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MoD May Need To Return Unspent Funds To U.K. Treasury

Nov. 3, 2012 - 01:26PM   |  
By ANDREW CHUTER   |   Comments
Secretary of State for Defence Philip Hammond finds himself in a bizarre position: He can't spend money fast enough and may have to hand back unallocated cash to the Treasury unless the problem can be resolved.
Secretary of State for Defence Philip Hammond finds himself in a bizarre position: He can't spend money fast enough and may have to hand back unallocated cash to the Treasury unless the problem can be resolved. (AFP/Getty Images)
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LONDON — In the 13 months since Philip Hammond took over as British defense secretary, many of his waking hours have been spent leading an effort to get the Ministry of Defence’s notoriously wayward spending habits under control.

Now, bizarrely, the man nicknamed “Spreadsheet Phil” or “Forensic Phil” due to the financial rigor he brought to the MoD has the opposite problem: He can’t spend money fast enough and may have to hand back unallocated cash to the Treasury unless the problem can be resolved.

The exact figures involved are unclear, but the amount is significant enough for MoD officials to have engaged with their Treasury counterparts to see if at least some of the budget money can be rolled over into the next financial year starting April 2013, one senior military officer said.

Peter Luff, who until a government reshuffle in September was the MoD’s procurement minister, said the issue of a possible under-spend was on the agenda during his final period in office.

“As I was leaving, it was becoming apparent we might have a bigger in-year surplus than we expected. I was confident we would find prudent, sensible ways of spending the money to fulfill the military’s Future Force 2020 restructuring, but as every week goes by and you get to the final quarter, it becomes very difficult to do that,” he said.

The sensible arrangement would be to hold up the money until next year, Luff said. At the moment, there is some in-year flexibility with the Treasury, but it might be nowhere near enough, he added.

Howard Wheeldon, the policy director of the aerospace and defense lobby organization ADS, gave the issue a public airing during a speech at the Royal United Services Institute air power conference in London on Nov. 2.

“The notion that having squeezed expenditure to the bone — the secretary for defense may now be able to pay back a sizable amount of funds to the Exchequer next year — will hardly be popular,” he told an audience of senior military officers and industry figures.

“Sadly, government rhetoric on defense equipment capability continues to fall well short of reality,” Wheeldon said.

A MoD spokesman said the department is confident it will not be handing cash back to the Treasury any time soon.

“MoD forecast spend varies throughout the year due to a number of factors including price changes in major commodities and the timings of major investment,” he said.

“Unlike in the past when the MoD routinely overspent, we are now taking a prudent approach to budgeting with appropriate contingency so that we can plan for the unexpected and order further equipment when we know we can afford it. We are only just over half way through the financial year and expect to announce future in-year procurements. We do not anticipate handing any money back to the Treasury,” he said.

This year, Hammond announced the MoD had finally balanced its budget, having inherited a 38 billion pound ($61 billion) black hole in funding from the previous Labour government. The Conservative-led coalition also imposed a further 7.5 percent budget cut of its own as part of wider government austerity measures.

As part of those cuts, the MoD’s budget is due to fall from 34.4 billion pounds this year to 34.1 billion pounds in the next financial year.

A number of sources said forecasts of a larger-than-expected under-spend in the 2012-13 capital budget have sparked discussions at the highest levels in the MoD over how to manage it.

Under Treasury regulations, government departments use or lose their annual budgets. Although there is a small amount of flexibility in the system, failure to spend the allocated cash means the unspent funds are returned to the Treasury.

The use-it-or-lose-it rules have in the past sparked a scramble by the MoD to sign new contracts as the clock runs down toward the end of the financial year.

Luff said the pressure of spending money quickly is likely to benefit the Army.

“For example, if you wanted to buy an additional batch of Foxhound [armored vehicles], it’s quite straightforward once you have identified a need. You have a live production line, and contracts and prices are well-known. You can do useful and important things, but you do run out of those sorts of possibilities,” he said.

Executives and politicians say new budget control processes, program delays and even significant procurement savings by the Defence Equipment & Support (DE&S) organization are contributing to the under-spend.

Luff said Treasury sometimes causes under-spend problems.

“Why does it happen? Frustratingly, sometimes it’s because the Treasury itself is slow to approve expenditure. You can’t spend the money and then you have to hand it back when you don’t spend it — it’s Kafkaesque lunacy,” he said.

“As I left the MoD, there was also some evidence that DE&S was generating real savings by procuring more efficiently and cheaply. That’s good news, and we are not used to that. It creates additional downward pressure on the total spend,” Luff said.

One industry executive, who asked not to be named, said he believed “better budget visibility resulting from the introduction of new budget control systems” was also playing its part in identifying in-year budget surpluses.

Budget under-spend in financial year 2011-12 enabled Prime Minister David Cameron to announce to Parliament in February that the government had purchased an eighth C-17 airlifter for the Royal Air Force at a cost he put at 200 million pounds.

“Because the Ministry of Defence’s finances are better run and better managed, and because we have found savings, we will be able to purchase an additional C-17,” he said.

The recent creation of a priority list of equipment capabilities the armed forces wants to acquire once funds become available should make it easier to identify worthwhile programs that can be brought forward quickly and effectively, Luff said.

“The Single Integrated Priority List, the MoD’s so-called white board, now makes it easier to identify projects to spend your money on in a hurry knowing the equipment is still genuinely needed,” he said.

There is a huge list of things the armed forces would like to spend the money on, Luff said.

“For someone who believes the budget is just adequate to deliver Future Force 2020 — if it did come to a requirement to hand money back — it would make it more difficult for the MoD to achieve its strategic objectives,” he said. “It would be bad news and very unpopular in a department that has undergone austerity measures.

“It takes time to write contracts and do deals. The MoD has important long-term requirements, but it can’t get these to contract quickly enough, so on the whole, it tends to be small things.

“The Treasury really should stop this ridiculously draconian, simple-minded, in-year lack of flexibility,” Luff said.

But with its finances in better shape and the MoD team now more trusted to spend the money wisely, the department might get more flexibility in its dealing with the Treasury, Luff said.

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