Treasury rethink hits defence budget

Britain’s deepening financial crisis has prompted the Treasury to pull back from funding any unexpected costs from fighting in Iraq and Afghanistan, putting further pressure on the core defence equipment budget.

Gordon Brown, as chancellor, set up the Treasury reserve to pay for any equipment urgently needed for operations and half of any unforeseen costs. But Treasury officials have recently told the Ministry of Defence to cover the entire cost of any overruns itself.

The Treasury sees the move as increasing the incentive for the MoD accurately to estimate the costs of operations. But it was attacked as a cost-cutting measure that would put further pressure on the strained military budget and have a negative impact on troops in the field.

The rule change was mentioned in passing in a Commons statement by John Hutton, defence secretary, in December but has only now been highlighted in a response by Mr Hutton to an inquiry by the Conservatives.

The department agreed a budget of £635m for urgent operational requirements (UOR) in the financial year 2009-10 which would be met by the Treasury’s reserve. However, any expenditure over and above that would be met “initially by the reserve, but repaid by the defence budget after two years”, Mr Hutton said.

The government has already come under fire for not spending enough on defence at a time when the country is fighting in two conflicts.

On Monday night, Liam Fox, shadow defence secretary, called on the MoD to explain why there had been a change to the rules.

“This is the result of a heavy reliance on the UOR process as an ersatz procurement programme. At this rate it is anybody’s guess on how bad the finances of the department will be in the years ahead. The unfunded liability for the department could total hundreds of millions of pounds. This deal with the Treasury makes very little long-term financial sense.”

Defence analysts said the move was a further sign of much tighter government budgets that had been strained by the recent bail-outs for banks.

“We have absolutely no money. The Treasury has too little funding and it’s a very tight equipment round for the coming financial year,” said Paul Beaver, of Beaver Westminster. “We continue to spend money even though we are moving out of Iraq. There is still a lot that needs to be done if we are going to do our job properly.”

The MoD said the change was “a reflection of the tighter financial times”. “Governments need to be able to plan properly. Every department has a responsibility to spend within the limits it sets for itself.”

The department has identified support for current operations as its main priority and everything from armoured vehicles to unmanned aerial vehicles have been pushed through under the urgent operational requirement scheme.

These requests have helped to improve protection for the forces in Afghanistan, which were poorly equipped when they arrived in 2006. The government underestimated the challenge troops would face, sending them in woefully underprepared, say defence specialists.

Last March, the MoD said it had processed 950 UORs since 2001, with a combined value of more than £3bn.


Portsmouth sees energy plant proposal as a time of waste

Almost 900 years after its dockyards opened for the building and servicing of Britain’s warships, Portsmouth’s historic naval base on the south coast is going green. The base, which will be the home of the Royal Navy’s two new aircraft carriers, plans to build a waste-to-energy plant to help cut its energy bills and meet the ships’ electricity needs onshore once they come into service.

The Ministry of Defence has asked a handful of waste specialist and support services companies to bid for a contract to build a commercial waste-to-energy plant. With fuel bills expected to keep rising, despite recent falls in commodity prices, the plant would help the base cut its electricity bills.

Under the proposal, the new plant would provide a minimum of 12 megavolt amperes (MVA) directly to the base. The base is limited to a 30MVA demand on the National Grid, with a further 10MVA reserve. However, the peak load once the new carriers are in service is forecast to be as high as 48MVA. The two ships, HMS Queen Elizabeth and HMS Prince of Wales, will be the biggest and most powerful warships built for the navy. Each will be at least twice the size of the Invincible-class carriers currently in service and, once in port, each will require a sizeable chunk of electricity from the grid. The new plant would help the base meet that increased demand.

VT Group is tipped by defence industry sources as the frontrunner to win the contract.

A decision is expected later this month.

2 Feb 2009 11:38pm
By Sylvia Pfeifer and Alex Barker

Source: Financial Times

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