MoD Annual Report and Accounts 2012-13

The Ministry of Defence has made some improvements to its reporting of information since last year but much work is still needed before it meets the standards we would expect to see in its Annual Report. We have set out the areas where the MoD needs to provide more extensive information on its performance.

The MoD has been reviewing its risk management arrangements and we look forward to seeing the results of its review. We are concerned that structural changes have led to a lack of clarity in aligning roles and responsibilities with risk management structures. Our major concern and, apparently the Defence Board’s second strategic risk, is shortage of key personnel. This was evidenced by the increase in the number of pinch point trades, the high level of voluntary outflow and the continuing breaches of harmony guidelines. The Defence Board should take these shortages seriously.

The provision of reliable management information is critical to the effective management of an organisation. It is crucial that the MoD improves its management information systems and the quality of the management information produced. In particular, the MoD should concentrate on improving its financial management information.

For the seventh successive year, the Comptroller and Auditor General (C&AG) qualified the Ministry of Defence (MoD) Accounts for 2012–13. The qualifications were:  The regularity of the treatment of the impairment of the valuation of the German estate resulting from the withdrawal of UK Forces from Germany;  Non-compliance with international reporting standards on the treatment of some contracts; and  The valuation of inventory and non-current assets. The latter two problems are likely to persist beyond 2014–15. The MoD needs a clear plan and timetable as to how and when it will achieve a clear audit opinion from the C&AG.

We welcome the MoD’s implementation of the recommendation in our last report on the Annual Report and Accounts that it provide a useful commentary on the input and impact indicators. We are, however, unhappy with the quantity and quality of performance information available to us and to the public. We recommend that more information of the type provided to the Defence Board should be provided to us and put in the MoD’s Annual Report and Accounts. We 4 The Ministry of Defence Annual Report and Accounts 2012–13 have identified those areas where we expect the MoD to provide information in its Annual Report and Accounts or where it should develop an improved set of indicators. These areas are set out in an annex to this Report.

We are concerned that structural changes in the MoD have led to a lack of clarity in roles and responsibilities. The MoD should report to us on the results of its work looking at this problem. We also wish to know how responsibilities are aligned with risk management structures and, how it is improving business continuity arrangements. We do not accept the assertion that because the detailed Strategic Risk Register is produced as advice to the Defence Secretary and the Defence Board, that fact should preclude members of the Committee from being able to see it. The Register is an important document with several functions, and it needs to be open to Parliamentary scrutiny. At the very least, the MoD should provide us with a commentary on the reassessment of the risks presented to the Defence Board and with the new Risk Framework documentation.

We recommend that the MoD should tell us what it is doing to manage the risks resulting from the volume of change presently being undertaken in the MoD alongside business as usual.

We are concerned that the rate of voluntary outflow from the Armed Forces is above the long term average. The MoD should identify the causes of this increased outflow and determine what measures it needs to put in place to reduce the outflow.

The MoD should support the Services in addressing shortages in pinch point trades—key shortages which leave the Armed Forces vulnerable now and in the future. The MoD and the Armed Forces should explore ways of filling these gaps by offering financial or other incentives to Service personnel to encourage those in pinch point trades to continue in service and to encourage others to undertake training in these trades or by using reservists and private sector contractors.

It is unsatisfactory that harmony guidelines are still being breached for some Armed Forces personnel, in particular that over five per cent of the Army is away from home in excess of the recommended time. The MoD should provide us with the annual figures for breaches of harmony guidelines over the last ten years. We call on the MoD to set out a timetable for reaching a point where no Armed Forces personnel are in breach of harmony guidelines.

As Lord Levene said in his second annual review of the Defence Reform programme, management information is critical for the effective management of Defence. The MoD should update us on its proposals to improve its management information systems in particular its financial management information systems. It should also describe in detail its planned work on costing defence outputs, in particular, operations. It should tell us the planned future level of investment in cost modelling and data and systems exploitation.

The MoD has presided over significant cost increases in the Carrier Programme mainly caused by repeated changes to the requirement. We ask the MoD to confirm The Ministry of Defence Annual Report and Accounts 2012–13 5 whether the Carrier programme is now on track and whether it now expects the programme to proceed without further significant cost or time overruns.

We are concerned that the MoD is still so dependent on external accountancy support to produce its annual accounts. The amount it spent on external accountancy support to produce the accounts is excessive. We ask the MoD to provide us with a timetable setting out milestones for progress towards producing its annual accounts without significant external resources.

We call on the MoD to report the finding of its review of contracts likely to be affected by the International Financial Reporting Issues Committee Interpretation (IFRIC) 4. We also ask the MoD to inform us about the cost and manpower implications of the work required to ensure compliance with IFRIC4 and provide us with an undertaking that the steps it has taken would fully addressed the grounds of the qualification.

We are pleased to see that the MoD is finally taking inventory management seriously. However, there is still much work to be done. We expect to see the relevant IT systems delivered on time and making a valuable contribution to inventory management by 2014–15. In response to this Report, the MoD should tell us what further measures it needs to take to remedy the poor state of inventory control in the MoD and the timetable to introduce them.

Operational Pinch Point trades are those where there are insufficient trained personnel against an operational requirement. In the Royal Navy, the number of Operational Pinch Point trades has increased from 11 to 15 since 2011–12, see Table 2 below for detail. In the Army, the number of Operational Pinch Point trades has increased from 19 to 26, see Table 2 for details.21 The number of Operational Pinch Point trades in the RAF reduced to just one. 18 Ministry of Defence Annual Report and Accounts 2012–13, HC 38, Governance Statement, page 88 19 Q 51 and Q 56 20 Q 51 21 Ministry of Defence Annual Report and Accounts 2012–13, HC 38, pages 40–41 The Ministry of Defence Annual Report and Accounts 2012–13 13 Table 2: Operational Pinch Point trades 2012–13 Naval Service Operational Pinch Point Groups –Quarter 4 2012/13 Liability Shortfall % Diff 1 Anti-Submarine Warfare Aircrewmen 90 15 15% 2 General Service Mechanical Engineer—Rank: 160 10 5% Warrant Officer Class 2 3 Strategic Weapon System Watch Keeper—Rank: Senior 120 20 15% Rate 4 Medical Assistant Operating Department Practitioner 35 10 30% 5 Seaman Specialists—Rank: Leading Rate to Petty Officer 265 65 25% 6 Royal Marine Other Ranks—Rank: Corporal to Warrant 2175 190 10% Officer Class 2 7 Mine Warfare—Rank: Leading Rate to Petty Officer 135 40 30% 8 Category A2 Nuclear Watch Keepers 140 20 15% 9 Category B Nuclear Watch Keepers 355 40 10% 10 Diver Specialist—Rank: Petty Officer 55 5 10% 11 Medical Assistant Submarines 30 ~ 15% 12 Nurses 50 15 30% 13 Warfare Specialists—Rank: Leading Rate 430 20 5% 14 Hydrographic 30 10 40% 15 Commando Aircrewman 90 25 25% Army Operational Pinch Point Groups –Quarter 4 2012/13 Liability Shortfall % Diff 1 Advanced Explosive Ordnance Disposal Operator 55 20 35% 2 Royal Engineers Explosive Ordnance Disposal Operators— 65 15 20% Rank: Corporal to Staff Sergeant 3 Royal Army Veterinary Corps Dog Handler 220 35 15% 4 Int. Corps Operator Military Intelligence—Rank: Corporal 605 225 35% 5 Interrogators 70 20 25% 6 Int. Corps Operator Military Intelligence—Rank: Sergeant 370 150 40% 7 Int. Corps Operator Military Intelligence—Rank: Staff 185 25 15% Sergeant 8 Int. Corps Operator Military Intelligence—Rank: Warrant 165 20 10% Officer Class 2 9 Int. Corps Operator Military Intelligence—Rank: Private to 230 115 50% Warrant Officer Class 2 14 The Ministry of Defence Annual Report and Accounts 2012–13 10 Human Intelligence Operator 245 105 45% 11 Int Corps—Rank: Captain 155 14 10% 12 Int Corps—Rank: Major 140 40 27% 13 Royal Engineers Engineer Logistic Specialist—Rank: Lance 80 30 35% Corporal 14 Radiologists 5 ~ 50% 15 Royal Artillery Fire Support Team Commanders 140 10 10% 16 Royal Artillery Integrated Unmanned Air System 275 20 10% Operator—Rank Bombardier to Sergeant 17 Emergency Nurse 100 40 40% 18 Intensive Care Nurse 85 20 25% 19 Anaesthetist 50 20 45% 20 Infection, Prevention and Control Nursing Officer—Rank: 15 5 40% Captain to Major 21 Electronic Warfare System Operator—Rank: OR4 145 55 35% 22 Electronic Warfare System Operator—Rank: OR6 85 35 40% 23 Military Engineer Fitter—Rank: Lance Corporal 105 ~ 5% 24 Veterinary Officer—Rank: Major 15 ~ 30% 25 Army Air Corps Aircrew—Rank: Major 135 55 40% 26 Royal Engineers Professionally Qualified Engineers 90 30 35% RAF Operational Pinch Point Groups –Quarter 4 2012/13 Liability Shortfall % Diff 1 General Technician (Mechanical)—Rank: Senior 825 15 ~ Aircraftman to Sergeant Notes: Figures have been rounded to the nearest 5, those marked ‘~’ are less than 5.

We were concerned by the number of trades in which there were shortages. In particular, we were worried about shortages in engineering and other technical subjects and in medical specialisms. We questioned the PUS about what the Defence Board were doing to address these shortages. Defence Board action on shortages

The PUS acknowledged that the increased number of pinch point trades was not ‘an ideal situation’22. He acknowledged that the MoD needed more of certain trades such as nuclear safety engineers, air worthiness certifiers and engineering specialisms.23 There were 22 Q 52 23 Qq 50–52 The Ministry of Defence Annual Report and Accounts 2012–13 15 also significant shortages in medical areas such as emergency nurses, intensive care nurses and anaesthetists, specialisms also in short supply in the NHS. 24

On dealing with shortages, the PUS said: The three Services own the primary responsibility, but the board may be able to assist. If there is a common problem, is there something the board could do, for example, on nuclear matters, that would enable us to give additional funds to those services to say, “Apply some financial retention incentives? Is that something the board could help with?” The board should try to stay out of managing individual services as much as it can, but where the board can assist, we should try to. We decided that manpower planning, manpower responsibility and recruitment are largely delegated matters for the services to manage, and that they do not require the board to manage. But if the board can assist, that is a perfectly reasonable thing to consider.25

The MoD should support the Services in addressing shortages in pinch point trades—key shortages which leave the Armed Forces vulnerable now and in the future. The MoD and the Armed Forces should explore ways of filling these gaps by offering financial or other incentives to Service personnel to encourage those in pinch point trades to continue in service and to encourage others to undertake training in these trades or by using reservists and private sector contractors. Breaches of Harmony guidelines

We were concerned that repeated deployments and breaches of harmony guidelines (the recommended maximum amount of time spent away from home by members of the Armed Forces) might be exacerbating the voluntary outflow. The PUS agreed that this was a concern: That is absolutely the risk that we are running. Interestingly, I tried to get where we were with current harmony and how many people were breaking harmony, because that is one of those data points that is not in the report but used to be in there before. It is still available, but I could not get it this morning. That risk is absolutely there for some pinch-point trades. The risk is that somebody comes off a deployment and then we ask them to do something fairly shortly after that. That is the risk that this system runs and we therefore have to address the underlying problem, which is to get more people into those pinch-point trades.26

The MoD told us that the latest figures for breaches of harmony guidelines were 0.6 per cent for Naval personnel, 5.1 per cent for the Army and 3.7 per cent for the RAF.27 24 Qq 59–62 25 Q 53 26 Q 60 27 Ev 20 16 The Ministry of Defence Annual Report and Accounts 2012–13

It is unsatisfactory that harmony guidelines are still being breached for some Armed Forces personnel, in particular that over five per cent of the Army is away from home in excess of the recommended time. The MoD should provide us with the annual figures for breaches of harmony guidelines over the last ten years. We call on the MoD to set out a timetable for reaching a point where no Armed Forces personnel are in breach of harmony guidelines. Financial management information

When asked about the state of the MoD management information systems, the PUS acknowledged that information on costing did not drop out of their financial information systems but that they had been working on developing a cost of defence process.28 The Government Response to the Committee’s Report on the Annual Report and Accounts 2011–12 stated that a business case would be put forward on work to improve financial management information by Autumn 2013.29

In response to our follow-up questions, the MoD provided us with more detail on plans to improve its financial and management information in the Defence Equipment and Support organisation and in the rest of the MoD.30 With regard to the next defence review, the PUS said that they were already planning to provide relevant costing information.31

In his second annual review of the Defence Reform Programme announced on 5 December 2013, Lord Levene stressed the importance of management information as he had in his previous review. He said: I would also reiterate the concern I highlighted in last year’s stocktake about Management Information (MI). It is absolutely critical for the effective management of Defence that MoD radically improves its MI and MI systems, and in particular that it achieves a single Department-wide version of the financial truth. This was always going to take time to come to fruition, and some progress has been made over the last year. But much more is needed.32

As Lord Levene said in his second annual review of the Defence Reform programme, management information is critical for the effective management of Defence. The MoD should update us on its proposals to improve its management information systems in particular its financial management information systems. It should also describe in detail its planned work on costing defence outputs, in particular, operations. It should tell us the planned future level of investment in cost modelling and data and systems exploitation. 28 Q 73 29 Government Response to the Defence Committee’s Report on the MoD Annual Report and Accounts 2011–12, HC 292 30 Ev 24 31 Q 74 32 Written Ministerial Statement: Defence Reform Programme, 5 December 2013 The Ministry of Defence Annual Report and Accounts 2012–13 17 Carrier programme

We did not set out to review major equipment programmes but given the strategic importance of the Carrier Programme, we asked the PUS to tell us of the latest state of play. The PUS explained that the cost overrun of the Carrier programme was because earlier estimates had not included Value Added Tax (VAT) as the joint strike fighter was expected to have been a Government to Government deal with the USA which would not attract VAT.33 In response to our written question about whether VAT had been omitted from the costs of other projects, the MoD told us that “we do not believe we have an endemic problem with VAT on purchases from the USA”.34

The PUS told us that the Carrier programme was still categorised as a red programme because the MoD was trying to re-baseline the programme following the decision to revert to the short take-off and vertical landing (STOVL) version of the joint strike fighter last May. He also said that the MoD had almost completed the negotiations to finalise the budget and timetable for the two carriers and that a statement would be made to Parliament when this was certain.35

After our hearing with the PUS , the Secretary of State announced on 6 November 2013 the results of the renegotiations—a total capital cost of procuring the carriers of some £6.2 billion, a cost increase of some £0.74 billion over the cost reported in the Major Projects Review 2012. The sea trials of the first carrier, HMS Elizabeth, will commence in 2017 and flying trials with the joint strike fighter will start in 2018. He also announced that the costs of nugatory design work, to introduce catapults and arrestors to function with a carrier variant of the joint strike fighter because of the decision to revert to a STOVL version of the plane fighter, currently stood at £62 million.36

Some extra resources have been put into the Crowsnest project (providing radar for the carriers) to bring forward the in-service date from 2022. 37 The MoD provided further information on Crowsnest subsequent to the evidence session: The in-service date for CROWSNEST will not formally be approved until it reaches its Main Gate decision point. However, the Department has recently adopted an accelerated programme delivery strategy, re-allocating funding from later years to 2015–16, and bringing forward the Main Gate investment decision to 2016. This now gives a planned in-service date in 2018, 18 months earlier than the previous assumptions. The earlier in-service date provides a CROWSNEST Initial Operating Capability in time for Carrier Strike Initial Operating Capability in 2020. The re- profiling of CROWSNEST funding will result in an overall saving to Defence of at least £22 million over the years 2013 to 2024.38 33 Q 83 34 Ev 20 35 Q 87 36 Ministerial Statement: HC Debates, 6 November 2012, Col 251 37 Qq 88–94 38 Ev 24 18 The Ministry of Defence Annual Report and Accounts 2012–13

The MoD has presided over significant cost increases in the Carrier Programme mainly caused by repeated changes to the requirement. We ask the MoD to confirm whether the Carrier programme is now on track and whether it now expects the programme to proceed without further significant cost or time overruns. The Ministry of Defence Annual Report and Accounts 2012–13 19 3 Annual Report and Accounts 2012–13 External support

The MoD was again heavily reliant on external support in producing its annual accounts 2012–13, as it was in 2011–12. It spent £362,000 on external accountancy support in order to prepare the 2012–13 Accounts. In 2012–13, the MoD spent a total of £1,967,000 on overall external accountancy support and some £855,000 in the first six months of 2013–14.39

We are concerned that the MoD is still so dependent on external accountancy support to produce its annual accounts. The amount it spent on external accountancy support to produce the accounts is excessive. We ask the MoD to provide us with a timetable setting out milestones for progress towards producing its annual accounts without significant external resources. Qualification of accounts

The Comptroller and Auditor General (C&AG) qualified his audit opinion on the Department’s 2012–13 Resource Accounts for the seventh successive year. He gave a qualified opinion on regularity as he disagreed with the MoD’s accounting treatment in respect of part of the impairment of its German Estate which was charged against the revaluation reserve instead of operating costs. Had the impairment been treated in accordance with the Government Financial Reporting Manual, the MoD would have exceeded the authorised expenditure limit set by Parliament by £395 million.40

The C&AG gave a qualified opinion on the financial statements in relation to the impairment of the estate in Germany following withdrawal of UK Forces, contracts that may contain a lease and the valuation of inventory and non-current assets. 41

The Ministry of Defence’s Votes A is presented annually to Parliament to seek statutory authority for the maximum numbers of personnel to be maintained for service within the Armed Forces. The maximum numbers for the Naval, Army and Air Force Services in all active and reserve categories were within the numbers voted by Parliament in 2012-13, except for the Reserve Naval Forces. The C&AG, therefore, reported on Votes A in that Special Members of the Reserve Naval Forces during the year was 1,950 against a voted limit of 1,940.42 Germany

In March 2013, the Secretary of State for Defence announced the Regular Army Rebasing Plan which set out plans for the Army’s move back from Germany. The MoD 39 Ev 22 40 Ministry of Defence Annual Report and Accounts 2012–13, HC 38, Certificate of the C&AG, page 90 41 Ibid, page 91 42 Ibid, page 92 20 The Ministry of Defence Annual Report and Accounts 2012–13 plans to hand back the garrisons and training facilities to Germany on a phased basis by

When asked about the qualification, the PUS said: [...] In the light of previous experiences, given the fact that we were clearly coming out of Germany and the value of the assets we have in Germany would be lower, we did everything, we thought. We went through a process with the Treasury and we had Treasury backing of our position, and then the National Audit Office disagreed. Interestingly, and possibly very unusually, the NAO’s opinion states: “Firstly, I disagree with the accounting treatment adopted by the Department, and endorsed by HM Treasury”. That is a direct quote from page 91 of the annual report and accounts. From my perspective as the accounting officer, we think we did what was right. We went to the Treasury and it endorsed our position, and then there was a disagreement between the Treasury and National Audit Office, which resulted in us getting two qualifications. I feel as though we did everything we possibly could to do the right thing, and then it didn’t occur.44 Contracts that may contain a lease

The C&AG qualified the MoD Accounts for the fourth time because of non- compliance with certain international reporting requirements on lease type arrangements. These arrangements which are now standard practice for Government Accounts are International Financial Reporting Issues Committee Interpretation 4: Determining whether an arrangement contains a lease (IFRIC4) and International Accounting Standard 17 Leases. The extent of this issue is likely to be significant for the MoD Accounts as strategic arrangements with key contractors for specialist defence platforms on a non- competitive basis may provide for the exclusive use of industrial assets. The C&AG could not quantify the impact on the financial statements as the MoD had not maintained appropriate records but given the number and size of contracts involved there is likely to be material understatement of the assets and liabilities. The C&AG said: 43 Ministry of Defence Annual Report and Accounts 2012–13, HC 38 Report of the C&AG, page 93 44 Q 104 The Ministry of Defence Annual Report and Accounts 2012–13 21 The accounting requirements for lease type arrangements are particularly relevant to the Department. It necessarily enters into strategic arrangements with certain contractors to procure specialist defence platforms on a non-competitive basis, for example in relation to surface ships, submarines and aircraft. These arrangements may provide for the exclusive, or near exclusive use of industrial assets and capability which have only limited utility to other customers. Consequently, the contractual terms, which are covered by the Government Profit Formula and its Associated Arrangements (GPFAA)3, may give rise to the Department controlling the significant majority of the outputs of the supplier’s assets involved in the arrangement. For example, where shipyards are used exclusively on defence contracts and the pricing of the contract recognises this by allowing recovery of fixed costs other than through market rate or unit cost pricing. As such, these arrangements may be considered to contain a lease under IFRS, and may have the characteristics of a finance lease.45

In response to the Committee’s Report on 2011–12 Accounts, the MoD said that it was undertaking a study to identify contracts which have the potential to fall within the scope of International Financial Reporting Issues Committee Interpretation (IFRIC) 4 and to assess the manpower and external cost implications.46

The C&AG reported: Since I last reported the Department has conducted a review of its contracts to identify those which have characteristics indicating that they contain lease type arrangements not currently recognised as leases. Through that review the Department has identified 27 contracts which they consider require a detailed assessment against the standards. The Department has committed to completing an assessment of all of these contracts, and for a small sample of these contracts, obtaining the necessary information and calculating the accounting entries required to comply with accounting standards by September 2013. Based on the results of this exercise, including the cost and time involved, the Department will consider whether to extend compliance to all relevant contracts.47 The PUS said that he agreed with the recommendation in our Report on the Annual Report and Accounts 2011–12 that the MoD should ensure that its accounts were no longer qualified on the basis of IFRIC 4 by 2014–15.48

We call on the MoD to report the finding of its review of contracts likely to be affected by the International Financial Reporting Issues Committee Interpretation (IFRIC) 4. We also ask the MoD to inform us about the cost and manpower implications of the work required to ensure compliance with IFRIC4 and provide us with an undertaking that the steps it has taken would fully addressed the grounds of the qualification. 45 Ministry of Defence Annual Report and Accounts 2012–13, HC 38, Report of the C&AG, page 94 46 Government Response to the Defence Committee’s Report on the MoD Annual Report and Accounts 2011–12, HC 292 47 Ministry of Defence Annual Report and Accounts 2012–13 HC 38 Report of the C&AG, page 95 48 Q 106 22 The Ministry of Defence Annual Report and Accounts 2012–13 Inventory Limitation on the scope of the C&AG’s opinion

For the 2012–13 Accounts, the C&AG limited the scope of his opinion49 on certain assets in the Statement of Financial Position. He said: I have limited the scope of my opinion in relation to certain non-current assets recorded within the SoFP [Statement of Financial Position], in the form of non- current asset capital spares (£7.2 billion) and inventory (£3.3 billion). The limitation arises as a result of the Department having an insufficiently robust and systematic process to assess impairment and the consequent impact on the valuation of these assets. Due to the lack of a systematic assessment the Department has been unable to provide me with sufficient evidence to support the valuation of these balances and the associated accounting entries which have been made in the accounts.50 MoD Review of stock-lines

The C&AG described the MoD review of its stock and the results of the NAO audit of that review: During the year the Department established an exercise to systematically review stock-lines which represented the most significant elements of the Capital Spares and Inventory balances. The exercise required a review of each stock line for impairment against criteria set out in centrally issued guidance. The Department estimated that by covering the top 1% of stock-lines they would cover around 75% of their total reported inventory balance of £15bn and that a portion of other balances would also be assessed to provide a suitable analysis on which management could draw conclusions over the remainder. The exercise represented a significant commitment by the Department to address my previous recommendations and to write down the relevant assets to their fair value.51 He also said that “the results of my audit have led me to conclude that the process is not yet sufficiently robust to provide management with the necessary assurance over the valuation of capital spares and inventory”.52

Last year, the PUS told us that the MoD was improving its management of the defence inventory: 49 A limitation on the scope of the audit opinion is given where the auditor has not been able to obtain sufficient and appropriate evidence to support material balances in the accounts. It relates only to the area described, not the entire account. 50 Ministry of Defence Annual Report and Accounts 2012–13, HC 38, Report of the C&AG, page 95 51 Ibid 52 Ibid, page 96 The Ministry of Defence Annual Report and Accounts 2012–13 23 We have an inventory management plan and strategy. There is a group that oversees it at the three-star level at DE&S. There is a specific full-time two-star military officer who runs this, who appeared in front of the Public Accounts Committee. There is a significant amount of work going on in terms of people, time, investment, training, IT systems and so on in order to improve the situation. He also said that the MoD was rationalising the IT systems dealing with stock and inventory control with an aim of reducing the 78 IT systems to four by 2015.53 The MoD later told us about the four IT systems being implemented.54

In our report on the 2011–12 Annual Report and Accounts, we concluded: Being able to identify and record the condition of inventory and assess its value is important for operational reasons as it enables the repair and replenishment of items needed and the disposal of those items no longer required. It is also critical in making value for money decisions about the amount of inventory to be purchased and held. 55

The PUS described what the MoD was doing to improve its inventory management: There was an NAO report on managing the defence inventory, which we gave evidence to the PAC about. I am absolutely with you. We have to turn off the taps. In April 2012, we introduced a new control regime so that people could not order without the explicit agreement of the Director General of Resources, who works directly for the CDM. In the last financial year, the amount of inventory ordered was £300 million less on a £2 billion number, so there was definitely some impact from turning off the taps. In the current year it will probably be £500 million. So you are absolutely right: reducing the inflow is definitely one of the things we need to do. Recording the inventory, appropriately valuing it and getting better information is absolutely fundamental to this. As the National Audit Office point out in the annual report when they are doing their various reports on inventory, the underpinning business systems of inventory and finance are hampering our progress, and we have to do something about that. The Department has announced significant investment in new information systems. It has appointed Boeing as a partner in this area to help us with that. There are four core systems we have to change and reduce from more than 70 down to four. The first one has gone in and we anticipate the second one going live in October. So we are trying to get a handle on this. I think we are making some reasonable progress. Indeed, we agreed with all the further recommendations that were made by the Public Accounts Committee in 2012. We can see some visible impact.56 53 Q 135, Defence Committee Evidence Session on MoD Annual Report and Accounts 2011–12, 12 December 2012 54 Ev 22 55 Defence Committee, Ministry of Defence: Annual Report and Accounts 2011–12, Ninth Report 2012-13, HC 828 56 Q 111 24 The Ministry of Defence Annual Report and Accounts 2012–13

We asked the MoD for an update on the four principal IT systems. A comparison of the position in 2012 with that of 2013 is shown in Table 3 below. Table 3: Comparison of relevant IT systems in 2012 and 2013 Description of the systems by the MoD in 2012 Description of the systems by the MoD in 2013 JAMES (Joint Asset Management Engineering Solutions): This new capability is primarily designed to This new capability, which entails adopting new manage and track all assets across the Land business processes supported by an information Domain, including vehicles, ground equipment, system, is primarily designed to manage assets and radios. Implementation of JAMES will enable and engineering for all equipment in the Land the retirement of 5 legacy systems. JAMES environment that requires maintenance, implementation is due to be completed (for all modification, repair and overhaul, including major units) by 31 March 2014. vehicles, ground equipment, and radios. Implementation of JAMES will enable us to retire five legacy systems. It is already playing a vital role in Op HERRICK, tracking the condition and configuration of redeploying vehicles and major equipments. JAMES implementation is due to be completed for all major units by 31 March 2014, with RAF Ground Support Equipment management being enabled by the end of March

We are pleased to see that the MoD is finally taking inventory management seriously. However, there is still much work to be done. We expect to see the relevant IT systems delivered on time and making a valuable contribution to inventory management by 2014–15. In response to this Report, the MoD should tell us what further measures it needs to take to remedy the poor state of inventory control in the MoD and the timetable to introduce them. 57 Ev 22 and Defence Committee, Ministry of Defence: Annual Report and Accounts 2011–12, Ninth Report 2012–13, HC 828 26 The Ministry of Defence Annual Report and Accounts 2012–13 4 Conclusion

The Ministry of Defence has made some improvements to its reporting of information since last year but much work is still needed before it meets the standards we would expect to see in its Annual Report. We have set out the areas where the MoD needs to provide more extensive information on its performance.

The MoD has been reviewing its risk management arrangements and we look forward to seeing the results of its review. We are concerned that structural changes have led to a lack of clarity in aligning roles and responsibilities with risk management structures. Our major concern and, apparently the Defence Board’s second strategic risk, is shortage of key personnel. This was evidenced by the increase in the number of pinch point trades, the high level of voluntary outflow and the continuing breaches of harmony guidelines. The Defence Board should take these shortages seriously.

The provision of reliable management information is critical to the effective management of an organisation. It is crucial that the MoD improves its management information systems and the quality of the management information produced. In particular, the MoD should concentrate on improving its financial management information.

For the seventh successive year, the Comptroller and Auditor General (C&AG) qualified the Ministry of Defence (MoD) Accounts for 2012–13. The qualifications were:  The regularity of the treatment of the impairment of the valuation of the German estate resulting from the withdrawal of UK Forces from Germany;  Non-compliance with international reporting standards on the treatment of some contracts; and  The valuation of inventory and non-current assets. The latter two problems are likely to persist beyond 2014–15. The MoD needs a clear plan and timetable as to how and when it will achieve a clear audit opinion from the C&AG. The Ministry of Defence Annual Report and Accounts 2012–13 27