This report analyses the Annual Report and Accounts 2006-07 of the Ministry of Defence (MoD) (published as HC 697, session 2006-07, ISBN 9780102946369). The MoD's assessment of its expected achievements against its six Public Service Agreement (PSA) targets, which run until the end of March 2008, has deteriorated since the previous year's Annual Report and Accounts. At the end of 2007, the MoD did not expect to meet the target relating to generating forces and expects "only partly" to meet targets relating to recruitment and retention, and defence equipment procurement. The failure to meet the target for generating forces is a consequence of the continuing high levels of deployment of the Armed Forces. The Committee is concerned that the Armed Forces have been operating at or above the level of concurrent operations they are resourced and structured to deliver for seven of the last eight years, and for every year since 2002. Achieving manning balance in all three Service continues to be a challenge. Shortages remain within many specialist trades in all three Armed Services, but especially in the Army Medical Service. The report notes the failure to meet harmony guidelines in the Army and the Royal Air Force - another indicator of the pressure on the Armed Forces from the continuing high level of operations - and another target missed by all three services is for ethnic minority recruitment. The MoD continues to experience substantial forecast cost increases on equipment programmes, and the report notes delays in delivering equipment programmes to the planned in-service dates. The MoD faces difficult choices in the face of expected cuts in the defence programme and the management of a streamlining exercise to reduce civilian posts in the headquarters.

This report analyses MoD's annual report and accounts 2004-05 (published in October 2005 - later than planned - as HC 464, session 2005-06, ISBN 0102935424) which combines MoD's annual performance report and the consolidated departmental resource accounts. Overall MoD's performance against its seven Public Service Agreement (PSA) targets has been mixed: three were "met", two were "partly met", one was "on course" to be met, and one was "not yet assessed". On recruitment and retention (partly met) all three armed services are suffering from critical shortages in various specialist trades, including aircrew and medical personnel. Although MoD reported £400m of savings in the operating costs of the Defence Logistics Organisation, the Committee criticizes the fact that not all of them could be validated. On procurement, MoD did not meet the targets relating to project time slippage. Cost decreases of £699 million were reported on the top 20 major defence equipment projects, but much of this was a result of cuts in the numbers of equipment ordered or in the capability of equipment. Losses reported in MoD's Financial Accounts totalled some £400 million, a lower figure than the previous year but still a substantial sum. Reported losses on the Landing Ship Dock (Auxiliary) programme, which involves the procurement of four transport ships, were some £100 million and further losses might arise. Another loss totalling £147 million related to a building project at the Atomic Weapons Establishment at Aldermaston. The building was unable to meet the requirement and no other use could be found for it. It is another example of substantial waste which has to avoided in the future.

The Ministry of Defence (MoD) is unaware of the location of radios worth £184 million, and is unable to provide evidence of the existence and condition of assets worth £6.3 billion. This shortfall in accounting is reflected in the decision by the National Audit Office to qualify the MoD accounts for the fourth successive year. The Committee thinks this year's qualification should have been foreseen, given that it was a clear requirement on all Government departments to adopt the relevant reporting standards from 2009-10. It is unsatisfactory that the MoD expects their stock control problems to continue for another two to four years. The report notes the period of intense change that the MoD is going through, and recommends that any cuts to staffing levels must be appropriate for future business need and managed with care. The Committee will study the outcomes of the report of the Defence Reform Unit (ISBN 9780108510663) to ensure that the MoD retains the right skills. This will need to be reflected in decisions on redundancies through voluntary exit and otherwise so that the Department is not left without the right skills and experience required for effective performance. The Committee wishes to be assured that decisions on the scrapping of assets before the end of their useful life have been made on the basis of a sound cost-benefit analysis, taking into account the savings to be achieved and the effect of the loss of capability.

This report examines the administration, expenditure, activities and achievements of the MoD during the 2008-09 financial year, as detailed in the Ministry of Defence annual report and accounts 2008-09 (ISBN 9780102962239). It continues a series of inquiries and, indeed, the Committee sees it as cause for concern that the NAO found the need to qualify the MoD's resource accounts for the third consecutive year. Whilst it is acknowledged that capability in theatre must be the Department's first concern, failing to maintain accurate and full information on personnel and to keep track of assets has the potential to threaten the long-term capability of the Department, including operational capability.

The Defence Reform was launched in August 2010 as a fundamental review of how Defence is structured and managed. Many of the issues are not new and have been noted by similar reviews. The Steering Group believes an effective MOD is one which builds on the strengths of the individual Services and the Civil Service and does so within a single Defence framework that ensures the whole is more than the sum of its parts. A key driver for this review has been the Department's over-extended programme, to which the existing departmental management structure and management structure and behaviours contributed. Many of the Steering Group's proposals are designed to help prevent the Department from getting into such a poor financial position in the future and to put it in the position to make real savings. There are 53 recommendations the key ones of which are: to create a new and smaller Defence Board chaired by the Defence Secretary to strengthen top level decision making; to clarify the responsibilities of senior leaders, including the Permanent Secretary and the Chief of the Defence Staff; make the Head Office smaller and more strategic, to make high level balance of investment decisions, set strategic direction and a strong corporate framework; focus the Service Chiefs on running their Services and empower them to perform their role effectively with greater freedom to manage; strengthen financial and performance management throughout the Department to ensure future plans are affordable; create a 4 star led Joint Forces Command; create single, coherent Defence Infrastructure and Defence Business Services organisations; manage and use less senior military and civil personnel more effectively, people staying in post longer, more transparent and joint career management.

For the sixth successive year, the Ministry of Defence Accounts were qualified. The Qualifications covered non-compliance with international reporting standards on the treatment of some contracts; lack of audit evidence on the valuation of inventory (worth some £3 billion) and of capital spares (worth some £7 billion); and on the regularity of the Accounts because of the failure to obtain approval for the remuneration package of the Chief of Defence Materiel. The MoD was also five months late in submitting its audited accounts to Parliament. The National Audit Office had found errors in its sample examination of accruals and so the MoD decided to resolve these problems before submitting the accounts. The MoD said they did not have the necessary expertise to manage the financial complexity that featured in the implementation of the Strategic Defence and Security Review so sought assistance. The MoD should ensure its people have the right skills to deal with all financial problems so that they do not need to bring in expensive external accountants. There is also concern about the MoD's reluctance to estimate the full costs of its operations in Afghanistan, Iraq and Libya. The NAO did not consider that the MoD has adequate information, especially with respect to recording the cost of its activities and outputs, to run its business effectively. The MoD should set out its commitment to improving its management information. It is also vital that defence spending remains at more than 2 per cent of GDP in line with the UK's NATO commitment.

Ministry of Defence : The Governments expenditure plans 2005-06 To 2007-08