable, it is not critical so long as it is not sustained indefinitely; the force structure is both resilient and flexible. As well as seeking and receiving additional funding for current operations, the Department has reprioritised within the core defence budget to ensure the delivery of key Defence outputs—notably success on operations. Clearly, one result has been that certain areas of Defence have been accorded a lower priority than we would like.

As the Chief of the Defence Staff said in December, reducing the number of our military deployed on operations is the key to restoring the training base within the UK and more widely. 2007 saw the successful conclusion of Operation BANNER in Northern Ireland after 38 years, and Operation OCULUS in Bosnia after 15 years. We were also able to reduce substantially the number of British forces deployed in the South of Iraq and close a number of bases. While force levels in Afghanistan increased over the same period to meet the very demanding challenges of that campaign, overall activity levels and the pressure on the force structure have reduced. Extrapolation of future commitments and force levels is inherently uncertain, but we expect to be able to reduce further in Iraq, and while our military contribution in Afghanistan is certainly not going to be short-term, we expect the Afghan security forces, particularly the Afghan National Army which has been performing very well recently, to take on an increasing share of the military burden. As the Committee would expect, we have plans in place to recuperate the force structure further over time, subject to the necessary resources being available, once commitments return to a level where this is possible without taking risk against success on current operations.

Service Personnel Issues

4. (Recommendation 4) We note that the MoD does not expect, for different reasons, to achieve manning balance in the Royal Navy / Royal Marines and the Army by the end of March 2008. We recommend that, in response to our report, the MoD sets out how it plans to achieve manning balance in the future for the Royal Navy/Royal Marines and the Army. (Paragraph 27)

All three services were outside the manning balance range (2% below and 1% above the required trained strength of the Service) on 1 January 2008, although we expect the Royal Air Force to achieve manning balance by 1 April 2008. The current situation within each Service is:

• Royal Navy: There are no critical manning shortfalls preventing deployment of Royal Navy Units, and we are working to close the current deficit by 2009-10. This includes:
  • a combination of a restructuring measures to ensure there are sustainable specialist branches for the future and to reflect newer, less manpower intensive vessels being brought into service;
  • a number of initiatives to grow Strength such as increased recruiting, further expenditure on marketing, and streamlining of career progression to accelerate the filling of gaps at critical levels; and
  • review of training and remuneration to improve retention. Financial Retention Initiatives for Royal Marine Other Ranks, specialist nurses and naval aviators are already in place, and the Armed Forces Pay Review Body 2008 recommendations included a realistic pay rise and substantial retention package for the fragile Submarine community.
• Army: Reaching full manning is the Army's highest priority after operations. We have therefore introduced a package of further measures over and above existing recruiting and retention programmes and activities. In particular we are introducing incentives to improve retention within the training and recruiting system as we recognise that the current level of wastage is unsatisfactory. These include improved mentoring, activities to inject greater variety in training, and facilitating greater parental involvement. We are also introducing incentives for recent leavers to rejoin. In combination with the retention incentives and other elements in this year's AFPRB settlement, we expect these measures to support progress towards achieving manning balance; and
• Royal Air Force: We expect the RAF to achieve manning balance by 1 April 2008, although there is a risk that it may subsequently fall again. A programme of retention and recruiting measures to address this is therefore now underway.

5. (Recommendation 5) The MoD continues to experience shortages within some specialist groups in all three Armed Services, including substantial shortages within the Army Medical Service and Elsewhere. The MoD have put in place measures to try and reduce the number of manning pinchpoints. We note that the MoD also expects that force level reductions in Iraq will reduce some of the pressure in these specialist groups. We recommend that, in its response to our report, the MoD provides us with an update on the position relating to manning pinchpoints and its assessment of the success of the measures introduced to reduce their number. (Paragraph 31)

Manning Balance is a very broad measure and within the overall picture there can be larger shortfalls or excesses against particular trades and specialist groups. We therefore devote considerable effort to managing the balance of personnel at those more detailed levels. Where there is a shortfall in trained strength in a particular trade or area of expertise or a commitment that exceeds the formal establishment this is identified as a manning Pinch Point. Considerable effort is devoted to managing these to alleviate shortfalls, and we welcome the Committee's recognition of this work. A variety of measures are used, including: financial bonuses to incentivise recruitment and retention; continuous review of the posts required and the rank and expertise required to fill them; mobilisation of Reserves; contractorisation; and increased training (including fast-tracking for some trades). Over the longer term, the Services also adapt their manning structures to reflect the skills and expertise required for the type of operations we expect to undertake.

ROYAL NAVY

As of 21 January 2008 there were 15 identified pinch points in the Royal Navy:

• RN Harrier GR7 Instructors
• Lt GR7 Harrier Pilots
• Merlin Observers
• Able Bodied Seaman
• Merlin Pilots
• Able Bodied Diver
• Leading Hand Warfare
• Strategic Weapons Systems Junior Ranks
• Able Bodied Warfare Specialist (Sensors Submariner)
• Petty Officer Mine Warfare
• Nuclear Watchkeepers
• Able Bodied Warfare Specialist (Tactical Submariner)
• Merlin Aircrew
• Sea-King & Lynx Avionics Supervisors
• Royal Marines Other Ranks

Across the RN there are currently over 60 recruitment and retention initiatives, including a number of specific Financial Retention Incentives. Over the longer term the Navy is working to resolve many of these pinch points through Project Fisher and other Navy Board Personnel Change Programme projects.

ARMY

As of 18 February 2008 there were 28 identified pinch points in the Army:

• Army Medical Service Radiologist
• Army Medical Service General Surgeon
• Army Medical Service Anaesthetist
• Army Medical Service Orthopaedic Surgeon
• Royal Engineers Explosive Ordnance Disposal
• Royal Artillery Operator Unmanned Aerial Vehicle
• Royal Logistics Corps Ammunition Technician
• Army Medical Service Radiographer
• Royal Logistics Corps Petroleum Operator
• Army Medical Service Operation Department Practitioner
• Royal Engineers Military Engineer Geographic
• Royal Electrical and Mechanical Engineers Recovery Mechanics
• Army Medical Service Emergency Medicine Nurse
• Army Medical Service Registered General Nurse (Officer)
• Intelligence Operational Military Intelligence
• Army Medical Service Intensive Therapy Unit Nurse
• Royal Electrical and Mechanical Engineers Vehicle Mechanic 1
• Royal Engineers Mechanical Engineer Fitter
• Royal Logistics Corps Postal and Courier Operator
• Royal Engineers Clerk of Works
• Adjutant Generals Corps Military Administrator
• Royal Engineers ME C3S
• Royal Electrical and Mechanical Engineers Armourer
• Army Medical Service General Medical Practitioner
• Royal Logistics Corps Chef
• Infantryman
• Royal Electrical and Mechanical Engineer Avionics Technicians
• Royal Signals Information Systems Engineer

The introduction of various Financial Retention Incentives such as Golden Hellos has resulted in steady improvements in some pinch point trades. Non-remunerative measures have also had effect. For example, deficits have reduced against the following trades:

Trade	Deficit April 2006	Deficit January 2008	Measures taken
Intensive Therapy Unit Nurses	97%	23%	Golden Hello £20K
Emergency nurses	96%	30%	Golden Hello £20K
Petroleum operators	11%	-10%	Improved recruiting Extra course to get more people into trade
Unmanned Aerial Vehicle operators	51% (October 2006)	48%	100% take-up on recently introduced £10,000 payment for three years return of service. The benefits will be seen in the future.
Royal Signals Engineer	18%	-1%	Conversion courses from other trades.

Financial retention incentives continue to be used to manage voluntary outflow among carefully targeted groups, such as the commitment bonus for Infantry soldiers at the four-year point. New incentives for Army Vehicle Mechanics have also recently been announced.

ROYAL AIR FORCE

As of 31 December 2007 there were 14 identified pinch points in the RAF:

• Medical
• Weapons Support (Linguist)
• Princess Mary's RAF Nursing Service
• Weapons Support (Air Load Master)
• Gunner
• Operational Support (RAF Regiment)
• Staff Nurse (Registered General Nurse) Accident and Emergency
• Air Traffic Control/Flight Operations Manager/Flight Operations Assistant—Sergeant
• Operational Support (Provost/Security)
• Operational Support (Flight Operations)
• RAF Police
• Operational Support (Intelligence)
• Movements Operations/Controller
• Motor Transport Technician

Examples of measures being taken to alleviate shortfalls include continuing recruitment efforts, retention bonuses; golden hellos and other incentives.

6. (Recommendation 6) We are concerned that there are signs that voluntary departure in the Armed Forces, in particular the Army, is increasing and that in the RAF personnel are not extending for a further engagement to the extent that had happened in the past. This may well reflect the pressure that our Armed Forces continue to experience. We look to the MoD to monitor this issue closely. (Paragraph 36)

A reasonable level of voluntary outflow is healthy for any organisation and the Armed Forces compare well with other public and private sectors. Outflow rates are also in part a reflection of past recruitment rates. On average, other ranks serve for eleven years. Military staff turnover is in the region of 10% per year, of which 4.5% is voluntary outflow. The remainder largely comprises those who complete their full engagements or are discharged involuntarily for a wide range of reasons including medical and disciplinary. Voluntary outflow rates are broadly stable but edging upwards slightly, but average rates can mask higher rates in some very significant areas, and high rates in certain specialisations can contribute to Manning Pinch Points. As the Committee would expect, we therefore keep this under close review.

In some important areas, voluntary outflow is currently too high. For example, the rate for soldiers in the Army is running at 5.8% against a target of 5.1%. We are therefore reviewing ways of retaining our people, including a number of measures specifically aimed at reducing Voluntary Outflow, such as:

• Commitment Bonuses: £5,500 is currently available to Other Ranks in all three Services for a return of an additional two years service. As noted above, on 19 March 2008 the Government announced that this would be significantly increased from 2009 to a maximum of £15,000 for those who deliver nine years service in total;
• Financial Retention Incentives, such as the Army's payment of £4,500 for Infantry Other Ranks, paid for return of service between the four and six year point;
• Initiatives to improve work/life balance and to introduce more flexible ways of working; and
• The new operational bonus of £2,320.

The Royal Air Force is taking forward a Retention Action Plan, which has contributed to the work of the Armed Forces Pay Review Body. Elements include: use of financial retention incentives and/or specialist pay to address Operational Pinch-point Trades; review of selected allowances; introduction of an enhanced Career Management Strategy, broadening opportunities, reviewing Career Terms and Conditions of Service; accommodation issues; and greater awareness of the identity and profile of RAF personnel.

7. (Recommendation 7) We note that the Army and the RAF are failing to meet both individual and unit harmony guidelines, and that the percentage of RAF personnel exceeding the individual harmony guidelines has risen sharply during 2007. We find the reported performance against Unit Tour Interval harmony guidelines for the RAF much less precise than for the other two services, with some RAF squadrons just reported as "heavily tasked". We look to the MoD to identify how the setting and measuring of Unit Tour Interval harmony guidelines for the RAF can be improved. (Paragraph 43)

The Armed Forces have always taken the impact of separation on people and their families very seriously and they therefore set harmony guidelines—which are not rigid rules—that are designed to ensure that they can perform the tasks that the Government requires of them without asking their people to bear an excessive long-term burden. Performance against Individual Separated Service guidelines, reflecting the balance between the amount of time spent on operations and training away from home as against in the home base, is effectively used to monitor the work-life balance of military personnel. The guidelines are set by each Service to reflect their individual operating contexts, cultures and practices. The current approach is quite new, having been introduced in 2005, and we continue to refine how it is measured and monitored. We are also reviewing whether there should be a common standard across all three Services.

The percentage of Royal Air Force personnel exceeding the Individual Separated Service Guidelines (of no more than 2.5% of RAF personnel with over 140 days over a 12-month rolling period) rose sharply during 2007. In large part this reflected the change in measurement methodology in the second quarter of 2007-08 to bring the RAF in line with the other Services by counting single nights away, rather than periods of Separate Service of three or more consecutive nights away. This accounted for the majority of the rise from 6.7% of RAF personnel exceeding Individual Separated Service guidelines in the first quarter of the year to 9.2% in the second quarter.

Unit Tour Intervals are difficult to apply to most RAF units because only the RAF Regiment deploys as complete formed units in the same way as the majority of the Royal Navy and Army:

• Air Combat Units have only had to deploy either at, or near, full unit strength in the first stages of operations in Iraq and Afghanistan. Subsequent stages of these enduring operations have required less combat air support. As a result we have not been deploying full formed units but have rather rotated personnel between their home station and the deployment location for shorter periods at more frequent intervals, in order to ensure that complex flying and engineering skills are maintained at appropriate levels;
• Air Support and C4ISTAR units generally have a Headquarters element and deployable aircraft/crews or teams. The units themselves therefore do not deploy as whole entities but as numbers of aircraft/crews or teams in support of deployed locations; and
• Enablers, such as the Air Transport fleet and Air Movements do not deploy as formed units, but deploy individual aircraft and crews as required to meet in theatre tasks and movements to and from deployed locations.

Consequently, the way most RAF units currently operate makes it impossible to measure deployments against the formal Unit Tour Interval guideline of four months on deployed operations in 20 months. This has been reflected by our use of terms such as "very hard pressed". Recognising this, we have therefore been developing an alternative way of measuring operational deployments against this guideline by taking that element of Individual Separated Service arising from operational deployments and calculating from that the level of operational service against the Unit Tour Interval guideline. Measured this way, 10.6% of RAF personnel exceeded the guideline in the first quarter of 2007-08, 11% in the second quarter, and 7.1% in the third quarter. We are working to try and apportion this data to formed units from the first quarter of 2008-09.

8. (Recommendation 8) We are very disappointed with the failure to meet harmony guidelines in the Army and RAF. This is another clear indicator of the pressure on our Armed Forces from the continuing high level of operations. The MoD expects the position to improve with a reduction in the current operational pressure. We certainly hope so, as we find the continuing failure to meet harmony guidelines unacceptable. In its response to our report, we expect the MoD to set out what impact the failure to meet harmony guidelines is having, such as the impact on the retention of Service personnel. (Paragraph 44)

We have noted and understand the Committee's concern, but our priority has to be achieving success on current operations. As we have made clear, this has required the Armed Forces to operate in excess of the established planning assumptions for which they are routinely resourced and structured. Some parts of the Army and Royal Air Force have consequently exceeded harmony guidelines. While this is undesirable, it is neither critical nor unacceptable so long as it is not sustained indefinitely; the force structure is both resilient and flexible. It is not possible precisely to quantify the impact. With regard to retention, as set out in the response above to question 2, the recent National Audit Office study into Recruitment and Retention in the Armed Forces confirmed our judgment that "it is difficult to identify any one factor that leads people to leave the Services". While the level of operational pressure reflected in the failure to meet harmony guidelines is clearly one factor in why personnel leave the Services, it is neither the only nor the preponderant one.

9. (Recommendation 9) We continue to be extremely disappointed and concerned to learn that all three Services missed their targets for UK ethnic minority recruitment and that the RAF performed particularly poorly against its target. Our concern is strengthened by the fact that we considered this in our report on the Annual Report and Accounts 2005-06 and the figures appear to have worsened. The fact that some 60% of ethnic minority Service personnel come from outside the UK, serves to heighten our concern. We acknowledge that the three Services have put in place arrangements to improve recruitment. We look to the MoD to ensure that the planned recruitment activities of the three Services are adequately funded so that the expected improvements in UK ethnic minority recruitment are delivered. We expect the MoD to address this matter both in response to our report and in its command papers to be delivered in the spring. (Paragraph 51)

We welcome the Committee's continuing interest in this area, and note its disappointment and concern. We agree that more is needed. As the Committee has noted, despite considerable and continuing effort, the Services did not meet their ethnic recruiting targets for 2006-07. We wish the Armed Forces to reflect the UK's full diversity and for UK citizens from all backgrounds to want to serve in them. Moreover, a growing proportion of the pool of young people from whom we recruit will come from ethnic minority backgrounds in future, and if we are unable to attract enough of them to join, it will be much more difficult to meet the Armed Forces' manning requirements over the longer term. We have set out in previous evidence to the Committee the factors underlying the Royal Air Force's performance in this area. We have also set out in some detail the wide range of outreach and recruiting activities all three Services are taking forward across the UK, with particular emphasis on high ethnic minority population areas. We are making progress. From a baseline of just over 1% in 1999 ethnic minority representation in the Armed Forces has risen to 6% in January 2008, against a goal of 8% by 2013. The quality of the Services' policies in this area is recognised by their consistent high placement in national rankings under schemes such as "Opportunity Now" and "Race for Opportunity". We are pleased that the Committee has recognised that arrangements have been put in place to improve recruiting. All this work is fully funded.

Civilian Personnel Issues

10. (Recommendation 10) We are disappointed that the MoD only met two of its nine diversity targets in relation to civilian personnel. We recommend that in response to our report, the MoD sets out how it plans to improve its performance in this area, particularly given that the MoD has announced that there are to be substantial civilian job losses. (Paragraph 54)

Although there has been some progress, we share the Committee's disappointment. We remain committed to improving the diversity of the Department's civilian workforce and we have a positive story to tell within our "talent feeder" schemes aiming to develop individuals for early promotion to Band B and beyond. The Fast Stream scheme is 48% female with 11% of participants coming from an ethnic minority. 5% have a registered disability. The MIDIT scheme (through which we bring on internal talent) is also 48% female with 8% of participants coming from an ethnic minority. 6% have a registered disability. The challenge is to ensure that these statistics are reflected in the future leadership of the department. We also support a number of schemes to develop the potential of individuals in identified diversity groups, such as the internal New Horizons programme for personnel from ethnic minority backgrounds, and various Cabinet Office schemes for disabled and ethnic minority staff. In this way we are working to improve diversity at more senior levels in the Department over time, although the limitations on progression and promotion in a shrinking department constrain the scope for rapid progress. But the continuing reduction programme means that our scope to make more general improvements across the Department through external recruitment has been, and remains, very limited. We have therefore focused our diversity efforts in other areas, and in particular on benchmarking. We participate in the annual Opportunity Now and Race for Opportunity exercises, where we perform well and often gain awards. As one example, on 10^th January it was announced that the Ministry of Defence Police service had improved from 125^th to 24^th place in the Stonewall Index.

11. (Recommendation 15) We note that the MoD's Permanent Under Secretary considers that progress has been made over the last few years to improve the way the MoD procures and acquires defence equipment and that the Defence Equipment and Support (DE&S) organisation, formed in April 2007, is becoming more capable. We welcome the recognition by the Permanent Under Secretary that much depends on making sure that the necessary skills exist at all levels. We are examining the progress made by DE&S in our current Defence Equipment inquiry. (Paragraph 69)

12. (Recommendation 32) We share the Permanent Under Secretary's concern that the MoD needs to be more highly skilled and look to the MoD to set out in its response to our report what steps it intends to take to achieve this. (Paragraph 140)

While individuals are responsible for their own direction and pace of development, it is the Department's policy to help all our employees to realise their full potential. We provide central advice, guidance and information on opportunities to learn and develop new skills and knowledge. Since April 2007, a pilot of an enhanced management information tool, designed to allow us to better understand the data captured in our civilian personnel Management System, has shown considerable potential to provide better quality information on skills and training. Following a trial period, the software is now being made more generally available across the Department to help identify the gaps between our current workforce skills set and our organisational needs. A new Development Review process has been launched for civilian staff to give a higher profile to staff development. This brings together several key development tools, including post and personal skills profiles (which help staff and managers assess and record skills gaps), the mid-year development discussion between individual and line manager, and the updating of the Personal Training and Development Plan through which staff are required to plan and record their future learning activities. The associated completion of skills profiles and training plans will also increase the amount of management information available to the Department.

The Department has also made substantial investments in acquisition skills training during the year. The Defence Industrial Strategy (DIS), published in December 2005, signalled the need to address shortages in project delivery skills. To achieve the objective of "battle-winning people and equipment", we need to ensure our people have the right professional skills. The Defence Acquisition Change Programme (DACP) has enabled the development of a cost effective and coherent acquisition training curriculum that is combined with strong leadership and effective people management and built around the acquisition Skills Champions areas. In 2007-08 £5.5M was invested in the DACP upskilling programme. This provides tailored training in Commercial Management; Project and Programme Management; Integrated Logistic Support; Through Life Capability Management (TLCM); and the Defence Acquisition Management Education Programme. £6.6M was invested in the Defence Equipment and Support (DE&S) Upskilling programme, which has focused during the year on: Engineering; Project and Programme Management; Logistics; Resource Management; and Commercial/ Procurement. All acquisition staff will have access to awareness training and staff in key acquisition roles will be able to receive specific practitioner and expert level training. Training is delivered through the Defence Academy using a range of e-learning and distance learning, classroom teaching and workshops, and professional examinations.

This investment in the skills of our people helps them to develop and apply those skills and ways of working in acquisition. It also contributes to the Professional Skills for Government agenda. DE&S has set targets that by March 2008 50% of professional posts should be filled by qualified people, and 85% of its workforce undertaking six days of development plus four days of additional Continuous Professional Development for those in the five key areas. DACP is also working to embed the Defence Values for Acquisition and TLCM into the ways of working for all civilian and military staff in acquisition, and through performance management and recognition, instil the changes in leadership and behaviour that are necessary to deliver more agile and effective acquisition. DE&S is also taking forward the PACE programme based on a realistic assessment of skills, numbers and capabilities required to deliver our forward plan to improve our support to the frontline.

The Department has a number of corporate development schemes to help those who have been identified as having greater potential to progress more quickly. In particular:

• the Band B development scheme supports the development a small number of selected Band B's who have been identified as having the potential for promotion into the Senior Civil Service within one to five years;
• the "Aspire" scheme (formerly Acquisition Leadership Development Scheme) supports the development of individuals with the potential for leadership posts in the Acquisition community;
• the MoD Fast Stream programme provides an opportunity for high calibre individuals, who demonstrate the required potential, to benefit from intensive development and training to equip them for early promotion to Band B and beyond; and
• the MIDIT (Means of Identifying Internal Talent) scheme Stream aims to develop the Department's future managers. It typically require participants to reach Band B2 at a relatively early stage in their career and be deployable across a broad range of posts at that level.

In June 2007 the Permanent Secretary also signed the Leitch "Skills Pledge". This emphasised the Department's commitment to raising the skills levels of its workforce, Service and civilian, by undertaking to support every employee without a Level 2 qualification in reaching at least functional levels of literacy and numeracy, and to provide them with the opportunity to gain an NVQ Level 2 or equivalent qualification.

Efficiency and Streamlining

13. (Recommendation 16) We congratulate the MoD on the progress it has made against the 2004 Spending Review Efficiency Target. We note that the MoD expects to meet all four targets which underpin the overall Efficiency Target by 31 March 2008, and to exceed three of these four targets. (Paragraph 74)

14. (Recommendation 17) We welcome the news that the MoD is expected to save some £50 million by combining its office supplies requirement with those of other Government departments. We note that the MoD is planning further collaboration with other Government departments across a range of categories and look to the MoD to make quick progress in this area so that potential savings can be delivered as soon as possible. (Paragraph 77)

We welcome the Committee's comments on our progress towards meeting the 2004 Spending Review Efficiency Target. The Department is already engaged in a number of other collaborative procurement programmes with other Government Departments. We are leading a pan-government collaborative pilot on energy aiming to deliver significant financial benefits across government by the end of the CSR07 period. This involves a number of other departments and agencies, including the NHS Purchasing and Supplies Agency, OGC Buying Solutions, the Department of Work and Pensions, Local Government, The Energy Consortium (which buys for Universities), The London Energy Project, HM Prison Service and the Department for Business, Enterprise and Regulatory Reform. We are leading a number of collaborative programmes to provide professional services in areas such as consultancy and relocation services and we use contracts managed by other departments to procure other professional services. And we are pursuing a number of other areas with potential for collaborative arrangements with various departments.

15. (Recommendation 29) We note that the MoD has to achieve savings of £2.7 billion by 2010-11 and that it plans to achieve these savings by introducing leaner processes and new arrangements which will deliver better value for money. Leaner processes and value for money improvements should generate savings which can be used elsewhere. However, the MoD must ensure that, in achieving these savings, the speed and quality of the support provided to the front line is not diminished. (Paragraph 128)

We have no intention of achieving savings in ways that would not provide the front line with the speed and quality of support required, nor would any such saving represent value for money.

16. (Recommendation 30) We note the assurance given by MoD that the £50 million annual savings that are expected to be delivered from the implementation of the "streamlining" exercise of the MoD Head Office will not be returned to the treasury and used to fund the costs of operations. (Paragraph 133)

17. (Recommendation 31) We call on the MoD to address the concerns about the militarisation of civilian posts and the related issues that have been raised with us by Prospect in full in its response to this Report. (Paragraph 139)

18. (Recommendation 33) We note that the MoD is to streamline its Head Office in London with the loss of around 1,000 civilian jobs. The aim of the "Streamlining" is to deliver savings of £50 million a year and also, we are told, to make the MoD more agile and better able to respond to the needs of those on operations. We remain to be convinced that improved agility and responsiveness will follow from the reduction in staff. We look to the MoD to keep staff fully informed as the "streamlining" exercise is implemented and to provide adequate support for those civilian staff who are to lose their jobs. (Paragraph 141)

19. (Recommendation 34) We consider there to be a real risk that some of the MoD's best staff will leave and look to the MoD to identify ways to prevent this from happening. We are concerned to learn that civilian staff dissatisfaction with the MoD as an employer has increased over the last year. The MoD must monitor closely staff morale during the implementation of the "streamlining" exercise and ensure that the Head Office continues to deliver the services which Government, parliament, the Armed Forces and the public expect. (Paragraph 142)

While we note the Committee's reservations, and do not underestimate the difficulties, we are in no doubt that the Head Office function in the MOD needed radical review, and that the course we are now pursuing is capable of delivering a more responsive and agile Department. Streamlining is not about reducing high-priority defence outputs; it is about achieving those outputs more effectively. The aim is for swifter decision making based around clearer roles and responsibilities, clearer accountability and elimination of over briefing and unnecessary or duplicated staff work, with senior officers setting the example Staff themselves know best where changes in the way work is done are likely to bring benefits. The design of the streamlined Head Office is being driven through workshops that give members of staff the opportunity to be fully involved. The new governance structure will reduce the number of standing boards and committees reporting to the Defence Board.

We agree with the committee that maintaining staff morale during Streamlining is of critical importance and we will be closely monitoring Head Office morale as the programme is implemented. Although our Continuous Attitude Survey shows that there has been a decline in overall satisfaction with the MoD as an employer over the last two years, this may reflect inevitable pressure and uncertainty at a time of change. The Survey also shows the commitment of our civilian workforce to defence remains strong both in absolute terms and in comparison with most other large employers. We recognise that we will need, therefore, to pay particular attention to the way we manage the process of change, including consultation and communication over the next few years. Staff will continue to be fully informed about Streamlining as it progresses. We publish a weekly newsletter, which has been well received, and have an email account through which we respond to staff comments and enquiries. There have been cascade briefings by managers, 38 face-to-face discussions between Defence Board members and staff, and sessions with Ministers.

Support for civilian staff whose posts disappear will be provided through the Redeployment Pool. This provides a mechanism for assisting staff to find a new position in MOD or elsewhere in the Civil Service. In addition, a voluntary Early Release Scheme has now been launched, following consultation with the Trades Unions. Set criteria, against which applicants to the scheme will be judged, will ensure we retain staff with the key skills (especially scarce skills) needed for the future organisation. We will encourage all those leaving through the scheme to make full use of the MoD Outplacement Service or retirement planning advice. The Streamlining process will be fully Equality and Diversity proofed and an Impact Assessment produced. The Trades Unions have been and will be actively engaged throughout.

There is no distinction between military and civilian posts in determining what counts towards the Administrative Cost Regime. Streamlining will operate within the current guiding principle that the financial premium for employing military over civilian staff should only be justified where it produces clear benefits to Defence.

Equipment

20. (Recommendation 11) We note that the latest Annual Report and Accounts state that for the second year running the MoD "met or exceeded its Public Service Agreement targets for equipment procurement, despite them being more demanding than those for 2005-06", and that the Defence Procurement Agency met all its Key Targets in 2006-07 for the second consecutive year. The Defence Procurement Agency and the Defence Logistics Organisation merged on 1 April 2007 to form Defence Equipment and Support. We hope that the new organisation will maintain this momentum. (Paragraph 61)

As the Committee has noted, the Department met the PSA equipment target in full in 2005-06 and 2006-07. As set out in our most recent PSA reports, we currently expect only partly to meet this target in 2007-08, as while we expect to meet the target for delivery of Key User Requirements and are working hard to meet the cost growth target, we do not expect to meet the 2007-08 target for in-year variation of In Service Dates. DE&S is working to mitigate this as far as possible.

21. (Recommendation 12) We are concerned to learn that the Astute submarine and the Type 45 destroyer programmes have experienced further forecast cost increases, totalling some £500 million, since the Major Projects Report 2006. While we note that the Permanent Under Secretary says that much of the cost in the papers we received relates to the "toxic legacy" of earlier years, we note his admission that costs have risen by some £500 million since the end of March 2006. He attributes this to work to understand the cost base of the Astute and to resource the Type 45 programme more efficiently with subsequent renegotiation of fixed price contracts which he says there is good reason to believe will now control the costs of both programmes. It is, nevertheless, disappointing that the MoD has failed to limit further cost growth on these programmes which had already experienced forecast cost increases totalling some £1.7 billion. (Paragraph 62)

We note the Committee's concerns. We share the Committee's disappointment that it has not been possible to avoid further cost growth. As the Permanent Secretary has made clear, we have taken measures that we believe should contain the costs of both programmes.

22. (Recommendation 13) Yet again there have been problems with the Nimrod MRA4 programme which is experiencing further cost growth. We note that the MoD recognises it has to "attend" to these problems now and we look to the MoD to do this as a matter of some urgency given the current pressures on the defence budget. We look to the MoD to undertake a review of the Nimrod MRA4 programme in order to ensure that best value for money is achieved in maintaining this important capability, both in quality and quantity of platforms. (Paragraph 63)

The Nimrod MRA4 aircraft will provide the RAF with a significantly enhanced maritime patrol aircraft capability. Recent cost increases are largely the result of the need to implement essential changes in the production aircraft and the cost of converting the trials aircraft to production standard. Like all defence programmes, Nimrod MRA4 is kept under review to ensure we obtain the best value for money.

23. (Recommendation 14) It is disappointing that there has been further in-service date slippage relating to the Type 45 destroyer programme and that further delays are likely on the A400M transport aircraft programme. We are particularly concerned about the delays on the A400M programme as new transport aircraft are desperately needed by our Armed Forces who are already having to use ageing transport aircraft. We look to the MoD to continue to work closely with the contractors on these programmes to reduce the risk of any further delays and, where possible, to identify ways to recover some of the forecast delays. We look to the MoD to undertake a review of the A400M programme given the problems experienced to date. (Paragraph 67)

We note the Committee's concerns. As the Committee expects, we continue to work closely with the contractor to manage the risks and schedule. The DE&S Chief Operating Officer commissioned an independent assessment of the A400M programme last year, and its recommendations are now being implemented.

24. (Recommendation 24) We welcome the announcement by the Secretary of State in July 2007 that the MoD will be placing orders for two aircraft carriers, a key programme which the Defence Committee has closely monitored. (Paragraph 107)

The finalisation of the Joint Venture between BAES and VT is closely interlinked with signature of the carrier contracts. We are working closely with the companies to ensure that these are placed as soon as practical. In the interim, a number of contracts have been placed with the supply chain for design and engineering data and materials in support of manufacture.

25. (Recommendation 35) We find it disappointing that the original timetable for the publication of a revised version of the Defence Industrial Strategy has slipped and is now not expected until early in 2008. We hope that this does not indicate that the impetus given by Lord Drayson, the former Minister for Defence Equipment and Support, is starting to wane. It is crucial that the MoD come to speedy decisions on the current planning round and the implications for the equipment programme so that the revised version of the Defence Industrial Strategy can be published and industry given the clarity it requires about future work. In its response to our report, we expect the MoD to inform us of the date when the revised version of the Defence Industrial Strategy is to be published. (Paragraph 146)

We are committed to publishing a revised version of the Defence Industrial Strategy. The change in planned publication date does not indicate a lack of impetus but reflects our desire to ensure DIS v2.0 takes full account of the results of the current planning round. This approach was welcomed by industry, with whom we have been engaging extensively as we develop DIS v2.0. Work continues apace. As Baroness Taylor said in her letter of 20 November 2007 to the Chairman, we are not yet in a position to announce the publication date.

Defence Agencies

26. (Recommendation 18) We have no objection to the budgets of former agencies being included in the MoD's main vote, because in our view that is a straightforward way of dealing with public money. We continue however to be concerned to ensure that Defence Equipment & Support, which is responsible for procuring equipment and managing it through-life, should not reduce the scope for proper accountability and parliamentary scrutiny. We note that the MoD intends to report on the activities and performance of DE&S in its Annual Report and Accounts 2007-08, but it remains to be seen whether this course of action, rather than the publication of a separate annual report from DE&S, will best meet our objectives. We will consider this matter closely when we examine the next MoD Annual Report and Accounts. (Paragraph 82)

As the Permanent Secretary has made clear, we have no intention of reducing proper accountability and parliamentary scrutiny through the disestablishment of agencies. We note the Committee's particular interest in the activities and performance of Defence Equipment and Support, and its intention to review how well inclusion of reporting on this in the Department's Annual Report and Accounts meets its objectives.

27. (Recommendation 19) We note that in 2006-07 Defence Agencies have generally performed well against their targets with over 40% of the agencies meeting all their targets. However, the one exception is the MoD Police and Guarding Agency which met only 40% of its targets, a similar level of performance to that achieved in 2005-06 and 2004-05. (Paragraph 86)

28. (Recommendation 20) We are concerned to learn that "a major" gap in the funding of the MoD Police and Guarding Agency has been identified and that it is unlikely that the funding gap will be closed until the end of 2009-10. In its response to our report, we expect the MoD to provide us with a full account of why this funding gap has arisen and what effect it is expected to have on the services expected by the Agency's customers. We also look to the MoD to set out the reasons why the Agency has continued to perform to poorly against its targets and the action being taken to improve performance and plug any security deficiencies that may have arisen as a consequence of the funding gap. (Paragraph 87)

We welcome the Committee's recognition that Defence Agencies have generally performed well against their targets.

The financial shortfall referred to by the Chief Constable/Chief Executive in the MoD Police and Guarding Agency (MDPGA) Annual Report and Accounts for 2006-07 resulted from the establishment of the Agency in April 2004, when the MoD Guard Service and the then MoD Police Agency were brought together under a single new Defence Agency. Until that time responsibility for managing and funding the MoD Guard Service had fallen to the Top Level Budgets where they were based. A detailed financial reconciliation following formation of the MDPGA revealed that the financial provision which had been transferred to the Agency by the TLBs on formation was insufficient to fund the tasks that were required of it. This is the major cause of the funding gap. A further, but much smaller, part of the gap was due to police pay rises outstripping the allowance that had been made for them.

The funding gap is being addressed through a programme of work known as "Closing the Gap", which is being led by the Agency Chief Constable/Chief Executive in consultation with TLB customers. The outcome of the "Closing the Gap" process will be to bring the cost of providing the policing and guarding services supplied by the MoD Police and Guarding Agency into line with available funding. This will be achieved by a combination of increased efficiency in the way that the Agency achieves its outputs (such as improving rostering and reducing overheads in the MoD Guard Service), additional funding provided by TLB customers and negotiated reduced requirements for policing and guarding. The target is to complete the Closing the Gap exercise and bring tasks into line with resources by the end of Financial Year 2010-11, and the Agency is on track to achieve this.

The seven key targets agreed by the MoD Police Committee for the MoD Police and Guarding Agency in 2006-07 were challenging and sought to stretch the performance of the Agency. Performance against them was as follows:

• Key Target 1: to increase overall customer satisfaction with MoD Police and MoD Guard Service services to 90%. The result achieved for the MoD Police was a customer satisfaction rate of 86.5%, an increase of 7% over the previous year. This was therefore a very near miss. It is likely to be explained by the fact that not all taskings were delivered (see Target 3 below);
• Key Target 2: to increase the detection rate of crimes that impact significantly on Defence by 3% above the level achieved in 2005-06. This was achieved. A detection rate of more than 72% was achieved, an increase of 34% on the figure achieved the previous year;
• Key Target 3: to deliver 95% of funded and agreed MDPGA customer taskings. The MoD Police delivered 91% of its customer tasking and the MoD Guard Service 87%. The shortfall was due to a combination of factors: insufficient funding provided by MoD customers (the gap referred to above); agreed rundown of complements in anticipation of reduced customer requirements and diversion of officers to other tasks at the request of the customer;
• Key Target 4: to achieve all international tasks agreed with the FCO in support of wider defence and foreign policy objectives. This was fully achieved, with the Agency delivering all tasks requested by the FCO including peace support operations and post conflict reconstruction missions in locations such as Kosovo, Bosnia, Iraq, Sudan, Jordan and Sierra Leone;
• Key Target 5: to increase the number of female police officer by 6% and ethnic minority officers by 5%. By the end of 2006-07 the number of female officers had increased by just over 4%, but the number of officers self-recording as ethnic minority reduced by 3.8%. The MoD police and Guarding Agency is fully committed to improving the representation of women and members of the ethnic minorities across the organisation. The Chief Constable/Chief Executive has personally taken on the role of Diversity Champion for the Agency demonstrating top level commitment. A new Agency Diversity Strategy, which flows from the MoD's own Unified Diversity Strategy, has been introduced. Benchmarking of the Agency's work on Diversity against other organisations has continued with the Agency participating in the Opportunity Now benchmarking exercise and achieving the highest score in the MoD in the Stonewall workplace equality index exercise;
• Key Target 6: to demonstrate the recovery or prevention of loss to the MoD of a minimum of £2M is assets based on all Fraud investigation activities within the Agency. This was achieved. By the end of 2006-07 the total monies recovered via compensation, restraint, forfeiture or disruption was in excess of £4.4M, more than double the target; and
• Key Target 7: to achieve 32 efficiency targets set out in the Agency efficiency plan. Of these, 14 were fully met, eight were nearly met and four were missed. The remaining six targets were set aside in year as either unviable, disproportionate in terms of effort required to achieve results, or impossible to measure.

Funding of Operations

29. (Recommendation 21) We note that the C&AG qualified his audit opinion on the MoD's 2006-07 resource accounts because of an excess vote on Request for Resources 2 (net additional cost of Operations) and that the MoD has identified improvements in both the forecasting and accounting for Request for Resources 2. We look to the MoD to ensure that the improvements identified are implemented. We acknowledge that it can be difficult to predict exactly how much ammunition is to be fired during operations and we accept that a reasonable contingency is needed in the MoD's estimate of its forecast expenditure. (Paragraph 96)

The Department continues to monitor the procedures for reporting RFR2 costs and implement improvements in areas requiring further development. We recognise that requesting resources for operations two thirds of the way through the year leaves the Department at risk of any unforeseen additional costs particularly those directly attributable to the tempo of the operation such as firing of guided weapons and missiles. We have taken steps to ensure the accurate reporting of these costs and will apply realistic and robust forecasts when seeking future resources. All this work is visible to and scrutinised by the National Audit Office.

30. (Recommendation 36) We note that the 2007 Comprehensive Spending Review has set down a new funding arrangement for Urgent Operational Requirements (UORs). The arrangements appear far from straightforward and we will be interested to see how they work out in practice when they are implemented. We look to the MoD to ensure that the new arrangements do not, in any way, undermine the success of the UOR process seen to date. (Paragraph 155)

We note the Committee's interest in the implementation of the new Urgent Operational Requirement arrangements in the 2007 Comprehensive Spending Review. Support to current operations remains our highest priority, and the revised funding arrangement will not affect the speed and agility of the UOR process. We remain committed to ensuring that it continues to deliver theatre-specific, battle-winning capabilities to the Armed Forces at the front line.

Losses and Special Payments

31. (Recommendation 22) We note that the total value of losses and special payments in 2006-07 are just over 1% of the MoD's total expenditure and that the advance notifications of losses and special payments have continued to fall. We welcome the continued reduction in advance notifications of losses and special payments and look to the MoD to build on the action it has taken to date to minimise losses in the future. (Paragraph 99)

We welcome the Committee's recognition of the continued reduction in advance notifications of losses and special payments. We are always working to minimise losses. The continuing work to improve project, risk and performance management performance will inter alia reduce the risk of future losses and special payments. The Department routinely undertakes internal reviews of all losses and special payments throughout the year at both TLB and Departmental level, ensuring that all payments are accurately reported, that the circumstances surrounding each loss are fully understood and that, where appropriate processes are reviewed and lessons learnt to avoid any reoccurrence. The DE&S "Learning from Experience" team draws on this work to provide guidance to new projects to try and eliminate any repeat of procurement errors. Performance in this area is also scrutinised by the Defence Audit Committee, chaired by a non-executive member of the Defence Board, and is visible to the National Audit Office.

JPA

32. (Recommendation 23) We are concerned to learn that the Joint Personnel Administration (JPA) system, which was rolled-out to all three Services during 2006-07, has experienced problems and that a substantial number of Armed Forces personnel have had incorrect deductions from their salaries. We have written to the MoD separately about the problems experienced and the progress in resolving them. We look to the MoD to ensure that the remaining problems are resolved as quickly as possible and that the training for the users of the system is improved. This is a matter which we plan to monitor closely. (Paragraph 104)

The Department has already provided a detailed memorandum in response to the separate questions on this programme the Committee refers to. For completeness and convenience that response is repeated below (in italics, indented).

What is the background to the JPA system (the purpose of the new system, the expected benefits, the approved and current forecast cost, and the approved and current forecast in-service date)?

JPA is a programme to modernise administrative support to approximately 190,000 regular and 80,000 reserve members of the Armed Forces. Although payroll is a critical and highly visible outcome, JPA covers the full range of administrative processes (other than those involving "medical-in-confidence" information) and provides world-wide support, including to those deployed on military operations.

The programme was delivered by the Armed Forces Personnel Administration Agency (AFPAA) with support from its commercial partner Electronic Data Systems (Defence) Ltd (EDS) and in close collaboration with the Services and MOD Centre. Work started in late 2000 and went through feasibility, assessment, demonstration and manufacture stages before implementation to the Services commenced in March 2006. AFPAA became the Service Personnel and Veterans Agency (SPVA) in April 2007, following its merger with the Veterans Agency. This briefing Paper will only refer to SPVA from this point.

The Armed Forces (both Regular and Reserves) personnel policies, rules and processes, and resultant pay structures, are uniquely complex, especially in the areas of specialist pay and allowances. Prior to JPA, pay and personnel administration were supported by three separate, single-Service suites of IT and associated business processes involving individuals, unit staffs, single-Service career management (posting, promoting, recruiting, training) staffs, central policy staffs and SPVA as the payroll delivery organisation. The three IT suites were all custom designed and supported increasingly divergent single-Service interpretations of the common over-arching policy framework. In most cases both the IT software and hardware were old and approaching the point where cost effective support was no longer available. The age of the systems also meant that amending them was difficult; this was preventing the implementation of flexible employment packages that would best meet the needs of today's Armed Forces.

The increasingly joint nature of modern military operations highlighted the differences in the way that policy had been interpreted by the single-Services and this was proving to be a cause of dissatisfaction in the operational environment where, for example, personnel from the different Services working under the same conditions might have differing entitlements to allowances. Replicating the existing bespoke IT suites with modern software and hardware would not address the causes of dissatisfaction and was deemed unaffordable. An assessment study in 2000/2001, sponsored by Deputy Chief of the Defence Staff (Personnel) (DCDS(Pers)) and using both internal and external expertise, identified that the use of a commercial personnel software application to replace the existing IT applications could both significantly reduce the development and implementation risk and offer financial benefits of up to £100 Million per annum which could then be used in other areas of Defence. This solution incorporated a degree of self-service by individual Service personnel, an approach that was seen as both empowering the individual and being consistent with the expectations of today's younger personnel who are joining the Armed Forces familiar with the benefits of on-line transaction processing. The proposed solution would also, for the first time, provide a complete whole-life record for each Service person from a single administration system and, thus, would provide MOD with a comprehensive picture of the size and shape of the Armed Forces. Data would be captured once and used many times.

The Defence Management Board endorsed the findings of the study and the vision of personnel administration for the Armed Forces that it presented to 2010 and beyond. They further endorsed the use of a "commercial off the shelf" (COTS) software package and mandated that the personnel policies, rules and processes were to be adapted to achieve the simplest possible implementation of the COTS approach. In doing so they recognised that JPA was, in fact, a major business change programme involving harmonisation and simplification across the whole of Defence and not just an IT project.

The Investment Approval Board approved the JPA programme at a total cost of £244.94 Million (excluding VAT). The approval comprises all extramural costs for JPA and includes the cost of personnel administration services using JPA up to the end of financial year 2008-09. At the end of financial year 2006/07, actual spend on JPA was £162.8 Million which was on target for that stage of the programme.

What is the progress to date in rolling out the system across the three Services and when is the system expected to be available to all Service personnel/other users?

In late 2001 the decision was taken to select the ORACLE Human Resource Management System (HRMS) as the under-pinning software application. Linked with this decision was a recognition that the integrated nature of the personnel and pay processes within both HRMS and the existing IT suites meant that it was not feasible to "drip feed" functionality and gradually move from the old to the new. It was, therefore, agreed that the lowest risk option was a full implementation to each of the Services in turn; this recognised that each of the Services would be faced "over night" with a significant cultural change across all areas of personnel support. The chosen implementation sequence was RAF, RN, Army. Experience to date has shown that these decisions were correct.

In order to release the resultant financial benefits of JPA back to the rest of Defence at the earliest opportunity, it was decided at the time of Defence Management Board endorsement that implementation timescales and remaining within the approved funding framework would be the key drivers for the project. The availability of Defence Information Infrastructure (DII)[1][1] would also be a key factor, and JPA timescales had to be adjusted slightly to maintain alignment with the DII programme; JPA was critically dependent on DII to ensure that sufficient IT hardware would be in place to support the self-service concept. The DII dates changed and, therefore, JPA dates had to change to maintain alignment. The interface between the two programmes was successfully managed by the Department's Change Delivery Group (chaired by Second PUS). As a result, JPA achieved its implementation timescales for the RAF (April 2006), RN (October 2006) and Army (April 2007). The decision to focus on timescales required compromises to be made, particularly in the critical areas of:

• Policy harmonisation and simplification (with consequential impact on the complexity of the final HRMS product).
• Single-Service, particularly RAF, ability to complete the necessary training to utilise the new processes correctly (with consequential impact on perceptions of JPA within the Services).

It is still, however, considered that any other approach would actually have increased the risk to successful implementation.

A strong programme governance structure was put in place. The programme was sponsored by the then Vice Chief of the Defence Staff (VCDS) and latterly by the 2^nd Permanent Under Secretary (2PUS) as head of the overall Defence Change Programme; the Senior Responsible Owner (SRO), with full accountability for its successful delivery, was DCDS(Pers). The single Services and EDS, as the supplier of the IT solution and much of the associated administrative support, were fully integrated into the governance structure at equivalent levels.

As part of the governance, prior to each of the 3 Service implementations a series of formal Readiness Reviews was conducted. These involved all levels of the governance structure, up to and including 2PUS, and all stakeholder areas, both internal to MOD and key suppliers, were fully engaged. The reviews considered the readiness of all areas of the programme, technical and non technical, and specifically addressed issues such as the readiness of the receiving user community. The risks to the programme from proceeding with the implementation at that point, versus those associated with delay, were carefully analysed. At the end of the process for each implementation there was unanimous agreement from the senior stakeholders that, on balance, the implementation should proceed in accordance with the planned timescale.

A key area of risk related to the harmonisation and simplification of policy, rules, and processes. Service concerns about issues such as impact on ethos meant that although very significant progress was made, particularly with harmonisation, there were some areas that, by the time that the design for the technical development needed to be finalised, had not progressed as far as envisaged at the time of Defence Management Board approval. This meant that the technical solution was more complex and thus took longer to develop than planned, with consequential impact on time available for user training and cultural change; it also had some impact on the financial benefits to be delivered—these have not yet been fully captured but are generally a reflection on increased complexity including enhanced support arrangements. An example of this was where an initial surge in the number of service requests from personnel not familiar with the system meant that an additional support team was formed. Notwithstanding this, the implementation timescales were achieved and not a single payroll run was missed at any stage of the preparation or implementation processes; this is a very significant achievement on a payroll of this scale and complexity. The Office of Government Commerce recognised this in their recent "Gateway" review of the JPA programme.

What are the problems experienced to date with the system and what has been the impact of these problems? In particular, what is the scale of the problems experienced by Service personnel (including the number of Service personnel who have been wrongly paid—either overpaid or underpaid)?

There were relatively few technical issues at implementation. The most significant issue arose very early after RAF "go live" when system performance for self-service users slowed to an unacceptable level, although background activities such as payroll were not affected. As a result, self-service access for all types of user was withdrawn for two weeks at the end of April/beginning of May 2006, and there were also restrictions for two to three weeks before and after this. The problem, which related to the interaction between HRMS and MOD security profiles, had not shown during the very extensive testing because it only manifested when large numbers of self-service users were attempting to log on to the system simultaneously.

Another major issue at RAF implementation was the accuracy of specialist pay components, most notably Flying Pay for aircrew. Although some technical issues were identified, in the vast majority of cases the root cause was the unfamiliarity of the various personnel in the end-to-end pay process (in the case of Flying Pay, predominantly RAF career management and SPVA staff) with the critical initial setting-up activities required. This was down to delivery of the final product prior to implementation being delayed by the complexity issue described above; it was only available immediately prior to RAF go-live and this significantly impacted on the ability to fully train all types of user.

The very constrained time for final preparations prior to RAF implementation also seriously affected the ability of the RAF senior management to prepare their Service for the cultural change that would result from moving to a self service environment from one where individuals predominately completed paper forms which were then assessed and transferred to the IT systems by Human Resource clerical support staff.

The EDS staff within SPVA's telephone and e-mail Enquiry Centre (EC), set up to support JPA, also suffered from the same very limited training window and, thus, were unable to provide struggling users with adequate levels of support.

The lessons were learned after the RAF implementation and the RN and Army implementations both went more smoothly. That said, a number of issues have been apparent across all three implementations. Key amongst these are:

• "Multiple referrals" (where individuals are passed backwards and forwards between SPVA EC staff and their unit support staff or Service career management staff, with no one seemingly able to resolve their problem).
• The effectiveness of the termination of employment process.
• The ability of JPA and, in particular, the COTS package which underpins it, to support MOD's existing finance and accounting processes.
• The provision of adequate training at all levels.

In all of these cases measures, such as revised processes, have been agreed and implemented.

The media have reported a number of cases of personnel being "underpaid". Payroll accuracy, however, is now consistently in excess of 99% and, although a range of discrete issues were identified at implementation, there are now no known IT issues of any significance. The majority of the pay errors are due to late or incorrect human input, either within SPVA or by individuals and/or their unit support staff. In the early period of implementation, there was a lack of robust support processes and, as described earlier, both SPVA and Service HR professionals lacked some of the training necessary to operate the system effectively. Through the introduction of new support arrangements and better training, the situation has been significantly improved.

In a number of cases, although a JPA pay error has been reported, the impact on the individual was negligible. For example, in August 2007 it was reported that some 35,000 RN personnel had been underpaid; in fact this underpayment was only £3 per individual and was the result of an error within SPVA that was corrected the next month. There is no complacency and the MOD acknowledges that all such errors should be eliminated if at all possible. Whilst it is recognised that it is not necessarily the IT solution that is to blame, there remains an ongoing requirement to raise the awareness of those who play a part in the pay process of their responsibilities in following the process correctly in order to avoid unnecessary errors. A more detailed breakdown of pay errors in the period January to November 2007 is below. This does not include individual errors dealt with at unit level as these are not captured centrally.

JPA OVER AND UNDERPAYMENTS

Month	Overpaid	Underpaid	Total	Notes
January	161	1,383	1,544	See Note 1
February	70	0	70
March	229	54	283
April	13,908	252	14,160	See Note 2
May	0	1,181	4,521	See Note 3
June	0	90	90
July	2,978	416	3,394	See Note 4
August	0	46,305	46,305	See Note 5
September	0	722	4,971	See Note 6
October	213	50	263
November	1,987	311	2,298	See Note 7
Total	19,546	50,764	77,899	See Notes 3 & 6
Notes (specifically relating to months with 500+ overpayments/underpayments): 1. Comprised 763 underpayments ranging from £98 to £348 due to a JPA formula error, fixed in month and 620 Substitution pay errors (~£150 underpaid) fixed in February. 2. A decision was made not to recover some elements of Service debt and miscellaneous charges until data accuracy on transition could be proved (13,908). Some of the underpayments (~100) were caused by non receipt of payable orders whilst 121 were caused by Late Entry Majors not being transitioned to their correct pay scale and was corrected in June. 3. The majority of the 1,181underpayments were caused by University Officer Training Corps input of bounties and training nights; other factors were mess subscriptions and disturbance allowance. The majority of the underpayments were resolved in May and June. There were a further 3,340 minor errors due to migration of some data elements which were mainly resolved in June, though the breakdown of underpayments vs overpayments is unknown. 4. The majority of the overpayments (2,611) were due to double payment of the female clothing grant (£4.50). The underpayments relate to late input of Cadet Force Home To Duty, which was resolved in month. 5. Comprised 35,553 incorrect deductions of £3.00 for the discontinued Royal Navy and Royal Marines Dependants' Fund, and 10, 752 underpayments of Home to Duty Travel claims for Royal Navy reservists. The former was re-credited to pay accounts in October, and the latter in September. 6. 4,249 additional cases occurred where the incorrect rank on JPA generated an incorrect payment. The breakdown between underpayments and overpayments is unknown, corrective action was taken in time for the October 2007 pay run. 7. A formula error resulted in 1,978 personnel receiving incorrect refunds of accommodation and CILOT charges. Corrective action was taken in November 2007.

What progress has been made in resolving the problems experienced to date and what outstanding issues have still to be resolved?

There are four main areas where more work is required before JPA can be considered to have delivered its Vision, as endorsed by the Defence Management Board. These are:

• Improvements to the provision of Management Information (MI).
• The control framework around the JPA processes to ensure that not only are the processes being followed correctly, but that the processes themselves do not allow opportunity for fraudulent behaviour such as, for example, individuals making multiple or inflated claims.
• Improvements to the EC and back-office functions.
• Reduced "cost of ownership" through further harmonisation and simplification of the personnel administration and pay policies, rules and processes.

Of these, it is only the provision of MI that would not necessarily be considered as part of the normal business improvement agenda at this stage of a programme as large and complex as JPA. It was envisaged that, for the first time, JPA would provide a single authoritative source of military personnel data (other than medical information) and, as such, that it would allow for the production of high quality information to support decision making across Defence. SPVA and the Services are working closely together to exploit what is available and to establish a common basis for future development but this is still in its early stages. It is being taken forward not just as part of JPA development but also alongside the MOD-wide initiative to develop improved MI capability.

What is the current relationship with the contractor for the JPA system, given the problems experienced to date?

JPA was delivered through the existing contract between SPVA and EDS rather than through a separate commercial arrangement. The decision to follow this route was subject to Defence Investment Approvals Board (IAB) endorsement and was taken on a combination of value for money and risk to successful and timely implementation grounds. The initial performance issue at RAF implementation with the system slowing down to an unacceptable degree was dealt with as a joint problem, with EDS bringing in not only their own best people from around the world but also using their influence upon ORACLE and others, including Microsoft, to ensure that their deep experts on HRMS were fully involved. Throughout the JPA development and implementation process, the relationship with EDS has remained strong, with excellent support and regular dialogue between MOD and the Corporation at the highest levels. From a technical perspective, EDS have built a product that is fit for purpose against a very demanding user requirement (due to the limited achievement of harmonisation and simplification) and timescale. They do, however, recognise that some aspects of their non-technical support to SPVA were not as mature as they might have been at the time of implementation and they have applied much effort and resource to correcting that since RAF implementation 18 months ago, working closely with the MOD to bring about the necessary improvements.

SUMMARY

JPA should be considered as a business change programme with IT as a key enabler, rather than as just an IT project. As such, its impact on personnel administration and the associated culture across both the Armed Forces and SPVA has been significant. As a business change programme, at the time of its development, it was one of the largest being undertaken anywhere in the World. It was delivered to time and budget in spite of the final technical solution needing to be significantly more complex than originally envisaged. Although the initial system performance issues got the implementation off to a difficult start, few of the issues that have arisen since then have been due to fundamental flaws within the HRMS IT solution constructed by EDS to meet MOD's requirement. SPVA/EDS staff and personnel throughout the Services are, however, still coming to terms with how JPA impacts on their individual roles. In some areas the JPA processes themselves are proving difficult to utilise reliably and accurately, with consequential impacts on payroll accuracy. Overall, payroll delivery is as least as good as under the previous IT environments and processes, but there remain a number of areas where further improvements are required. JPA is now a stable product that provides an excellent foundation for further optimisation and modernisation of the administrative support arrangements for members of the Armed Forces.

The Comprehensive Spending Review

33. (Recommendation 25) The Comprehensive Spending Review 2007 settlement for defence announced in July 2007 provides "an additional £7.7 billion for defence by 2011, and a 1.5 per cent average annual real terms increase". We welcome the increase in the MoD's budget for the next Spending Review period. However, the defence budget will be under substantial pressure in the period covered by the 2007 Spending Review, given that several funding commitments, such as the future carrier programme, a pay increase for the Armed Forces, and further investment in accommodation for Service personnel, have been announced. These will need to be met from the average annual 1.5% real terms increase and the cumulative efficiency savings which are referred to in paragraphs 108-109 of the report. In order to fully appreciate how significant these pressures are, we would like to see a clearer description of what resources from these "savings/efficiencies" are available to meet these pressures and urge the MoD to seek ways of spelling this out more clearly in future reports. (Paragraph 110)

In playing its part in Value for Money (VfM) delivery, the MoD has committed to making at least £2.7Bn in net cash-releasing savings over the CSR07 period. These will be aimed at ensuring resources are delivered to front line priorities through cash-releasing savings generated by: continuing to improve efficiency in all aspects of defence business; by taking advantage of technological gains which improve the effects of modern weapons and delivery platforms and by re-prioritisation of activities and capabilities within Defence. Over 25% of the Department's VfM savings are expected to derive from major efficiency measures such as 5% real annual reductions over the CSR period in administration costs (primarily delivered by streamlining corporate services) and further reform in logistics delivery. Additional efficiencies, albeit on a smaller scale, will also be delivered through continued improvement in energy efficiency, and from the programme of normalisation in Northern Ireland. The Department will also make allocative savings within the defence programme. This means that to ensure a continued focus on the delivery of Departmental Strategic Objective (DSO) outputs, we will take decisions to reallocate resources from lower priority areas thus freeing up resources to the front line. In all cases, the aim will be to achieve the performance indicators set in the DSOs. A high level outline of how these savings are to be achieved is set out in our VfM Delivery Agreement.

34. (Recommendation 26) We note that the costs of replacing the current nuclear deterrent will amount to some £1 billion over the three years of the Comprehensive Spending Review 2007 period. The MoD told us that the undertaking in the White Paper, that these costs are "provided additionally" and will not impact upon conventional capability, has been met. (Paragraph 112)

The Comprehensive Spending Review Settlement has provided resources in the core Defence Budget to allow work to proceed on the successor for the nuclear deterrent. This honours the Government's commitment in the White Paper on the Future of the Nuclear Deterrent "that the investment required to maintain [the nuclear deterrent] will not come at the expense of the conventional capabilities our armed forces needs."

35. (Recommendation 27) We note that the MoD is currently preparing advice to ministers about the defence budget for the three years 2008-09 to 2010-11. The MoD acknowledges that there are pressures in the defence programme and that there are likely to be cuts in some areas, including cuts to the equipment programme. We look to the MoD to be realistic about the number of equipment programmes, the number of platforms within equipment programmes, and the phasing of equipment programmes, that can be funded. We plan to monitor the progress and the outcome of the current planning round closely. (Paragraph 117)

We recognise the need to be realistic about the equipment programme, to ensure that it provides the tools that the Armed Forces require to meet the challenges that they face both today and tomorrow. We are currently engaged in our regular planning round to ensure that this is the case. We welcome the chance to engage with the Committee once decisions on future priorities have been made.

36. (Recommendation 28) The Comprehensive Spending Review 2007 settlement for defence is reported as being a 1.5 per cent average annual real terms increase against the MoD Comprehensive Spending Review baseline. But this is based on the general rate of inflation and takes no account of the reportedly higher rate of inflation which applies to defence products, in particular advanced equipment projects. We look to the MoD to press ahead with its plans to develop a robust price index for defence products which will assist the MoD in both its financial planning and in its negotiations with the Treasury in future spending reviews. We consider that a robust price index for defence products is vital for allowing real comparisons to be made and to enable the Committee to undertake more effective scrutiny in this area. (Paragraph 123)

Work is underway on developing a robust measure of inflation for total defence expenditure. We note the Committee's close interest in this. It includes identification and collection of suitable data; the design of methods and applications for storing and aggregating the data; and the validation and testing of the outputs. To construct a measure for total defence expenditure we will need to collect data relevant to: service and civilian pay; long-term equipment, support and construction expenditure; and shorter term commodity and service purchases:

• service and civilian pay data should be available from MoD administrative systems, although its coverage and quality will require some work. A base-weighted index for military pay is already published in UK Defence Statistics and a similar index for civilian pay could be calculated;
• measuring defence equipment inflation is inherently difficult as it involves measuring price change for defence products adjusted for quality and quantity. Our initial approach based on matching micro level producer price data from the Office for National Statistics to MOD contractors failed to produce a sufficiently robust measure because there is no single industrial classification for defence, and capital expenditure is often through long-term contracts for unique pieces of equipment which do not lend themselves to price comparisons across time. For successive generations of equipment it is not usually possible to separate out the changes in specification from pure price movements, and this can be further complicated by contracts that offset some current costs with future payments to make programmes more affordable. To construct an index for this element of Defence expenditure we will therefore need to collect detailed information on extant contracts; develop a robust data store for the data; and then ensure the data is kept up-to-date with details of new and amended variation of price clauses; and
• identifying all logistic commodity buys and separating out the inflationary element of the prices will be a challenge, although good information on the prices and quantities of fuel purchased already exists. Expenditure data by Standard Industrial Classification is available from the Department's contracts database and this can be linked to relevant Producer Price Indices to produce a base-weighted index.

These different sources of inflation can then be aggregated together based upon the Department's expenditure in the previous year, from which it should be possible to produce a Defence Inflation Index for total Defence expenditure. This will however be resource intensive and we expect it will take up to two years to complete. Until then it will be difficult to provide coherent estimates for the different rates of inflation that affect the Defence budget.