Fifth supplementary memorandum from the Ministry of Defence

Responses to further questions from the Committee following the oral evidence sessions with Minister (DES), the Chief of Defence Materiel and the Deputy Chief of Defence Staff (Capability) held on 15 December 2009 and with Minister (SDAR) and the Permanent Secretary, held on 12 January 2010.

15 December 2009 - Minister for Defence Equipment and Support

1. With regard to the reduction of the equipment programme funding gap from £21 billion to £6 billion during the previous planning round, what proportion of the reduction was achieved by delaying activities beyond the ten year horizon of the programme?[Q454]

We will write to you separately with a response to this question.

2. Why does the Minister believe that he cannot provide further explanation of how the reduction from £21 billion to £6 billion was achieved?[Q472]

An explanation of the reduction is included in the response to Question 8.

3. How can the Minister's refusal to provide an explanation of how the funding gap was reduced be reconciled with the assurance given by Lord Drayson that in the future the affordability of the equipment programme will be open to public scrutiny?[Q693 - 12 January 2010]

In response to the Bernard Gray report, the Department is committed to the publication of an annual assessment of the future affordability of the Equipment Programme over the 10 year planning horizon. It is not envisaged that this will include a detailed breakdown of future funding profiles for individual projects as to do so would weaken the Department's commercial position.

12 January 2010 - Minister of State for Strategic Defence Acquisition Reform

4. Please provide a copy of the information about staff rotation referred to by PUS.[Q718]

The data relating to Project Team Leader average length of tenure in 2009 shown in the table on Page 184 of the Bernard Gray report was provided by DE&S, in response to a request by Mr Gray's team. It was based on a trawl of Team Leader post-holders for the 30 projects (20 post-Main Gate and 10 pre-Main Gate) which had featured in the Department's Major Projects Report for 2008.

Further to the recent sessions with Min(DES) and Min(SDAR), representative DE&S Operating Centre data comprising more than 100 Project Teams has been analysed in the table below. For the purposes of this exercise, a Project Team Leader is defined as a substantive officer in post with overall responsibility for the delivery of one or more significant DE&S projects, and who has either completed a tour or has a projected tour end date. For each of the years shown in the table, the average tenure figure is calculated by dividing the total time in post by the total number of team leaders in the sample.

The data presented provides evidence that there has been no degradation in Team Leader tour length or adverse turnover since the formation of DE&S.

Prior to the formation of DE&S, the risk of high turnover of those occupying Senior Posts (including Project Team Leader posts) was identified and a mechanism put in place to minimise that risk; DE&S introduced Succession Planning to Senior Posts as part of its internal HR agenda.

5. Please provide a note about the extent to which DE&S financial management posts are occupied by qualified accountants.[Q721]

DE&S recognises the need to develop the skills of those working in finance and is actively taking steps to do just that through its Upskilling programme.

Within DE&S there are currently 244 designated Professional Finance Posts (i.e. where an accountancy qualification is essential). The designation is applied to all Finance posts where staff have a financial letter of delegation and are responsible for approval and scrutiny of expenditure proposals and plans. This covers all Project Team Financial Controllers (generally at middle management grades), and in large projects the Deputy Financial Controller. It also includes Operating Centre Finance Team Leaders and deputies, as well as specific posts in the DE&S Corporate Finance team.

At the end of December 2009, 63% of filled professional posts were occupied by a member of staff with an appropriate qualification. This has been increased from 50% when the posts were designated and DE&S introduced its Upskilling programme. The DE&S graduate Trainee Accountant Development Scheme (TADS) is a key intervention to achieve the target of having 90% of posts filled with appropriately qualified and experienced staff by 2012/13. Currently 47 people are on the first stage of the scheme and 19 have graduated. Results have been very successful, with five trainees gaining ten Top 10 worldwide Chartered Institute of Management Accountants (CIMA) exam results.

For other finance staff (middle and junior management grades) DE&S provides training to gain the Association of Accounting Technicians (AAT) qualification. All finance staff, and all staff within DE&S at Pay Band B1 level and above are required to hold the Department's internal finance licence. We also have 48 designated Professional posts filled by qualified accountants in the Cost Assurance and Analysis Service.

We acknowledge that recruitment of qualified accountants is difficult across the public sector as we often cannot offer salaries to match those that accountants could earn in the private sector. That is why we invest heavily in developing our own skills, through the Upskilling programme and the TAD Scheme. Once qualified, our accountants working in middle management grades receive an additional allowance as recognition of the extra skills gained. They are required to comply with the Continuous Professional Development (CPD) requirements of the MoD and Professional Institutes to continue to receive this payment. The amount paid is £3,000 per annum for those at the top of the middle management group and between 13% and 15% of their salaries for the lower pay bands.

6. Which of the decisions taken as a result of the short examination of the equipment programme contributed to the reduction in the ten year funding gap? [Q730]

The decisions are set out in reply to Question 8.

7. What did ministers say at the time about the cost of delaying the carriers? [Q735]

During the oral evidence session on 12 January 2010, it was suggested by the Committee that the previous Secretary of State, John Hutton, had stated the decision to delay the introduction into service of the Queen Elizabeth Class carriers would incur no cost for Defence. The official record (11 December 2008, Column 66-67 WS) shows that he did not state this. In response to a question asked in the House on 12 January 2009 (Official Record Column 76W) Mr Hutton acknowledged that additional costs would result from the decision to delay the in service dates. He advised that "We have estimated the costs of a delay to in-service dates in close consultation with the Aircraft Carrier Alliance and other stakeholders". Mr Hutton declined to give a figure at that stage to safeguard the commercial interests of the Department.

During the Defence Procurement Debate on 20 April 2009 (Official Record, Column 54) Minister (Defence Equipment and Support) provided further clarification. He said "if something is delayed, it tends to cost more in cash terms". He also explained that "When I said that there were no defence costs, I clearly said-the record will prove it-that there was no loss to the nation's defence capability". He was referring to his earlier statement when giving oral evidence to the Defence Committee on 16 December 2008 (Q308).

On 16 July 2009 (Official Record Column 589W), Minister (Defence Equipment and Support) advised "The new cost will be at least £4.6 billion but we are not yet able to provide a final estimate."

8. Please provide the "fuller note" offered by PUS regarding the make-up of the £21 billion funding gap, and how it was reduced to £6 billion.[Q737]

At the start of the 2009 planning round, before we undertook the Equipment Examination, we assessed that the cost of the future Defence Programme exceeded the projected Defence Budget by £21 billion over the then 10 year planning horizon. This estimate reflected a number of the cost pressures we have faced over recent years including rising fuel and utility costs, increases in pay and pensions and cost growth on major equipment projects.

As a result of the Equipment Examination and wider 2009 planning round activity, we removed approximately £15 billion from defence spending plans over the ten year planning period. The Equipment Examination removed much of this excess and included the following measures:

- Restructuring the FRES programme, including delaying the FRES Utility Vehicle, which removed approximately £2.6 billion over the 10 year planning period;

- Delaying the new aircraft carriers by one to two years, which removed £450 million over the first four years of the planning period, though it added £674 million over the ten years;

- Deferring the fleet tanker element of MARS, which removed approximately £210 million over the first four years of the planning period, though it added approximately £41 million over the ten years;

- A reduction in the Lynx Wildcat contract from 70 to 62 aircraft which removed approximately £194 million over the ten year planning period

- The deferment of future increments (B & D) of the FALCON armoured and mobile trunk communications system, which removed £53 million over the ten year planning period.

- A reduction in the number of Merlin Mark 1 helicopters to be upgraded through the Capability Sustainment Programme, which removed approximately £65 million over the ten year planning period.

A further approximate £7.8 billion was removed through other programme changes in the Equipment Examination. The 2009 Planning Round delivered a further £3.3 billion of reductions to the 10-year equipment programme. This included savings in the early years arising from the delayed introduction of A400M; and a revised production timetable for Astute, which removed £131 million over the first four years of the planning period, though it added £539 million over the life of the programme. Various other changes to the wider defence programme made up the remainder. Most of these related to changes in internal planning assumptions, on which we do not as a rule comment. Their general disclosure would preclude the full and frank discussion of planning options as well as affecting our commercial negotiations with industry.

After changes resulting from the Equipment Examination and the 2009 planning round, we assessed that an excess of approximately £6 billion remained over the forward 10 year defence programme, assuming the Defence budget remains constant in real terms. This represented the starting position for the current planning round, and although that process continues, we were able to announce a number of measures on 15 December 2009 which have removed some of the cost pressures while finding room for £900 million of enhancements for current operations. Work continues and remaining cost pressures will be addressed in the course of the planning round and the forthcoming strategic defence review.

5 February 2010