Oral evidence: Ministry of Defence Annual Report and Accounts 2018-19, HC 91

Oral evidence, 15 October 2019.

Witnesses

Sir Stephen Lovegrove, KCB, Ms Cat Little, Air Marshal Richard Knighton, CB, and Sir Simon Bollom, KBE, CB.

Chair

Good afternoon, and welcome to the Defence Committee’s session on the Ministry of Defence’s annual report and accounts 2018-19. We have four highly qualified witnesses before us today, and as usual, I shall ask each of you to introduce yourselves briefly for the record, starting with you, Sir Simon.

Sir Simon Bollom

Simon Bollom, CEO, DE&S.

Ms Little

Cat Little, Director General Finance.

Sir Stephen Lovegrove

Stephen Lovegrove, the permanent secretary at the MoD.

Air Marshal Knighton

Air Marshal Richard Knighton, the Deputy Chief of Defence Staff for military capability.

Chair

Thank you. We are expecting there to be a Division at any moment, whereupon we will obviously have to interrupt, but in optimism we begin with Ruth Smeeth.

Ruth Smeeth

Good afternoon, everybody. How regularly will you report to Parliament on progress against the three priority areas identified in last December’s—I can’t believe it was last December—Modernising Defence programme report?

Sir Stephen Lovegrove

That is a good question. I am not 100% sure that we have a schedule for reporting to Parliament, and I am very happy to consider one. If you would like me to give you a bit of a headline now as to those things, then I will certainly do so. The easiest way to think about modernising defence and the Modernising Defence programme was under the three main headings that we had: Mobilise, Modernise and Transform. Mobilise was really about making sure that we are capable of being able to use effectively what we have at the moment. That is about ship availability, it is about weapons stocks, it is about training, among other things—but those are some elements of it. Modernise is, as much as anything else, about investing in new types of capability which we will need in the future: directed-energy weapons, different types of cyber-capabilities, and so on. Transform is really about making sure that we have an enduringly affordable base for defence, which at the moment we do not quite have. We want to be able to invest in a variety of ways of running the Department, principally around support and logistics, acquisitions, people and digital and IT, which over a period of time will reform—as I say, on an enduring basis—the cost base of defence. We are making a lot of progress on all of those fronts. We are dealing with weapons stocks, for instance; we are looking hard at issues of ship availability, which no doubt we will come back to later on in the session. In Modernise, these are balance of investment decisions—[Interruption.]

Chair

There we go; break time. The Committee is adjourned for 15 minutes, so we will get our skates on and get back to you as soon as possible. Sitting suspended for a Division in the House. On resuming—

Ruth Smeeth

Sir Stephen, you were touching on the MDP and some of the financing available around the MDP, so can you give us some more information about whether there is enough money to implement it within your programme? How much have you got, and is it enough?

Sir Stephen Lovegrove

We have budgets of approximately £39.5 billion at the moment. We have been, obviously, offered more money in each of the last three years, which we are very grateful for. There is always a balance-of-investment decision to be made in defence, no matter how much money you have. If we had completely unlimited funds, we would pretty much have to make balance-of-investment decisions. We are happy with the kinds of investments that we are making at the moment. We are able to invest in the transformation of the business practices. We are able to invest in modern and new capabilities. And we are able to invest in the mobilisation of existing capabilities. But if you were to say to me, “Would you prefer to have the security of a multi-year settlement?”, which would allow us to plan more effectively across all those three particular lines of activity, obviously the answer would be yes. Your first question before the vote was how often we are proposing to report. The moment at which the MDP would find, as it were, reporting expression to Parliament would be in any SDSR of next year, when hopefully we would get multi-year settlements, which would allow us to do that.

Ruth Smeeth

You have jumped ahead to my two further points. First, what impact there has been from the lack of a fully comprehensive spending review on your priorities, in terms of multi-year spending? Secondly, when do you expect the next SDSR to take place?

Sir Stephen Lovegrove

It goes without saying that much of what we do, particularly in the capability and equipment area, concerns long-term programmes. We often feel that the right thing to do in terms of value for money is to make bigger investments upfront, so as to defray risk in the out years. We find it more difficult to do that when we are not dealing with a multi-year settlement, and some of those kinds of decisions have had to be made. We would definitely prefer a longer term multi-year settlement. As I have said, I hope we will get that at some point next year as it will be five years since the last SDSR. It will obviously be for the Government to decide whether there is an SDSR or a comprehensive spending review, let alone a security and defence review. As you can imagine, we have done a lot of preparatory work with the Modernising Defence programme, and before that with the national capability security review. We are ready for that, and we hope for some event like that next year.

Ruth Smeeth

How different would the next SDSR be to the MDP? Is it a valuable piece of work, given the amount of work that went into the MDP? The issue for us was always about whether there would be an SDSR so quickly afterwards.

Sir Stephen Lovegrove

It would be extremely valuable, which is not to say that we think the theoretical or conceptual underpinnings of an SDSR would be hugely different for defence. It is not as if we stick our analytical heads on only once every five years—we are constantly working on this kind of area. I would identify two particular advantages to an SDSR. One is the money. The MDP was not a fiscal event in any shape or form; it was about setting a policy headmark and ambition. The fiscal events associated with that were one-year settlements. That is not the case with the SDSR, which is meant to last for five years and gives much greater certainty of long-term money. The second thing about an SDSR—this is advantageous to the Government and to us­­—is that it gives us the opportunity for a different set of deeper and richer conversations with other colleagues across the security institutions in Government, in a way that sometimes purely defence discussions do not. We are not under any illusions, particularly in a world of constant competition, that we are doing this as a solo sport. This is not a defence sport. We want an answer that works for the whole of Government, and that is constructed with the Home Office, the agencies, DFID, the Cabinet Office and all other interested parties. The SDSR gives us the opportunity to do that.

Chair

May I take you a little further on that? You will recall that the Modernising Defence programme was not originally intended to happen at all. It was originally the national security capability review, and it became clear that that mini-SDSR would say that we had only the same pot of money for defence and security taken together. It was coming down in favour of spending a lot more money on what are called 21st-century threats—cyber-threats, intelligence and so forth—and defence was going to take another hammering. That was when the then Secretary of State, Gavin Williamson, set up the MDP so that you could look at what defence required, without that being done in the context of a fixed pot of money that would result in some pretty horrendous cuts that were mercifully averted. Are you going to fall into the same trap with the SDSR? You say you want to have all the Departments with a seamless defence and security strategy, and that of course is admirable, but it is not admirable if you lump all the budgets for those together in a single pot and then say, “Well, if we’re going to spend more on intelligence, cyber and other 21st-century threats, the conventional Armed Forces are going to take further cuts.” That was the trap from which Gavin Williamson extracted you. Are you about to walk into it again at the time of the next SDSR?

Sir Stephen Lovegrove

The Secretary of State did a terrific job while he was in the Department, but I do not recognise the characterisation of the NSCR that you have just given. The NSCR was certainly resource-neutral, because it was being done in isolation from any kind of fiscal event, so it did not really have any opportunity to be anything but resource-neutral.

Chair

Will the SDSR be done in the same way?

Sir Stephen Lovegrove

I would be very doubtful that the Treasury would say that an SDSR, which is likely to be alongside a spending review, will inevitably be resource-neutral. This is the moment at which the centre of Government—the Prime Minister, the Chancellor and so on—decide where the national priorities ought to lie. There may be a bit of shifting of money towards defence and security; there may not. I do not know.

Chair

Can we have a guarantee, as far as it is within your power, that you will ensure that you never again find yourself in a situation of conducting a fiscally neutral SDSR? There is no doubt about it; we saw in The Times a very specific table of all the major cuts in the conventional Armed Forces that were going to have to be inflicted if the national security capability review plan had proceeded.

Sir Stephen Lovegrove

I do not particularly want to comment on the press reports at the time, but I can assure you that any actions that we were considering taking or not considering taking were absolutely nothing to do with a shift of resources from one part of the security establishment to another part of the security establishment in the NSCR.

Chair

So the plan to get rid of the two amphibious assault ships and 1,000 Royal Marines, just to give one example, was not related to the fact that they wanted to spend more money on countering cyber and intelligence, notwithstanding a very specific report in The Guardian that set all that out?

Sir Stephen Lovegrove

I am not going to comment on specific measures such as the ones you mention, but I can absolutely—

Mr Francois

Why not?

Sir Stephen Lovegrove

Because it would be inappropriate for me to do so.

Mr Francois

But this is the Defence Committee.

Sir Stephen Lovegrove

I am afraid those questions ought to be directed towards Ministers. What I can say is that there is absolutely no question of any other parts of the security establishment, as a result of the NSCR, effectively making the kinds of raids that you are talking about on the defence budget. That is absolutely not the way in which that process evolved.

Chair

There was a very well informed report by Ewen MacAskill in The Guardian, which attributed to senior civil servants the fact that a battle had been raging between the security side and the defence side, and the security side had come out on top until this Committee produced its work on not scrapping amphibious assault ships and the Defence Secretary accepted it.

Sir Stephen Lovegrove

It is entirely for the Committee to decide which senior civil servant they wish to believe, but this senior civil servant is telling you that there is absolutely no way in which that zero-sum game between the Defence Department and other bits of the security establishment was being played out during the NSCR. It simply did not work like that.

Chair

So you are saying that all those cuts that were listed to the Army, the Royal Navy, the Royal Air Force and, above all, the Royal Marines and the amphibious assault ships were not going to happen?

Sir Stephen Lovegrove

Well, they did not happen. No decision was taken to make those cuts. But I think the point you are asking about is whether, somehow or other, other bits of the security establishment in Whitehall were capable, in that process, of trying to get some of the defence budget. That simply was not the way in which that process worked.

Chair

You will be pleased to know that I will not pursue this much further, but they did not happen because the Government was forced to stump up some extra money and prevent them from happening. The main point of this questioning is about whether we can rely on the Ministry of Defence not again to get itself caught in a situation where its capabilities are being lumped together and considered as a whole with the capabilities of what we might call the security establishment, cyber and so forth, in a financially neutral envelope.

Sir Stephen Lovegrove

You can rely on my understanding that an SDSR in the future will not be financially neutral because those kinds of exercises never are. You can also rely on my assertion that it would not be a question of “again”, because that has never happened.

Chair

We will have to leave it at that.

Mr Francois

Sir Simon, there is a shortfall of between £7 billion and £15 billion in your latest equipment plan. The NAO, in its analysis, is “not fully confident” in the robustness of your underlying assumptions. Some 84% of that shortfall arises by 2021-22. You are in charge of the equipment plan. How will you plug the funding gap?

Sir Simon Bollom

I will answer your question, but I will also defer to Ms Little on the gap. I can only operate with the funding that is allocated, so where there are budgetary constraints, Ms Little and the team will ask me for options in terms of constraining spend, slipping spend, and accelerating spend in some areas, and that is what I have to do.

Ms Little

If I could perhaps add to that, the equipment plan covers, in large part, the work of the DE&S but it also covers our IT, our cyber and our nuclear activity.

Chair

And some risk?

Ms Little

Yes. The NAO report last year alluded to the fact that when it came to our assessment of financial risk, specific measures such as forex and some of the things that are not in our control, particularly external factors and our ability to explain how efficiencies were delivered, the Department had to make a number of improvements. Certainly, since last year we have done a huge amount of work in all those areas to ensure that the assumptions and the way in which we plan over the next 10 years is significantly improved. On the gap of £7 billion to £14 billion, the upper end of that threshold assumes that every single risk that could possibly crystallise went against us and there were no other opportunities. That scenario, I suppose, comes back to the need for a multi-year spending review. The way that we have been managing that gap in the last two years is by putting in bids to the Treasury for further funding. Until we have a multi-year settlement and are able to explain how, over the next 10 years, we need to fund priority programmes, we will not be able to fully close that gap.

Mr Francois

Forgive me; this is part of the problem. The MoD is run on what you might call the Mr Micawber principle that something will always turn up. Somehow the Treasury will eventually always come up with this magic dollop of money that gets you out of trouble, so in the meantime, you fudge everything to get you to the Mr Micawber point. It never quite happens that way. When we asked the NAO, “Why can they never balance the equipment plan?”, it told us, “Because they are not very good at managing their contractors.” That is their bottom-line conclusion of why you cannot make the numbers add up: you cannot make the contracts run properly. Let us test that briefly. MFTS: total basket case, but we will come back to that later. Warrior capability update programme: critical for the Army, years late and going nowhere. Sir Simon, where are we on Warrior?

Sir Simon Bollom

On Warrior, we re-baselined the programme in April this year. It is true that that programme had slipped by 18 months and has cost us in the order of £200 million.

Mr Francois

It has cost you or cost the contractor?

Sir Simon Bollom

It cost us and it cost the contractor.

Mr Francois

But the taxpayer—a fifth of a billion pounds.

Sir Simon Bollom

But can I just say that we changed the requirement as well. We introduced a new requirement for a 40mm smoothbore gun. As a result of how the budget replanned, we also slipped the in-service date.

Mr Francois

To summarise, you have wasted a fifth of a billion pounds and it is going to come in later than it would do. The armoured infantry is critically reliant on it. You have changed the gun. It was originally caseless ammunition. You couldn’t make that work, and now it is going to come in late. Is that about right?

Sir Simon Bollom

No, it isn’t, with respect. We changed the requirement. We added to the capability through the smoothbore gun. We made some very significant modifications to the turrets and the sighting system. We spent more on the development and therefore into production as well.

Mr Francois

But they still haven't made it work, have they?

Sir Simon Bollom

The programme is moving ahead well. It has hit the capability milestones—the 40 test points that were required have been achieved.

Mr Francois

Is there a working prototype in trials?

Air Marshal Knighton

Yes.

Mr Francois

Working?

Air Marshal Knighton

Yes. I’ve driven it.

Mr Francois

Right. Does the gun work now?

Air Marshal Knighton

They have fired the gun, and fired on the move as well.

Mr Francois

I didn’t ask if they had fired it; I asked, did it work?

Air Marshal Knighton

Yes.

Mr Francois

Right. So a fifth of a billion quid and way late—that is Warrior. On A400M, £2.6 billion and a handful of them available at any one time. The crews that work on it call it the dog. At some point in your career, Sir Simon, you were associated with the programme. How are we doing on that one?

Sir Simon Bollom

All the equipment has now been purchased. I want to take you back. You used the word “dog” again.

Mr Francois

That is what crews who work on it have told me.

Sir Simon Bollom

I think when you completely reconstruct a flying training system and you re-catalyse it from end to end—aircraft, simulators, emulation; it is potentially a completely world-class training system—that takes in with it a certain amount of risk. It has taken us longer than was planned when the contract was let in, I think, 2008.

Mr Francois

Sorry—did you say training system?

Sir Simon Bollom

Yes, training system.

Mr Francois

I said A400M.

Sir Simon Bollom

Oh, sorry.

Mr Francois

It is a transport aircraft. That is what I asked you about.

Sir Simon Bollom

I know. Okay. A400M—reset. That has had some teething problems. We have covered this before in this Committee. Last time, in terms of availability, I mentioned that it was not as good as it should be. We were at about four aircraft. We predicted that by this time we would be at six task lines, and that is where we are now. The engineering modification programme and the combustion chamber cracking has been sorted out. The other problem was the ground support system—the MDS. We have now got to a point where almost all the aircraft are loaded on to the MDS. I would say that the prospects going forward are much improved.

Mr Francois

Six out of 25.

Sir Simon Bollom

Six out of 20.

Mr Francois

I thought we bought 25.

Air Marshal Knighton

No, 22.

Sir Simon Bollom

We have got 20 at the moment and another two to be delivered.

Mr Francois

Six out of 22. So less than a third.

Sir Simon Bollom

You also have to remember that this is an evolving programme. We are putting the early batch aircraft back into retrofit, so actually what we are getting is six out of 10 at the moment.

Mr Francois

No more questions, Chair—can’t even tell one programme from another.

Sir Simon Bollom

Fair enough.

Mrs Moon

One of the things that has been worrying and exercising the Committee quite a lot is how you are going to meet the four main purposes of good quality Government accounts and financial information identified by the PAC and the Treasury. How are we going to achieve that? Is that a work in progress or do you have a plan?

Ms Little

The four priorities for financial reporting set up by the PACAC is integrated into our improvements for the annual reporting account. There is also a cross-government simplification and streamlining project, which we are part of. For me, every single year, our accounting and financial reports are being improved. This year, I hope you will have seen much more effort in the way in which we simply explain how our money is used and what we have actually delivered. The understandability of that in plain English, so that both Parliament and taxpayers can understand what we have done, is a constant endeavour. We work very closely with the NAO and with Treasury, as well as some of the main accountancy boards, to make sure that all those principles are integrated in the way in which we pull together the annual report and accounts.

Mrs Moon

The MoD’s accounts have been qualified for 10 years in succession. How will all these changes affect that? Will they?

Ms Little

I hope our explanation for why the accounts are qualified in respect of IFRIC 4 and IAS 17, which pertain to the way in which we account for leases and embedded leases, is more understandable within the accounts. One of the priorities is to make sure that those quite technical things are put in plain English in the documents. Of course it gives me no pleasure at all, as a chartered accountant, to say that my accounts are qualified; that is a basic fundamental hygiene factor. We agreed several years ago—nearly a decade ago—with the Treasury and the NAO that the cost, effort and time that would be needed to correct that historical qualification was not good value for money, so all our efforts have been going into complying with the new leasing standard, which comes in in April 2020. It is an accounting standard that will remove the distinction between finance and operating leases. So far, we have assessed 11,000 contracts to ensure that we understand how we should account for those leases. My expectation, depending on how we now proceed through the audit process, is that we can once and for all remove that qualification, and that is where we have been putting all our effort, time and resources.

Chair

I will bring in Gavin Robinson, who has just joined us, in a moment, but I just want to check something with you—Cat in particular. I am told that there have been improvements in the way in which you have been presenting the accounts. The NAO feels that last year’s accounts were clearer than previous accounts, and that one of the problems with the qualification of the accounts is whether the Department sufficiently understands the contracts to which it is committed. What do you think you will be able to do, as you bring your touch to everything, to build on the improvements that have been made? Do you feel confident in making a prediction that a time will come reasonably soon when the accounts will not be qualified?

Ms Little

Of course we will do everything within our power to make sure that we set ourselves up to remove that qualification. As I keep saying to my team, that is a basic thing that we have just got to get right, but it is hugely reliant on the delegated bodies within the organisation understanding contracts, understanding what IFRS 16 is, which is no mean feat in itself, and knowing how you apply that standard to every commercial arrangement that we enter into. We have tens of thousands of contracts, so for the last two years we have been working with our delivery agents and the frontline commands to make sure that we have improved not only the understanding of IFRS 16, but our contract management within the Department. We are working very closely with the Cabinet Office on upgrading all the training for all our contract managers, and our ambition over the next two years is to ensure that there is a minimum standard of contract management training across the whole Department—we are talking about several thousand people. On IFRS 16, we estimate that we have somewhere between 1,500 and 2,000 people whom we need to train. In Simon’s organisation, there are online videos, resources and training materials that we are rolling out across the whole of MoD. Our anticipation is that if people understand what it is that they are looking for, it becomes embedded in the way in which we go about our business day to day.

Chair

Have you been able to establish exactly what the reasons were for the accounts continuing to be qualified? Do you then try to take in hand the people who, sadly, did not meet the required standard? Do you think that you have got nearer to not having the accounts qualified this year? Would you like to hazard a guess as to whether you are in striking distance of escaping from this next year?

Ms Little

We still have a lot of work to do. Having read all 11,000 contracts that we think are within the scope of the new accounting standard, we now have to value them, assure the quality of that valuation, and work out how to then bring it on to the balance sheet. Our work is by no means done and there is a lot to do in the next six months.

Chair

Do you think that you have got closer to not being qualified this year than the year before?

Ms Little

Absolutely.

Chair

Do they give you a sort of points score, so that you know what your grades are, as if it were a GCSE?

Ms Little

I am afraid auditors don’t quite work that way. I would say that the previous qualification, in part, is because there are lots of people who did not think it was their responsibility to understand accounting standards and left it to technical finance people to do that work on their behalf. Of course, accountants are not there on the frontline; they are not running programmes. One of the biggest changes that we have made, certainly in my time, is the amount of training to non-accountants that we are doing in the core standards that impact our work. You may recall me coming to the PAC to talk about contingent liabilities. We have trained nearly 3,500[1] people on IAS 37, which, I have to say, is my favourite accounting standard and everyone should understand it. Ultimately, we need to keep going and ensure that people see it as part of their responsibility, not just the finance function.

Chair

I think it is a mark of approval that the NAO did appear to recognise that you are making progress. Obviously, this is a discussion to be continued in 12 months’ time.

Martin Docherty-Hughes

This question relates to previous questions to Cat or Simon. Of those contracts that we talk about for those non-accountants, how many would be dollar-denominated?

Ms Little

I do not know off the top of my head. We don’t look at the dollar and euro requirement by contract necessarily, but we forecast by volume. I could probably give you that answer if I had a bit more time to go away and have a look at the analysis.

Martin Docherty-Hughes

If you could, write to the Committee about it, because I think it would be interesting to understand the value impact of the dollar on contracts and on spend, as well as on non-accountants having to deal with accountancy procedure in other denominations.

Ms Little

Of the £186 billion that we are due to spend over the next 10 years, about £30 billion is in dollars and about £6 billion is in euros—if that gives you a sense of the scale of what we are talking about.

Mr Francois

You are assuming an exchange rate for the equipment plan of about $1.45.

Ms Little

That is where we started in our planning. The average forward purchase that we got for this year is $1.34.

Mr Francois

It is a 10-year plan, and in 2019-20, according to the NAO, you are at $1.40, and in the rest of the plan you are $1.45. The pound was trading yesterday, I believe, at $1.26, so unless the pound goes the way that you have anticipated—if anybody could do that accurately, they would be billionaires on the FX market—if you are 20 cents out, over a $30 billion programme, that is a massive hole in the equipment plan, isn’t it?

Ms Little

It absolutely is. Foreign exchange rates are getting much harder for us to predict, plan and mitigate against. A year ago, we thought even $1.45 was a credible planning assumption. We do not think that today. When our equipment plan is released on 7 November, you will see that we are reducing our exchange rate expectations.

Mr Francois

But you take the simple point, Cat: that the more US kit you buy—you might buy it for good operational reasons originally; it might be the best bit of kit—the greater the exchange rate risk to keeping the plan in balance.

Ms Little

Absolutely, and I will be frank: it is incredibly difficult for us to mitigate against that risk.

Sir Stephen Lovegrove

It is something that we have spoken to the Treasury about on many occasions, as I imagine you would expect us to.

Chair

I am going to do a slight change in the batting order, having got Gavin all keyed-up there, because Mark, you must leave us in a few minutes, so we will shift to your question about Capita and then we will come back to Gavin.

Mr Francois

Thank you, Chair. I will try not to be too long. The NAO reported at the end of last year that Capita had not met its performance targets for the number of new recruits in 37 out of the 38 months to September 2018. When the contract was let in 2012, it essentially had two objectives. One was to increase recruitment into the British Army. In that respect it has been an unmitigated disaster. But it was also intended to save in the order of a quarter of a billion pounds over the 10-year programme. How much money have you saved to date?

Sir Stephen Lovegrove

To date—that is an interesting question.

Air Marshal Knighton

I think, Mr Francois, the net benefit was £180 million. We are still forecasting that.

Mr Francois

No, the NAO said that, “In 2012, the Army forecast that the Programme would achieve financial savings of £267 million by 2022”. That is from the NAO’s report into Capita.

Air Marshal Knighton

You have to offset that with the costs that you would need to invest in it.

Mr Francois

I am just telling you that the NAO said 267. Anyway, go on.

Sir Stephen Lovegrove

I think the 267 is the same as the 180. It is just a net figure as opposed to a gross figure.

Mr Francois

Crack on—how much have you saved?

Air Marshal Knighton

The question was—

Mr Francois

Look, I’ll help you. In October 2018, the MoD claimed “to have saved £25 million in the first six years”—that is according to the NAO—"and will achieve further savings of £235 million in the remaining four years.” Is that estimate still credible?

Air Marshal Knighton

We would need to go back and give you the profile. I do not have that information to hand.

Ms Little

Broadly, the answer is yes, but the profile is now more backloaded, because we have not been able to deliver it as quickly as we anticipated.

Mr Francois

It’s a 10-year programme, and you are six years in. So far, you have saved £25 million. In the remaining four years, you are going to save not short of 10 times that. You are really telling the Committee that that is true.

Ms Little

That is the expectation.

Sir Stephen Lovegrove

That is the expectation, yes.

Mr Francois

How?

Ms Little

It is mainly through the baseline contract payments. The reason we have not been able to release those savings as quickly as anticipated is because we have had to invest much more in the IT to get the contract working in the way in which we had expected. The payment mechanism itself—that is, what we actually pay to Capita, without those additional investments—will yield those savings on an annual basis.

Mr Francois

So you think you are going to save money by not paying Capita for doing the contract?

Ms Little

No—the savings were in comparison with what we would have paid if Capita was not doing it. The baseline amount that we pay Capita is where the saving was made through outsourcing it. As my colleague said, however, we are very happy to write to explain how the profile works.

Mr Francois

I think your assumptions for saving almost 10 times what you have saved so far are heroically optimistic, to put it mildly.

Sir Stephen Lovegrove

The NAO figure that you are quoting is the same one as the one that we have just been talking about, so they had a look at it and they did not feel that they were completely out of—

Mr Francois

For time, I am not going to quote the whole NAO report—the Chair would not thank me—but, “We found, however, that forecast savings will not be fully achieved because: the Army has employed additional personnel,” and it goes on to give a variety of other reasons why you are not going to do it. They are just the National Audit Office. Let us look at the actual numbers recruited. Because of the failure of this contract, large numbers of our infantry battalions are chronically understrength. The Scots Guards are at barely 60% and we have to rob Peter to pay Paul constantly when we send people on operations. It is a 10-year contract. In what year will we actually hit the recruiting target that we contracted for?

Sir Stephen Lovegrove

The head of the land army made some predictions the other day in front of the PAC, where he said that he was very confident that he would be getting 80% of the—

Mr Francois

That is not the question I asked you, Sir Stephen. In what year will you hit the target that you contracted for?

Sir Stephen Lovegrove

I will have to get back to you on that. I will check with the head of the land army.

Mr Francois

Forgive me, but you should know this. CDS gave evidence to this Committee last year. He said that you would hit the target in year 10—that is, in the final year of a decade-long contract. Since when has the British Army regarded one in 10 as mission success?

Air Marshal Knighton

What you have set out, Mr Francois, reinforces the point that we see inside the Department. The performance of the recruitment system, particularly in the Army, has not been good enough. There are, though, some very positive signs of improvement—some of those you have in front of you—

Mr Francois

You have been telling us this for five years. It is always just about to get better, Richard, and it never does. You said recruitment in the Department—sorry, we are tight for time; I do not mean to be impolite. Last year, the RAF very nearly hit their total recruitment target. They do it in-house; it’s not outsourced. The Royal Navy weren’t far short of their target. They do it in-house; it’s not outsourced. You outsourced the Army, partly because some very senior officers at the time were very keen on it, and it has been a disaster. Now the MoD is planning to outsource all three, isn’t it? Surely that’s insane.

Sir Stephen Lovegrove

The question is whether you are talking about outsourcing in terms of the back-office machinery that services it, or the approach to recruitment on a day-to-day basis and the way in which people interact with potential recruits. They are different. In the latter, you can see that the Army is getting much closer to the way in which the Navy and the Air Force do it. I think they would accept that it was a mistake to take, as it were, recruiting sergeants away from that first—

Mr Francois

It was!

Sir Stephen Lovegrove

It was. And they are moving back into a position in which serving soldiers are the ones who are doing it.

Mr Francois

Fine—good. Let’s just let the Army do it, like the Navy and the RAF do it, and sack Capita. Look, Capita had a strategic contract with the DIO, a 10-year contract. You sacked them after five years because they were useless, but you refuse to sack them on this because the whole system, including some very senior Army officers, are far too proud to admit that they got it wrong. What do you have to do, how badly do you have to fail, to get sacked by the MoD?

Sir Stephen Lovegrove

I took the decision to move away from the Capita contract in the DIO, because it was clear to me and the senior team there, after doing the analysis, that there was a better way of doing it. No final decisions have been made on Capita with respect to recruiting at the moment, but we always have to make sure that we have a better answer than the one that we have at the moment.

Mr Francois

This is my last question, Chair—you have been very decent. The answer we have at the moment is patently disastrous. Go to frontline infantry battalions and see all the soldiers who are missing. We are companies short. That is the effect in the real world of these idiots, and yet you cling to them like glue.

Sir Stephen Lovegrove

I really do not think that we cling to Capita like glue. You gave the good example of the DIO, where we moved decisively away from them. I also think that the problems of recruiting in the Army cannot be laid wholly at the door of the recruiting system. There are much bigger things in society and—

Mr Francois

Yes, but the RAF and the Navy face the same challenges, and yet they manage—

Sir Stephen Lovegrove

But they have a different offer. There is no question, as I said before, that the RAF and the Navy used a different way of making that first contact with potential recruits, which the Army have recognised is a better way of doing it than the way that they used to do it.

Mr Francois

My final point before I hand back to the Chairman, Sir Stephen: the emperor has no clothes. Everyone can see that this is a disaster. Just because a couple of very senior generals will be embarrassed doesn’t mean that you have to run this out to 2022. We all know that it is a total basket case. Before we have infantry battalions with one company left in them, for God’s sake, do something about it. My final word.

Chair

Are you being prevented by people in uniform from disposing of this contract?

Sir Stephen Lovegrove

Absolutely not. I can give the Committee the firmest possible reassurance that neither I nor any of my colleagues will be dissuaded from making the right decisions by virtue of the amour-propre of senior military officers.

Chair

You mentioned the distinction between the back office and the front office, when you talked about the interaction between recruits and uniformed members of the Armed Forces recruiting them. I can only speak from my very limited experience when I joined the Royal Naval Reserve in 1978 that to me, if there had not been a recruiting office on the high street, I would probably never have done it. I suspect that when Mr Francois joined the TA, I believe—in what year?

Mr Francois

In the last century, Chair.

Chair

But not as long ago as me—

Mr Francois

I joined at university.

Chair

Okay, in that case that was the way in, but again you were interacting with uniformed personnel in doing that.

Mr Francois

Yes, sir.

Chair

But what about the back-office side of things? How can it be that in making a presentation on defence to a group of retired officers a few days ago, I was told by one that his grandson is keen to join the Army, and he has been told that he will have to wait until next September before he can go to Sandhurst? His life is on hold for 11 months because the system is too inflexible to seize recruits with both hands and say, “Welcome. Come on board straightaway.” Have you any observations to make on either of those two things, the first one being of the rather obvious nature that if you want to get young or youngish people interested, you want them to be interacting with people who look like what they wish to become?

Sir Stephen Lovegrove

As I say, the Army is very open to the realisation that they got that part of it wrong. I think what they would say in their defence, although it would only be a partial defence, is that it was a time when there was intense activity in south-east Asia, and they needed to get as many soldiers on to the front line as they could. They took the view that they could do some of the recruiting without that interaction of somebody in uniform. It did not work, and they are going back decisively to the former, rather obvious approach that you outline.

Chair

So there is no question that service recruitment offices are going to continue from now on, then, in those other services. There is no question of the Army not bringing them back.

Sir Stephen Lovegrove

I do not know about the offices. I do know, when we are talking about the first interaction with the system that a potential recruit will have, it will be much more generated and channelled through serving military personnel. It will not be with a—

Mr Francois

Why do you need Capita, then?

Sir Stephen Lovegrove

Because there is a back-office processing exercise that they provide to us. One of the problems that both Capita and the Army have been very clear about is that at the beginning of this contract, they both hugely underestimated the complexity of transforming that back-office system.

Chair

And the 11-month wait for Sandhurst?

Sir Stephen Lovegrove

I am not in a position to answer questions about Sandhurst, because I simply do not know what the normal wait would be, or an 11-month wait in comparison with it. What I do know is that as a result of the initiatives that we have been putting in place for ordinary recruits in the past nine months or so, the transition time has come down from 200 days to 150 days. That is still too long, and certainly—

Chair

Do you know what it used to be?

Sir Stephen Lovegrove

We accept that it is still too long.

Chair

But do we know what it used to be before this outsourcing?

Mr Francois

Nothing like that.

Sir Stephen Lovegrove

Ninety is a number I have in my mind, but I would have to get back to you on that.

Chair

So it used to be about three months, and then we brought in this system and since then, it has skyrocketed.

Sir Stephen Lovegrove

Whether or not it was purely because of the system is open to question, but we are very conscious that that passage time has to come down a lot. It has come down a lot; we are working on making sure that it comes down further.

Mrs Moon

We were told that, in terms of the problems with the Capita contract, it was 50:50; it was 50% problems within the Ministry of Defence and the Army, and 50% Capita’s responsibility. Can we have an assurance that the 50% that was MoD mess-up is resolved? I have a military training college in my constituency. There is not a problem with young people wanting to join, let me tell you. The problem seems to be that back-office processing stuff, yet that is what stayed with Capita, so I remain worried about that. Finally, Sir Stephen, can we have an assurance from you that if Capita’s 50% and its back-office capability does not improve, the contract is one that we can get out of? I have actually seen the Ministry of Defence decide between two dreadful contracts and decide to get out of one because, although it was hard to get out of, it was easier than getting out of the other one. They have made disastrous decisions on the basis of which contract was the worst-written. So can you address the 50:50 issue, the back-office issue, and whether the contract is one that we can actually get out of?

Sir Stephen Lovegrove

On the, as it were, 50% that is the MoD/Army’s fault, I can give you an assurance that we are completely seized of the mistakes that have been made in the past and are completely committed to trying to fix them. You will understand that even with the best will in the world, sometimes when we go into a remediation process, that doesn’t go quite as well as we would like. This is a big, complicated contract. But we are working very, very, very hard, and successive Secretaries of State, successive Chiefs of Defence People and successive chiefs of the field army have all been very, very seized of that.

Mrs Moon

So where are we now? Are we at 40%, 30%—

Sir Stephen Lovegrove

I would say that, in terms of what we know we need to do, we are well over—it is 70% fixed, I think. But there is a long way to go until, for instance, we manage to get that time-of-flight number down from 150 to 90, if it is 90—I think it may be 90. That’s still two months we have to shave off, so that will be hard work and will mean that we have to look at medical standards and whether medical tests are being performed quickly enough, whether the communications are quick enough and whether we are using social media quickly enough. It may well be that the last 10% is difficult to get; I don’t know. We are still working hard at it, and it won’t be fixed in a matter of months. The question was asked: can we get out of the Capita contract? Yes, we can get out of the Capita contract. The decision has not been made as to whether we should get out of the contract, but can we? Yes, we can.

Martin Docherty-Hughes

Stephen, in response to Mark’s original question, you said that the Royal Navy and the RAF have a different offer. Are you saying, therefore, it is a better offer than what the Army has?

Sir Stephen Lovegrove

I really do defer particularly to Air Marshal Knighton on this, but my conversations with serving officers and, indeed, serving men and women of all ranks have showed that people join the different services for different reasons. Often they join the Navy for, as it were, the lure of the sea. They join the Air Force because it is a highly technical service, with some of the most cutting-edge technology in the world available for people to be able to help develop. Indeed, Air Marshal Knighton himself is a very distinguished engineer. I think people may join the Army for different reasons. It is that, really, that I am referring to.

Martin Docherty-Hughes

I don’t know whether the original question asked about the decline in female and black, Asian and minority ethnic recruitment. Would you like to add anything on that?

Sir Stephen Lovegrove

Again, it is an issue that is being addressed with the utmost seriousness at the highest levels of the Armed Forces. Indeed, there was a day-long exercise, which was chaired by the Chief of the Defence Staff and which I attended, just before the summer where that was one of the principal subjects of discussion. But it is moving at different paces in the different services. Again, I think the Air Force is probably doing rather better, particularly on recruiting women, than the Army is doing, and I think the Army is trying to address that, but it has different types of challenges.

Martin Docherty-Hughes

Were any of the senior personnel at that meeting female or from a black, Asian and minority ethnic community?

Sir Stephen Lovegrove

There was no one from a black, Asian and minority ethnic community. There was a female officer there, yes.

Martin Docherty-Hughes

One?

Sir Stephen Lovegrove

I think that’s right, yes. It was before the summer, so I’m casting my mind back.

Martin Docherty-Hughes

Given the profound issues faced by women and the BAME community in recruitment, that doesn’t sound great. Even if you had told me that people were brought in to inform the debate and discussion with senior officers, to represent those under-represented groups, I would have welcomed that—you might be about to say it—but I’m getting the idea that, with all respect to the gentlemen in that room, it was a case of pale, male and stale.

Sir Stephen Lovegrove

Well—

Martin Docherty-Hughes

And white.

Sir Stephen Lovegrove

Yes, which I guess is the pale bit. This is a question that you really ought to address to the Chief of the Defence Staff and the chiefs of the individual single services, but I don’t think that a single one of them would resile from a belief that the Armed Forces of this country need to more fully and accurately reflect the make-up of the population that they serve. They don’t do that to anything like the requisite degree at the moment. It is a more difficult question sometimes for the Armed Forces to be able to fix that kind of thing, because they are, in a phrase, bottom-fed organisations. It is not possible, for instance, for Cat to go in and become an air chief marshal because she doesn’t have the experience or the qualifications to be able to do so. There is a question of people reaching the highest rank having gone through lower ranks before, and therefore it is a question of flow, just as much as it is a question of stock. The chiefs of the single services, who are by and large all fairly new, are deeply aware of this and are all completely committed to making a difference to it. Others may wish to make a comment on this.

Ms Little

I am the race champion for the Department and obviously a senior woman. Last year, for the first time, we set quite ambitious targets to start measuring and performance-managing the way in which we are going about recruiting women and people from BAME communities. The way in which the Department holds the single services to account has significantly changed. For example, at the last meeting with the Army we went through in some detail what their plans were to improve. The fact that we are having conversations about detailed response plans and that they are being scrutinised at the top level, from a diverse community and a diverse group of leaders, is a real step in the right direction. I spent the whole morning with the Chief of the Air Staff as part of our Black History Month celebrations, talking about how we really go after this issue. We are not going to be able to defend the country if we can’t represent the communities that we seek to keep secure and safe. There are some real issues in translating the offer we have within the Armed Forces to make it relevant to young people from more diverse backgrounds. We also heard from the Army engagement team, who are doing direct outreach work. They are doing great work in schools explaining what the Armed Forces do, getting people from more diverse backgrounds to go to talk and explaining how inclusive we are as an organisation. We’ve got to work 10 times harder than any other organisation because the odds are stacked against the minority protected characteristics that we are seeking to improve. It is not unusual for us to have largely male and white dominated bits of our organisation. We are working hard at it. The fact that we are performance monitoring is a real step in the right direction.

Martin Docherty-Hughes

May I ask one more brief question? I am glad to hear that. Would there be any future discussion on the relationship to class—the economic diversity of who you are recruiting and how they work up through the senior ranks? I represent a very undiverse constituency. Lord West may have went to school in Clydebank but he never spent much time there. The relationship with class is also critically important in constituencies such as mine.

Sir Stephen Lovegrove

It is, and we are extremely interested in that area. We look upon the Armed Forces and the Ministry of Defence as a whole as being a real force for good in terms of social mobility. I was very pleased to see that we are now the 35th best employer in the country in the social mobility awards. That is a significant improvement over last year; I hope that we will continue to improve next year. We look upon some of the Armed Forces as being a real engine for social mobility and we want to increase that profile. It might be useful to hear from Air Marshal Knighton, because he is the one who actually has a uniform.

Air Marshal Knighton

As an ex-comprehensive school kid, I would reinforce what the permanent secretary has said about the meritocracy that we pride ourselves on in the armed services. I have had many young men and women who have worked for me and been given opportunities by the armed services that have allowed them to develop in ways that, if they had stayed their community, they probably wouldn’t have had. To reinforce a couple of points that Cat and the permanent secretary made, because we are a base-rank-fed organisation, it takes a long time for us to deal with this. The old adage that you can only aspire to be what you can see is something that really resonates with us, and we recognise that the under-representation of women and black and Asian minority ethnic people in our senior positions in the Armed Forces is part of the problem. Exactly the kind of work that Cat has described is going on in the armed services. In my career of more than 25 years, I have never known this subject to be seen as so important, and so much energy and effort being put into it, but it will take a long time for us to deliver. I hope that the meritocracy that is the essence of the armed services will help us through this challenge.

Mrs Moon

I have a number of questions. I have one to end on this, and then I will move on to—

Chair

I have to get Gavin in before you.

Mrs Moon

Sorry. In that case, I will just ask this one question. You must be aware that year after year for the Service Complaints Commissioner—honestly, this needs to come to you, Air Marshal, because you are the only one in uniform here—it is women and the BAME community who disproportionately are unhappy with service life. Disproportionately, it is about bullying and harassment. Are we getting on top of that? I have spent years on this Committee, and bullying, harassment and sexual assault have been the key issues that I have had to tackle as often the only female on the Committee.

Chair

Not any longer.

Mrs Moon

Not any longer, I appreciate that, but I have been at times in the past. Is this is finally being grasped? It is less of an issue, I appreciate, in the RAF and the Navy, but it is slightly. It is much more an issue in the Army. Are we getting on top of that? This is about attitude as well as values, and it worries me that it is happening here. If we are sending personnel who feel that it is appropriate to abuse BAME colleagues and female colleagues then God knows what they are going to get up to if we deploy them overseas. Is this seriously being addressed?

Air Marshal Knighton

I point to Air Chief Marshal Wigston’s most recent report, which reinforces some of your points about the rising rate of some of these events. I also point to Air Chief Marshal Wigston’s comments about some of the things that are already being done, and the redoubling of the efforts of the most senior people across the armed services to address what is reprehensible and unacceptable behaviour in the armed services. The position that is taken by the most senior people is unequivocal, but as you say it is about attitudes throughout the organisation. Some of it is unquestionably about leadership and setting the right example. Some of it is about structures and processes, so that people feel able to speak up, and those around them who see things that are unacceptable, to step in and challenge it. I don’t think the position we find ourselves in is acceptable. I think that is widely acknowledged across Defence. We must conclude from that that there is more to do. I hope that, if one of my two daughters decides to join the Army, the Navy or the Air Force, she will see an organisation that values people for what they are and for their backgrounds, and where they do not fear or feel any kind of resentment, criticism, bullying or harassment, but it is a constant effort for all of us in leadership positions, whether you are a corporal right the way to the Chief of the General Staff, to deal with these issues and to model the right kind of behaviours right the way through the organisation.

Chair

We really must move on now, because we have a lot to do. Some may have noticed that Madeleine is very bravely carrying on, albeit suffering from quite a nasty injury, and one or two other Members are time limited, so I am going to crack on a little bit more ruthlessly now. Gavin, please.

Gavin Robinson

Thank you, Chair, and apologies for being late. I had hoped that when I arrived you might be concluding, but given some of the answers I suspect my expectation and reality are quite far apart. Cat, could I return to some of the accounting questions that you have previously answered? Did you have to delay spending or make any unexpected cuts to stay within the non-ring-fenced budget last year?

Ms Little

The way in which we approached last year was that of course we received some additional funding from the Treasury, and it was incredibly tight: you will see from our out-turn position on our resource DEL, which is the limit for non-capital expenditure, that we were £22 million under our budget. The way we did that was partly through maximising money across the financial period, so we brought forward some priority programmes from this financial year into last and we deprioritised some activity into this year. That is quite normal; it is not easy to do in Government, because parliamentary controls work on an annual, short-term basis, as you know, but there was a small amount of saying, “Actually, we’ll move some things into next year and fund them next year, and we’ll accelerate and bring forward some things to live within our financial position.” We try not to delay things artificially, for several reasons. First, obviously, we do not want to stop critical capability being delivered on time. Secondly, we want to give industry certainty. Thirdly, we do not think that it always offers good value for money, so we only do it if we think that there is a legitimate good-value-for-money reason.

Gavin Robinson

Are you able to itemise what those things were—those that were brought forward and those that were deprioritised?

Ms Little

To be frank, there were not any big things last year that we decisively chose to move. The way in which the Department’s delegated system works is that once we set a revised budget for the Army, the Air Force, the Navy and our delivery agents, they may take some very local decisions to reprioritise. I cannot itemise the things that happen at that level of granularity—obviously it is a big, complex budget—but off the top of my head, there were no big things that we actively had to move, and that was because we were able to secure some additional funding.

Gavin Robinson

How did you get so close to the estimate figure for cash spending, given that the Treasury has reduced the MoD’s budget by £2 million because of poor cash forecasting performance?

Ms Little

What I think you are referring to is the fine that we paid for our cash forecasting last year. I think the first thing to say is that we have been relentlessly focused on improving forecasting, but our cash forecasting in particular is not good enough. We were at the bottom of the league table last year across Government; this year, to date—

Gavin Robinson

But you were rather close to the estimated figure for cash spending, were you not?

Ms Little

With the cash resource departmental expenditure limit, we were £22 million under, but the way the Treasury monitors our cash forecasting is month on month. What it is trying to get us to do is maximise the cash available to the whole of Government. Every month I have to be able to land the amount of cash that I draw down from the Treasury with quite a lot of precision. Unfortunately, in our kind of business, sometimes we get payments that are material and that come in unexpectedly at the last minute, either to do with big contracts or with those that we had not anticipated paying in that particular month. That is how we have ended up at the bottom of the cash forecasting table. Our overall forecasting is actually quite good; for capital, we are in the top quartile for forecasting across Government, which I am obviously very pleased with.

Gavin Robinson

Moving from month-to-month to year-to-year or decade-to-decade, I have raised portfolio agreements on a number of occasions. There is one that spans a 10-year period, and there is aspiration for a number of others. Has there been any further thought about portfolio arrangements with suppliers that would allow you to profile more properly and take intrinsic savings over a longer period of time?

Ms Little

Sir Simon might want to add to this, but the way in which our Government financial planning works means that it is quite difficult for us to get into those sorts of long-term portfolio arrangements.

Gavin Robinson

But you have already.

Ms Little

I am just trying to think of an example.

Gavin Robinson

MBDA?

Air Marshal Knighton

Are you referring to complex weapons with MBDA?

Ms Little

Right—the complex weapon pipeline. We do it where we are able to forecast with relative certainty what we need over a long term. We would like to do more of it, and there are some good examples of big, complex programmes where we think that it is right that we should do much more of it. But we have to do it with the explicit permission of Treasury, and some of the things where we think we would be able to benefit most are so valuable and cost so much money that we have not yet secured that level of approval from Treasury.

Gavin Robinson

Maybe I will pick that up on another occasion, specifically about another aspect that you are engaged in discussions on as a Department.

Air Marshal Knighton

May I offer just one other point, Mr Robinson, which is that part of the complex weapons portfolio and the plan was about ensuring that the UK had access to the right skills, as well as driving in over £1 billion-worth of savings through that long-term programme? It fell, in some respects, out of the thinking being done on the defence industrial strategy back in 2005-06. So it is a combination of factors that will lead us to make judgments about where we might need to intervene in order to sustain and support the kind of skills that we might need. The FCAS—future combat air system—investment that was announced as part of the combat air strategy is also partly about trying to sustain those skills in industry, and we think of it in portfolio terms.

Gavin Robinson

Perhaps, if you have time, we could discuss that afterwards. Will the spending review 2019 that has been announced increase the level of defence spending as a percentage of GDP and, if so, by how much?

Ms Little

Government has not yet agreed to what extent there will be an SR or SDSR, for how long and over what time period. Just to build on what the permanent secretary said earlier, we would expect some sort of fiscal envelope to be set, and we would expect there to be some sort of discussion about how we would measure defence spending. Obviously, the 2% and whether it is 2% or higher is the sort of discussion we would expect to have as you enter an SDSR, but none of that has yet been agreed.

Chair

Sorry—I just want to clarify that. What we are talking about—what was behind this question—is that the spending round that we have now—

Ms Little

Yes, apologies.

Chair

It’s all right—don’t worry. The spending round that we have now is just this £2.2 billion extra, although a lot of that was for pensions. And what we are looking at are the two sets of figures that we have. We have calculated as a Committee, doing the best that we can, that on the basis of the NATO rules, we are on 2.1% GDP, which we believe—on the basis that we used to calculate it—equates to 1.8%. And just to give you an idea, our rough calculation is that the £2.2 billion would just about take the 2.1% up to 2.2%, and the 1.8% up to 1.9%. We wonder whether you agree with that; it’s not a trick question.

Ms Little

I did see your paper in July, which updated the 2% calculation—

Chair

That was before this announcement, of course.

Ms Little

Yes. So, broadly, yes, I agree with your calculations. We haven’t done the old calculation; we only use the NATO definitions.

Chair

Well, I’m sure you do, because the old one takes us to below 2%.

Ms Little

The one that I focus on is Government policy on the 2% and it is the one that I am audited against. To be precise, it was 2.13%. Obviously, that assumes that the percentage of defence spending remains equal and that GDP remains equal. The big thing for us now is, obviously, to get a revised forecast for GDP.

Chair

Yes, but like for like, assuming—?

Ms Little

Like for like, it is 2.13%. It broadly maintains the level of defence spending as a proportion of GDP—

Chair

So you don’t think the £2.2 billion will take it up to 2.2%?

Ms Little

It’s a very small increase. So, in real terms—

Chair

Because it’s £2.2 billion over two years, isn’t it?

Ms Little

Yes. That’s correct.

Chair

So you think we are really still at 2.1% on that?

Ms Little

Yes, it’s still around 2.13%, using the latest GDP forecast.

Chair

Thank you. That is helpful; that is clarity. Sorry to interrupt.

Ms Little

Apologies for misunderstanding.

Gavin Robinson

Not at all. Then, specifically, is the £300 million funding for priority capability programmes announced in the 2019 spending round part of the £340 million additional defence transformation fund budget that was announced in the MDP?

Ms Little

The Secretary of State’s transformation fund, which was announced earlier this year in January, related to this financial period— so the 2019-20 financial year. And the additional £1 billion relates to the 2020-21 financial year. We are currently going through a budget planning process with the Secretary of State and Ministers, to agree to what extent the transformation fund continues and how we prioritise the £1 billion of additional spending. Of course, a lot of that will go on priority programmes that were already under way under SDSR15, and what we describe as the programme of record still needs to be delivered. But that planning process is currently under way.

Gavin Robinson

I suppose the question is whether the £300 million is new money, additional money, re-announced money or already profiled money?

Ms Little

For the transformation fund this year?

Gavin Robinson

The £300 million for priority capability programmes.

Ms Little

The £300 million that we have brought forward is to pay pound for pound for us accelerating programmes from next year into this financial period. It is definitely additional money, but it is to fund things and accelerate them into this financial period.

Air Marshal Knighton

This is stuff that we would have been spending in the following financial year—from 1 April next year. This additional money allows us to bring that expenditure forward, reducing the expenditure next year and accelerating the programmes, as Cat described.

Gavin Robinson

Reducing the expenditure—so the money is gone from next year? When you bring it forward, it is not replaced—it is just advanced?

Air Marshal Knighton

You bring the cost forward. It doesn’t reduce the budget next year.

Mrs Moon

I would just like a clear picture of the efficiency targets that you have now set yourselves, the timescale and the savings you have made so far. I would just like to see how it is progressing.

Ms Little

We have been doing quite a lot of work since we were last in front of you. Our target over the next 10 years is £35 billion. That goes out to 2029. We have now got plans in place, with varying maturity levels, to deliver £25 billion of that target, so there is a shortfall of around £10 billion. The work that we have established is our transformation portfolio, which the permanent secretary referred to earlier, where we are looking at wholescale cross-cutting change to sustainably reduce our cost base, when it comes to logistics and support, our acquisition process people, and digital and IT spend. That work is currently being cohered so that when we have an SR, hopefully next year, we are able to put forward some further savings and some further investment that will be needed in delivering those savings. In terms of what we have delivered so far, since 2010, we have delivered about £10 billion of efficiency savings. We have had that recently assessed by an independent review. Of course, we invite the NAO in every year to look at our specific efficiencies on the equipment plan. One of the things we are going to try to do next year in our annual report and accounts is to set out in a bit more simplicity how we are doing against savings targets on an annual basis. Having done all that work to rebaseline it, it will be easier for us to do so.

Sir Stephen Lovegrove

You make a very good point in the way in which you phrased the question, because the multiple overlapping efficiency programmes that have been announced, in 2010, 2013, 2015, have bedevilled the Department getting a clear sense of how we were doing against that, holistically. About 18 months ago, we spent a lot of time trying to clean this up and to get a sensible overall view. That £35 billion over 10 years is the best number to stick with, and that is what we are basically managing against now.

Mrs Moon

Do you have enough time to meet your targets by 2021?

Ms Little

The targets for 2021 from SDSR15 are currently on track, but it is fair to say that it is really challenging. One of the things we have learned is that, historically, the Department has gone after efficiency savings without investing in changing the way in which we do things. We have sort of just cut things.

Mrs Moon

Indeed; I was going to say, it is not efficiencies—it is cuts.

Ms Little

You are quite right. Part of the challenge has been us reading out what has been cut and what is genuine change and therefore genuinely doing more for less. One of the challenges we have is making sure that we have enough investment in transformation so that we genuinely change the systems through better technology and automation, making us easier to do business with so that efficiency savings can flow. It is still challenging to hit those targets—as I said, we have a shortfall—but one of the things we are trying to do in our budget planning for next year is to squeeze out some money to make sure we continue to invest in change. That is one of our big lessons learned.

Sir Stephen Lovegrove

Which is another reason why we are so keen on having another multi-year settlement. It is impossible to prove the benefits that will come as a result of spending money on a new system in year one. It just doesn’t work like that; it takes three, four, five or six years. We need to look at the investment horizon in that kind of way, and an SDSR or an SR will hopefully allow us to do that much more effectively with colleagues at the Treasury.

Mrs Moon

Can I move on to service personnel? We have talked about the difficulty of recruiting, but only a third are said to be happy with the pay that they are receiving. Given the apparent buoyancy of employment, pay is a really live subject. How sustainable is that situation when pay is not really being tackled and keeping pace with what else is on offer? Can you also confirm this? We gave a measly 0.9% one-off bonus. When what that finally made? Has it all been finally made?

Sir Stephen Lovegrove

We absolutely have been aware that pay is an issue. It is an issue in the civil service as well. The Government chose, after the last AFPRB report, which is all the ranks below one star—or is it one star and below?

Air Marshal Knighton

One star and below.

Sir Stephen Lovegrove

The Government chose to accept the 2.9% recommendation. For the lowest ranks, it effectively equated to a 6% increase, and it got everybody to £20,000. Across the board, that was £1,000[2]. We are hopeful that some of the data that you are referring to will show that people are a little more comfortable with the pay that they are being offered. For more senior ranks, the SSRB recommended 2.2% for military officers. The Government ultimately ended up offering 2% to those more senior ranks. That is obviously less than the SSRB suggested, but it was more than was offered to civilian senior civil servants. We are conscious of this as a factor in retention. We are conscious of lots of things as factors in retention—accommodation is another one.

Mrs Moon

Indeed.

Sir Stephen Lovegrove

These are all areas that we are trying to address as much as we possibly can. Clearly, there is again, even in this area, a balance of investment choices that we have to make. There is never a situation where we can do in any one area as we would ideally like.

Air Marshal Knighton

Might I add something? I have the Armed Forces continuous attitudes survey results in front of me. Between 2018 and 2019, the satisfaction with pay for officers and other ranks went up several percentage points. It is moving in the right direction, although it is still not high.

Mrs Moon

To what?

Air Marshal Knighton

The other ranks were at 32% and are now at 35%, and the officers have gone up to 51%[3]. There have been several single three or four percentage point increases both in the ranks and the officers post that award. That independent analysis indicates that there is some improvement, and that has been welcomed. It is still not back to the high of 2010.

Mrs Moon

I would be absolutely mortified if 30% of my staff said that they were happy. I wouldn’t be happy if 50% said that they were happy. They are not exactly John Lewis satisfaction survey standards, are they?

Sir Stephen Lovegrove

There is a difference between whether they are happy and whether they are happy with their levels of pay.

Mrs Moon

This was a survey of satisfaction.

Air Marshal Knighton

It was specifically about pay.

Mrs Moon

But 30%, even going up to 35%, is still not good enough.

Sir Stephen Lovegrove

It is higher than in the civil service.

Mrs Moon

I appreciate that, but we are not asking you to go and die for us.

Sir Stephen Lovegrove

No, but I am just saying that there are lots of things that draw people to do their jobs over and above what they are paid.

Mrs Moon

But we also have to recognise the job that we are asking people to do: they don’t get overtime; they often have to serve in extremely difficult situations; they often have to do all the antisocial things that the rest of us shy away from, including living in very difficult situations, particularly when they are in theatre. They deserve, at least with pay, higher levels.

Sir Stephen Lovegrove

That is why we are going for these awards, which we hope are seen to be generous.

Mrs Moon

I say that as a person who has not been in the reserves, but I recognise that that should be recognised in pay.

Ms Little

To answer your very specific question on the non-consolidated amount, it was paid in December 2018[4].

Mrs Moon

Fully paid?

Ms Little

Yes.

Martin Docherty-Hughes

Have you made any progress with the Home Office in resolving the impact on foreign and Commonwealth military personnel of the minimum income threshold, and the high cost of visas and indefinite leave to remain?

Sir Stephen Lovegrove

I am afraid that I am not able to answer that question.

Air Marshal Knighton

I am afraid that I don’t know.

Sir Stephen Lovegrove

We may have to come back to you on that.

Martin Docherty-Hughes

I take it, therefore, that you cannot answer how these issues affect your attempts to address the Armed Forces recruitment shortfall, if you are looking for soldiers from the Commonwealth and non-UK nationals.

Sir Stephen Lovegrove

They are certainly an important source of military personnel and we very much value their service, but on the specific point that you are asking we will have to take that away and write to you.

Martin Docherty-Hughes

I will ask you the final section on this. The former Minister for defence people and veterans told this Committee that he believed there is “a moral case” for getting rid of these fees. Does the Ministry of Defence continue to hold that view?

Sir Stephen Lovegrove

Again, I would be happy to answer that question when we return to you with a fuller answer.

Martin Docherty-Hughes

Okay. What has been the impact of the programme you planned to introduce in 2019-20 to address military skills gaps?

Air Marshal Knighton

I will take that one. What specific programme are you referring to?

Martin Docherty-Hughes

Around skills gaps and skills.

Air Marshal Knighton

From a military perspective or a civil servant perspective?

Martin Docherty-Hughes

From a military perspective.

Air Marshal Knighton

We track, across all three services, specific ranks and trades. There are specific skills requirements associated with those ranks and trades. We think about it in terms of where it could have or is having an impact on our ability to deploy people—the operational impact, which we call operational pinch points—or we talk about manning pinch points, which are where we have gaps around the armed services that cause us some challenges in filling gaps at particular points in time. The level of detail around each of those is quite granular and we have a whole series of bespoke programmes on specific skills to try to improve that situation. For the most part, we see improvements forecast in that situation over several years, but it is worth pointing out that these are not straightforward things to fix quickly. The example I would use is that we have a shortage of avionics technicians in the REME at sergeant and up to warrant officer level.

Martin Docherty-Hughes

So they would already be in the services.

Air Marshal Knighton

We have to do two things. One is to try to keep those that we have—retention is a really important factor here—because retaining skills when you have paid for all the training costs and lived with all the history of that is the most cost-effective way of dealing with it. We want to retain that expertise and skill. In a number of specialist areas, we introduced financial retention incentives. But it is not just finance; there is a whole range of factors.

Martin Docherty-Hughes

Can we take it slightly further back than, for instance, the sergeant or their equivalent in any of the other forces? Taking it right back to the basic young recruits coming through the door and the basic skills you look for them to have that might evolve further down the line, do you ever talk to the Department for Education about future pinch points and skills gaps in general, and how does that inform your recruitment processes for younger recruits?

Air Marshal Knighton

Yes, we do.

Martin Docherty-Hughes

There are several Education Departments in the United Kingdom of Great Britain and Northern Ireland; I am not talking just about Whitehall.

Air Marshal Knighton

Okay, I take your point absolutely. As far as I am aware, our conversations on some of these specific problems occur with the Department for Education in Whitehall, but I know that in Scotland, for example, a lot of work is done with the Scottish Government on science, technology, engineering and maths skills. In a previous role, I was responsible for the planning and setting up of the RAF 100 programme. A key component of that was the STEM work, and we worked very closely with the Scottish Government to engage and involve ourselves with some of the excellent projects and programmes they are running in Scotland to try to ensure that we lifted the sights of society more generally. The spin-off benefit to the Armed Forces is that we have a larger pool of technically qualified and capable people from which we can draw.

Martin Docherty-Hughes

What about Whitehall, Northern Ireland and Wales?

Air Marshal Knighton

I definitely know that we did it with Wales as well. I am afraid I cannot say, hand on heart, that it was done in Northern Ireland, but I know from experience that the quality of the education and technical skills available in Northern Ireland is a great attraction to us, and we have many very highly qualified recruits who have come from Northern Ireland. At a more senior level, taking a national view, the Chief of Defence People and teams who work for him have regular contact with the Department for Education, and we talk regularly, particularly about those STEM skills. It is not just that; we talk more generally about education standards, but those STEM skills are so important for us. As we look forward to a force that will be more technically competent and involve itself with higher levels of technology, that is going to be increasingly important to us.

Martin Docherty-Hughes

Let’s take the technology question next, then. Do you foresee the military’s attempt to develop cyber skills reducing funds for conventional activities?

Air Marshal Knighton

That is absolutely not the intention at all.

Martin Docherty-Hughes

Maybe I come at this with a slight devil’s advocate view. If you are looking at capability and at a changing environment in terms of what is necessary for effective Armed Forces, there is going to have to be some give between what is viewed as traditional delivery and what is more realistic delivery in an age in which cyber skills, as well as other modern technological advancements, are going to have an impact. There is going to have to be some give and take on that, surely.

Air Marshal Knighton

This is a debate that is—

Martin Docherty-Hughes

It is about capability.

Air Marshal Knighton

This debate is raging inside the Armed Forces at the moment. We recognise, with the increasing importance of space and cyber-space to future operations, and of our ability to code and programme our own software to deliver the agility we need, that there is a set of skills we are going to need to grow and develop in the armed services. Some of that will be about new people coming into the organisation with those skills or people being trained while they are part of the armed services—or, potentially, through a different relationship with industry, civilians and reserves. One of the opportunities that technology offers is for us to take people out of some of the work they do currently. Robotic process automation is widely used across the private sector, and there are opportunities, as we look forward to the future operating environment, for us to apply that technology to reduce our reliance on people. That is one of the ways in which we would—

Martin Docherty-Hughes

On which service do you see automation having the biggest impact?

Air Marshal Knighton

You could see it having an impact across all the services. I will give you a particular example. If we can collect the data effectively and apply sensible algorithms to that around the maintenance of our platforms, we can potentially improve the reliability of those platforms and reduce the time spent in maintenance, thus reducing the maintenance burden and the number of people we need actually to hold spanners and screwdrivers to maintain ships, planes and vehicles. So the opportunity there is quite considerable. There is a lot of work to be done to realise those benefits, and one of the points that I often make inside the Department is that the force structure we have today and those things that we are acquiring through the equipment programme will be in service for many decades to come. Aircraft carriers are a great example—they will still be in service into the 2060s. We must expect to have to continue to use that equipment, and to use it in the way it was designed, but trying to evolve it over time to improve its reliability and potentially to reduce the burden it has in terms of maintainability.

Martin Docherty-Hughes

But that would be reducing the numbers of people.

Air Marshal Knighton

You reduce the requirement for the number of people to do those tasks but, as you rightly point out, there will be new tasks that we need to do, and that is how we might create some of that headroom.

Martin Docherty-Hughes

I needed you to make that link so that people do not get the idea that you are going down the automated, “Let’s get rid of folk altogether”—