The Nimrod Review - Official Documents

13.59
Chapter 13 – Cuts, Change, Dilution and Distraction (1998-2006)
RAF’s Logistics Analysis and Research Organisation indicated that while some 50% of stock items might be
‘inactive’ at any one time (due to a lag in the manufacturing/purchasing process), somewhat less than 10%
of stock items were inactive in the long term. It appears, however, that a somewhat draconian approach to
disposals may have resulted in valuable and necessary spares held in stores being thrown away, only to have
been subsequently re-purchased at a later date.
The formation of a single supply chain organisation brought considerable financial benefits. It is not clear,
however, whether sufficient risk analysis was done in relation to the central sourcing of spares. As I discuss
in Chapter 5, the fact that a non-conforming Avimo seal part found its way into the Nimrod fleet raises
concerns about the MOD procurement chain for such parts and whether it is wise for specialist aviation
parts to be sourced by the centralised non-specialist ‘Medical and General Stores IPT’. And as Sir Sam Cowan
himself pointed out, the SDR principle that the armed services should not hold above what their immediate
readiness needs were, soon “broke down” during the Afghanistan and Iraq deployments.
Further financial pressures on DLO: (a) 3% cut over three years and (b) 3% annual efficiency
savings for four years
13.60
27 As Sir Sam Cowan would have been well aware at the time, the ‘Strategic Goal’ came on top of two further
financial pressures imposed on the DLO by the SDR. In the financial year 1999/2000, the DLO was given an
allocation from the total MOD budget of £22.295 billion based on the aggregate of the three PAO budgets
in the previous financial year. The DLO’s allocation was some 20%, or approximately £4.6 billion, of the total
MOD budget. The subsequent years’ allocations were, however, subject to two further financial reductions
imposed by the SDR: (a) a 3% cut in the total budget; and (b) 3% assumed annual efficiency savings, as
explained below.
(a) Defence settlement: 3% cut over three years
13.61 The first financial reduction amounted to a “3% over three years” cut in the Defence Budget imposed by the
SDR. The Government’s SDR White Paper provided: “The Defence settlement will mean a reduction, in real
terms, of £500M in the first year, rising to nearly £700M in the third year, as the efficiencies begin to take
greater effect. In sum, a fall of 3% in real terms in the Defence budget by the end of this Parliament”. 28
(b) Annual efficiency savings of 3% over four years
13.62
The second financial reduction arose from the attribution of the assumption of future efficiency gains made
in the SDR White Paper, namely “a 3% annual efficiency saving in operating costs over each of the next four
years”. 29
Move from cash-based to RAB accounting
13.63
In 2000, the MOD began to move from cash-based financial management to RAB. The burden of implementing
this change “fell particularly heavily on all staff across the DLO”. During Sir Sam Cowan’s time as CDL,
however, financial accounting in-year continued to be run on a cash basis, i.e. at the start of each year he
was given a cash allocation which he could not exceed.
Deductions at source – Iron rule
13.64 Thus, all budget reductions were be made at source, i.e. it was assumed at the beginning of the financial year
that the targets for reductions in output costs and annual efficiency savings would be met and funds were
deducted from the budget funds allocated for each financial year accordingly. It followed that each service
27 And as Sir Sam Cowan explained in his Written Statement to the Review dated 22 May 2000.
28 SDR White Paper, page 386, taken from the “Press Notice and Key Points of the Strategic Defence Review”.
29 SDR White Paper, paragraph 194.
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