The Costs and Receipts Arising from the Gulf Conflict

NATIONAL AUDIT OFFICE

REPORTBYTHE COMPTROLLERAND AUDITOR GENERAL

Ministry of Defence: The Costs and Receipts Arising from the Gulf Conflict

ORDEREDBY THE HOUSEOF COMMONS TO BE PRINTED 25 NOVEMBER1992

LONDON:HMSO 299 f5.95 NET MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

This report has been prepared under Section 6 of the National Audit Act, 1963 for presentation to the House of Commons in accordance with Section 9 of the Act.

John Bourn National Audit Office Comptroller and Auditor General 24 November 1992

The Comptroller and Auditor General is the head of the National Audit Office employing some 900 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments and a wide rangeof otherpublic sector bodies; and he hasstatutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources. MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

Contents

Pages

Summary and conclusions 1

Report 5

Glossary of terms 22

Appendix

1. Ministry of Defence: Funding of Additional Costs Arising from the Gulf Conflict 23 MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

Summary and conclusions

1 On 2 August 1990 Iraq invaded Kuwait. Following the passing of United Nations resolutions, the United Kingdom contributed to the build up of a military presence in the Gulf to defend neighbouring States from Iraqi aggression and to secure an Iraqi withdrawal from Kuwait. The United Kingdom’s military involvement was called Operation GRANBY. Diplomatic attempts to secure an Iraqi withdrawal failed and hostilities began in mid- January 1991. The Allies’ objectives were achieved and fighting ceased at the end of February 1991. The withdrawal of most United Kingdom forces took place between March and May 1991.

2 Since April 1991, Defence Ministers have made a number of statements giving the additional cost of Operation GRANBY as about f&500 million and the contributions received from other nations as C2,OOOmillion. In June 1992 the Treasury announced the more precise figure of !22,049 million for contributions from other nations. In view of the Parliamentary interest in the costs incurred, the National Audit Office carried out an examination to establish whether the basis of the assessment of costs by the Ministry of Defence (the Department) was reasonable. The National Audit Office did not duplicate the detailed examination of costs being undertaken by the Department’s Internal Audit but examined: the alternative bases of cost used by the Department and whether they were those which were most meaningful for Parliament; the adequacy of the Department’s arrangements for collecting costs; whether all costs were included in their calculations; and the effect of any omissions. The National Audit Office also compared the Department’s approach with that of the United States: examined the results of the Department’s own wide-ranging reviews of financial and accountability matters arising from the Gulf crisis; and identified estimated costs incurred by other Government departments.

Main findings 3 In the National Audit Office’s view the costs arising from Operation and conclusions GRANBY which are most meaningful for Parliament are the additional costs expressed in three ways: the costs for which the Department require Parliament to authorise additional funding; these same costs with the addition of sunk costs (costs already incurred before the deployment began) of assets consumed that do not require new funding; and the net additional cost to the Exchequer when contributions from other nations are offset against either of these expenditure calculations.

4 The Department’s latest detailed estimate of the costs of Operation GRANBY of C&434 million, is in effect the amount for which Parliament has been or may be asked to authorise additional funding. Internal Audit have identified possible costs of some 2Z30million not reported. In addition, identifiable sunk costs of .!200 million were consumed on equipment not requiring replacement; the total sunk costs will actually have been higher, having regard to other areas of consumption and depreciation for which costs have not been assessed by the Department. The cost figures are subject to uncertainties for a number of reasons and those for 199X-92 and later years

1 MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

are yet to be examined by the Department’s Internal Audit. In addition to the military costs, the Export Credits Guarantee Department may have to pay up to some ~850 million on claims arising as part of their normal insurance business and attributed to the situation in the Gulf in 1990-91, although some of this may be recovered. By comparison, costs incurred by other Government departments were not significant.

5 The Department have kept their broad estimate of costs under review as assessments of replacement expenditure have become firmer. The costs quoted above take account of their discussions with the National Audit Office on points arising from the latter’s examination.

6 The best current estimate of the main items comprising the total additional cost of the Gulf Conflict to the United Kingdom, including identifiable sunk costs of items not being replaced but excluding factors such as the effects on oil prices or exports, and net of contributions received, is therefore as follows: f million Operation GRANBY 2,434 Possible Internal Audit adjustment 30

2,464 Less contributions received 2,049 (a) Net identified military cost 415 Sunk costs of items not being replaced 200 minimum (b) Total net military cost 615 minimum (c) Export Credits Guarantee Department costs 850 maximum

7 The final costs in both departments will not be known for some time; they should keep Parliament informed of any significant changes in the estimated costs. The National Audit Office noted a number of points relating to the Department’s calculation of costs as detailed at paragraph 8 below. Subject to these points, the National Audit Office were satisfied that the Department had made a reasonable estimate of the costs of Operation GRANBY. There are too many uncertainties to calculate accurately the combined net costs of the two departments but they seem likely to exceed f1,400 million.

Detailed findings 8 The National Audit Office’s detailed findings and conclusions on the and conclusions Department’s assessment of the costs and other matters relating to financial control during the Conflict are as follows: (a) The National Audit Office agreed that while the more readily available full operating cost was a reasonable basis for early announcements of costs, it was appropriate to use additional costs arising from the crisis as the basis of announcements from February 19% (paragraphs g-12). (b) The Department’s estimates of additional costs for which funding is required have been and will be subject to special scrutiny by the Treasury before inclusion in Estimates or Supplementary Estimates (paragraph 25 and Appendix 1). (c) In some areas the Department’s accounting and forecasting systems did not readily provide the cost information required. Operation GRANBY commitments and expenditure were difficult to isolate and

2 MINISTRY OF DEFENCE: THE COSTS AN,, RECEIPTS ARISING FROM THE GULF CONFLICT

identification, including when expenditure would be incurred, required judgements to be made by many staff at various levels (paragraph 29). (d) The Department’s Internal Audit were satisfied that the reporting systems used reflected the additional costs recorded for 1990-91 but were unable to provide assurance as to the completeness of those costs. They have not yet audited the costs incurred in 1991-92 and estimated for later years (paragraphs 30-32). @I The Department’s estimate includes the costs of equipment and stores consumed during Operation GRANBY only if they are to be replaced. Replacement expenditure will continue to be incurred until at least 1995-96. The precise amount of expenditure will only become clear when the programme of inspections of materiel recovered from the theatre is complete and all replacement contracts placed. Completion of the repairs and replacement programme would depend on the necessary resources being available (paragraphs 27 and 32). (f) The cost estimate includes &336 million agreed with Treasury as the estimated savings lost as a result of the deferment of Options for Change measures because of the Gulf Conflict. But the actual cost cannot be determined precisely (paragraph 33). (g) Other equipments were excluded from the Department’s estimate because they are not being replaced. These include aircraft and munitions valued at E200 million. The total value of all items consumed but not directly replaced is not known at this time, but the Department will report such further figures as they become available. The Department have been unable to assess the costs arising from additional wear and tear to equipments sustained in the Gulf (paragraphs 34-36). (h) The Department have conducted a number of reviews of Operation GRANBY. These included reviews of financial aspects by central finance staff and, together with other aspects, by Internal Audit. Another Departmental report also illustrated the difficulties of exercising stores accounting control during an unexpected major deployment outside the NATO area (paragraphs 44-60). Recommendations made included the need for: . extant guidance on financial matters arising from out of area deployments (paragraph 45); . where necessary improved systems and arrangements to record and forecast costs (paragraph 45); . adequate financial and contractual expertise, with appropriate computer support, in-theatre from the start of any similar deployment in the future (paragraphs 45, 50-53); w a review of the use of plastic credit/charge cards (paragraph 47);

l more specific instructions on relaxation of peacetime accounting procedures in war (paragraph 47); . rear parties to be retained in-theatre for each unit in future out of area operations to ensure the orderly preparation and return of unit equipment [paragraph 47).

3 MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

The National Audit Office endorse the need for action in these areas. The Department have accepted the recommendations and action in all cases is either in hand or planned.

(i) There was an important difference between the United Kingdom and the United States approach to financial matters in the Gulf. The United States Forces had large numbers of finance and contracts staff in post in the Gulf from the beginning in August 1990, whereas the United Kingdom had few finance and contracts staff and they were not in place as quickly as the Americans. Nevertheless, the United States also found difficulties in identifying and recording their costs (paragraph 66).

National Audit 9 The Allies’ military operation in the Gulf was an outstanding success. Office’s overall Objectives were achieved in a much shorter timescale, with less casualties conclusions and at lower cost than had generally been predicted prior to the Conflict. The National Audit Office recognise that the prime purpose of the Armed Forces in the Gulf was to ensure the military success of the Operation. The size of the deployment greatly exceeded contingency plans and involved an enormous planning and management task, including movement of all equipment and supplies over several thousand miles for operation in a hostile desert environment. It was therefore not surprising that peacetime financial practices were varied and accounting practices were relaxed in some areas.

10 Nevertheless, there are lessons relating to the latter to be learned from Operation GRANBY. The National Audit Office recognise the thorough post- Operation GRANBY reviews of financial aspects carried out by the Department and emphasise the need to ensure that for any similar future operation, appropriate standing guidance, based on experience in Operation GRANBY, is in place to govern financial procedures in the Department and the operational theatre, supported by adequate systems and arrangements to record and forecast costs.

4 MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

Report

Introduction and 1 On 2 August 1990 Iraq invaded Kuwait. Following the passing of United background Nations resolutions, the United States, with support from the United Kingdom and other nations, began to build up a military presence in the Gulf. The aim was to defend neighbouring States from Iraqi aggression and to secure an Iraqi withdrawal from Kuwait. The United Kingdom’s military involvement was called Operation GRANBY.

2 From August 1990, the United Kingdom began to prepare for the possibility of conflict. The Royal Air Force and later, the Army, established bases in the Gulf and front line and support troops moved there, mainly from Germany. Royal Navy vessels took up positions in the Gulf. Some Reserve Forces were mobilised for specific tasks. The build-up of military personnel and hardware continued to early 1991. Diplomatic attempts to secure an Iraqi withdrawal failed and hostilities began in mid-January 1991. The Allies’ objectives were achieved and fighting ceased at the end of February 1991.

3 The withdrawal of most United Kingdom forces took place between March and May 1991. Some Army personnel remained and were involved in “clearing-up” operations in Kuwait. The various phases of Operation GKANBY involved the commitment and deployment of considerable military resources and a cost in cash expenditure, the consumption of stores and stocks, and the utilisation and loss of equipment. There was also a cost in injuries and human lives. Overall, the United Kingdom’s deployed manpower was some eight per cent of that of the United States.

Parliamentary 4 The Treasury and Civil Service Sub-Committee, in their April report on the interest in costs 1991 Budget, stated that the total additional costs of the Gulf Conflict [see Glossary of Terms) might be up to E3 billion. This figure was based partly on evidence taken in February 1991. The report gave a list of contributions received and some information on the type of additional costs covered.

5 The House of Commons Defence Committee, in their Eleventh Report Session 1990-91 (HC 3941, considered that: (a) it would have been helpful if, in the financial information laid before Parliament in the form of the Supplementary Estimates, expenditure attributable to Operation GRANBY had been separately identified: and that in any comparable operation in future this should be done; (b) a final detailed reckoning of gross and net Operation GRANBY co,sts and receipts should be presented in some appropriate public document, indicating recurrent and non-recurrent costs.

5 MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARlSlNG FROM THE GULF CONFLICT

The National 6 Defence Ministers have made a number of statements on the cost of the Gulf Audit Office Conflict and the contributions received from other nations. Since April 1991 examination they have announced the additional costs arising as about E2,500 million and contributions from other nations as E2,OOOmillion. In June 1992 the Treasury announced the more precise figure of f2,049 million for contributions from other nations.

7 In view of the Parliamentary interest in the costs incurred, the National Audit Office carried out an examination to establish whether the basis of the assessment of costs by the Ministry of Defence (the Department) was reasonable. The National Audit Office did not duplicate the detailed examination of costs being undertaken by the Department’s Internal Audit but examined: the alternative bases of costs used by the Department and whether they were those which were most meaningful for Parliament; the adequacy of the Department’s arrangments for collecting costs: whether all costs were included in their calculations; and the effect of any omissions. The National Audit Office also compared the Department’s approach with that of the United States: examined the results of the Department’s own wide-ranging reviews of financial and accountability matters arising from the Gulf crisis; and identified estimated costs incurred by other Government departments. The National Audit Office did not examine the effects of the Conflict on the United Kingdom economy as a whole. For example, they did not consider the effect of fluctuating oil prices. Also they did not attempt to assess the cost to the nation of injuries and the loss of life resulting from the Conflict, nor the costs of humanitarian assistance to the Kurdish refugees.

8 I intend to provide the Committee of Public Accounts with further details to supplement this Report on a confidential basis; these relate to negotiations with Saudi Arabia on a claim by the Department for recovery of some costs incurred.

Estimated cost 9 During and since Operation GRANBY the Department have announced costs of Operation mainly through replies to Parliamentary Questions. Until February 1991 the GRANBY amounts quoted were based on full operating costs. Initially the decision to use full costs for public announcements was taken because this was the most practical basis available. The United States were also using full costs publicly. These estimates often had to be prepared at short notice using statisticaland management accounting techniques for calculationsof costs per day since precise in-theatre cost figures were not always available within the time scale. Since February 1991, the Department have quoted amounts based on the additional costs incurred. The Department’s definitions of full and additional costs were as follows: . Full operating costs-reflected the input of resources to the Operation and were expressed as a combination of one-off costs-new equipment requirements plus deployment-and a daily rate covering the costs of manpower and the operation of weapons platforms in-theatre. These costs included items such as military pay and equipment maintenance at normal rates (which were not additional costs) but excluded costs such as amortised costs of training and existing equipment.

6 MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

. Additional costs- were those costs the Department would not have incurred if the Operation had not taken place, offset by savings in the Defence programme as a result of deploying Forces to the Middle East (see Table 2). During the Conflict itself the costs included the value of major equipment and munitions that were known to have been lost or consumed in the military operations, but not the costs of repair and replacement (since these could not be readily assessed during the few weeks of the Conflict itself). After the Conflict, and as it became possible to estimate the extent of the need in the coming months and years to commit new funds to replace or repair equipment and to replenish ammunition and stocks, the costs of such repair and replacement were included instead of consumption values. [The treatment of the cost of losses and consumption not requiring replacement is addressed in paragraphs 34 to 37 below).

10 By early September 1990, full operating costs were estimated at El million a day plus a total of f 75 million for one-off costs. These estimates increased gradually as force levels increased. Ministers announced in February 1991 that the full cost of the Conflict to the end of 1990-91 was likely to be f1,250 million, based partly on a daily cost of f4 million. These estimates were based on the position at the start of hostilities on 16 January 1991.

11 Later in February 1991, the Department began announcing additional costs. The Department’s reasons for the change in the basis of calculation were linked to the negotiations which were taking place with other nations on burden-sharing and the need for comparability with other nations’ costs. The United States were by then announcing additional costs, and realistic estimates of the Department’s additional costs were then becoming available.

12 The Chancellor of the Exchequer announced on 26 February 1991 that the additional costs to the Defence Budget of the Gulf Conflict so far assessed were some f 1,500 million, including equipment lost and munitions used. Eventual defence costs were uncertain but, allowing for continuation of the campaign, could be around f3,OOO million. After the Conflict the additional costs were reassessed and announced in April 1991 as about f2,500 million. Ministers have continued to date to quote this rounded figure. The Department have kept the broad estimate under review as assessments of replacement expenditure became firmer and calculated in October 1992, that the figure was now f2,434 million. The Department and the National Audit Office agreed that there were other costs arising from the Conflict in the category of costs not requiring new funding [see paragraphs 34-37).

Costs incurred by 13 Extra costs were also incurred by some other Government departments as a other Government consequence of the Gulf Conflict. The Department of Health (f12 million to departments meet the preparatory costs to the National Health Service of possible treatment of military casualties from the Gulf) and the Foreign and Commonwealth Office (f3.35 million to provide assistance to the British community in the Gulf of which f1.39 million reverted to the Consolidated Fund; and f2.5 million to finance the United Kingdom’s contribution to an appeal from the International Committee of the Red Cross for funds for humanitarian assistance in the Gulf) were voted additional funds by Parliament. The Foreign and Commonwealth Office, like other departments,

7 MINISTRY OF DEFENCE: THE COSTS AND RECHPTS ARISING FROM THE GULF CONFLICT

had to contain all other additional expenditure within their existing budgets. Costs incurred by other departments were small in relation to those of the Ministry of Defence, with the exception of those of the Export Credits Guarantee Department.

14 In November 1991 the Export Credits Guarantee Department told the House of Commons Trade and Industry Committee that they had already paid claims totalling some f 140 million (arising as part of their normal insurance business) and attributed to the events which occurred from 1 August 1990 onwards. Approximately a further f800 million of claims had yet to be examined and possibly paid. They explained that at that stage it was difficult to forecast to what extent claims payments would be recovered, and what therefore the eventual net loss might be. They suggested that it would be prudent to assume that recovery would be a difficult and extended process.

15 The Export Credits Guarantee Department told the National Audit Office that the figures given to the Select Committee referred only to Iraq. As at 31 October 1992 claims paid on Iraq totalled f463 million, with some E367 million of claims still to be examined and possibly paid. They emphasised that this latter figure was still very much an estimate and that the final cost would not be known for some time. Furthermore, claims totalling f17 million had been paid on Kuwait, of which f9 million had already been recovered.

The Department’s 16 As soon as the Gulf Crisis begain in August 1990, the Department reviewed arrangements for the application of their normal peacetime procedures for the financial determining costs scrutiny and approval of equipment requirements and of operational expenditure. Early guidance. supplemented later as the scale and character of the deployment unfolded, provided that: (a] additional costs were to be recorded and machinery set up for this purpose; (b) the usual principles of financial discipline and logistic and contractual procedures would remain unchanged. However, special procedures would be introduced to enable the many urgent operational requirements for new equipments and modifications, and other contracts and expenditure needs associated with the developing operation, to be processed very quickly. Treasury delegated limits were to continue to apply.

17 The Department told the National Audit Office that these instructions were prepared and evolved against the background that there was no precedent on the same scale as Operation GRANBY in the previous 30 years or more. Operation CORPORATE, the Falklands Conflict, had been a different kind of operation, involving comparatively little in-theatre expenditure. On the other hand Operation CORPORATE experience had established the procedures for handling urgent operational requirements for equipment from which Operation GRANBY was greatly to benefit. But, overall, the Department did not have to hand for immediate use a compendium of financial practice and guidance, built up from earlier experience, on how procedures were to be varied, streamlined or adapted in Headquarters or theatre. MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

18 Costing by activity is not generally a standard feature of the Department’s accounting systems. In accordance with the normal practice for Government departments, these are based mainly on the need to account for expenditure in the Appropriation Accounts under the various Defence Votes and Subheads. Costs attributable to Operation GRANBY were incurred on many different Votes and Subheads, which also included costs unrelated to the Operation, making collection and estimating of Operation GRANBY costs a complex task.

19 The Department decided that the net additional costs of Operation GRANBY should be identified and recorded by Headquarters vote managers in special returns in which they forecast the additional costs and consequential savings arising as a direct result of the deployment. Examples of savings were those arising from cancelled exercises and lower rates of activity. In addition, and in advance of action by vote managers, forecasts of equipment costs were made initially when urgent operational requirements were scrutinised and approved. This enabled a cumulative record of costs which required such approval to be maintained.

20 Save in respect of urgent operational requirements, early forecasts were tentative, and delays in forecasting and/or assessing actual expenditure occurring for a number of reasons including: . some accounting systems were not able to identify and separate Operation GRANBY costs: . unless vote managers were actually engaged in authorising demands for urgent requirements, they had no information on which to base their forecasts other than the latest known expenditure. Overseas expenditure is always brought to account at least one month in arrears and this affected the accuracy of forecasts; . there was difficulty in assessing in which year-in 1990-91 or 1991-92- some expenditure would fall.

21 This uncertainty led to fluctuating assessments of the additional costs of Operation GRANBY during 1990-91. The end of year forecasts for 1990-91, projected at the end of each month, are shown in Table 1.

Table 1: The Department’s Forecastsof Operation GRANBYcosts incurred in 1990-91 Forecast outturn Net Additional Date of Departmen 1990-91 Offset Savings costs Forecast fm fm fm At 31 Ott 1990 702 6 696 At 30 NW 1990 912 ii 666 At 31 Dee 1990 639 600 At 31 Jan 1991 616 56 756 At 31 Jan 1991 (updated) 636 69 747 At 30 April 1991 663 if 620 At 31 May 1991 903 652

9 MlNISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

Control of 22 Initially the Department considered that the normal imprest accounts would in-theatre be capable of providing the necessary financial support for Operation expenditure GRANBY. However, deployed units were soon handling large imprest accounts and undertaking local purchasing and contracting without the help of on-the-spot financial and contract staff. As the deployment grew the Department recognised that enhanced financial control was required and in October 1990 appointed a Civil Secretary in the Headquarters of the British Force Commander Middle East.

23 The Civil Secretary acted as principal financial adviser and reported to the Command Secretary at Joint Headquarters in the United Kingdom. Prior to his arrival a number of instances of poor financial control had occurred. For example, some accommodation charges had been waived locally and a water allowance to troops had been introduced without prior Treasury authority, although they subsequently approved it retrospectively. The required amount of fluid to comply with medical advice was not always available from official supplies and the allowance was paid in cash to allow purchase from other sources. These payments, which amounted to an estimated E15.7 million, continued until it became possible to make alternative arrangements. For rear based troops the allowance was replaced by other water supply arrangements from 1 December 1990, but it continued to be paid to the remaining forward based troops until July 1991.

The Department’s 24 In their detailed assessments of costs made after the end of the Conflict, the cost assessment Department concentrated on the costs incurred for which additional funding and results of was required. The National Audit Office examined the basis of the National Audit Department’s calculation and discussed it with them, together with alternative calculations covering any other items of costs incurred which did Office examination not require additional funding. In October 1992 the Department updated their assessment of additional costs requiring funding to the figures shown in Table 2. But the Department recognised that the figures were subject to obvious uncertainties and that there were other costs not requiring funding. Some of the latter could not be quantified, as indicated in the notes to Table 2. These points are discussed in paragraphs 26 to 40. The National Audit Office did not duplicate the detailed examination undertaken by the Department’s Internal Audit, some of the results of which are summarised in paragraphs 30 to 32, but reviewed and tested and were generally content with the Department’s calculation.

25 The additional costs will be spread over a number of years. Appendix 1 shows the funding of additional costs incurred in 1990-91 and 1991-92, the information presented to Parliament through Supplementary Estimates and the arrangements for costs to be incurred in later years. The Department’s estimates of additional costs for which funding is required have been or will be subject to special scrutiny by the Treasury before inclusion in Estimates or Supplementary Estimates.

Basis of “additional cost” estimate 26 The estimate covers: the direct costs of deploying to, operating in and recovering from the theatre; support in the United Kingdom, Cyprus and elsewhere; urgent operational requirements for new equipments or modifying equipments; ammunition; repair, maintenance and reconstitution of equipment to the lower of Options for Change or pre-GRANBY stock levels; and (in Part II of Table 2) the consequential costs from 1991-92 to

10 MlNISTRYOFDEFENCE:THRCOSTS ANDRECEIPTSARfSlNGFROMTHE GULFCONFLICT

Table 2: The Department’sestimate of Operation GRANBYadditional costs requiring funding (fmillion) 1990-91 1991-92 1992-96 Total I-Direct costs Vote 1: Personnel costs, support and other services Pay and allowances-Service 17 1 18 Civilian 24 11 35 (mainly extra allowancesto personnelserving overseas) Movements-Personnel 43 26 71 Freight 134 65 199 (mainly costs of transporting personnel,equipment and supplies to and from the Gulf) Stares/computers 26 15 41 Clothing 25 30 63 Food 21 3 24 Fuel and utilities 47 4 51 Rents (see paragraph50) 33 2 35 Telecommunications 13 11 24 Claims 2 5 7 Generaladministrative expenses 7 5 12 Other 5 3 8 Vote 1 Total 397 191 588 = Vote 2: Procurement Equipmentand armaments--special purchasesfor OperationGRANBY 329 295 624 Repair,maintenance. spares 8 modificationsto equipment 111 209 320 Other (includingworks) 8 2 10 Vote 2 Total iii SOS 954 = Vote 3: Service pensions and payments to dependents - 1 1 Vote 4: Works services 5 2 7 Vote 5: Ship refitting and repair 2 17 19 = = All Votes: Repairs:replenishment of stores, equipmentand ammunition; reconfigurationin future years - - 529 529 = Total direct costs 652 717 529 2,098 II-Consequential costs Optionsfor Changesavings deferred as a consequenceof OperationGRANBY - 168 ‘68 336 = = Total costs 652 885 697 2,434

Notes: The amountsshown above exclude the folkwing items for which funding is not being sought: Loss of major equipmentand munitionsnot being replaced (paragraph35) - f200 million Otheritems consumedbut not being replaced (paragraph36) - no figure available Accelerateddepreciation (paragraph 36) - no figure available

11 MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

1993-94 of delaying savings arising from Options for Change. In-year expenditure has been assessed on the basis of actual additional costs [for example: higher allowances payable to personnel serving overseas but not their salaries which would have been paid if they had not gone: or the extra costs of transporting personnel, equipment and supplies to and from the Gulf). The estimate is net of consequential savings to the Defence programme during the Operation. No allowance has been made in the calculation of costs for losses and consumption not requiring replacement, or for the effects of faster depreciation in operational conditions as discussed in paragraphs 28 to 36.

27 The figures include in 1992-93 to 1995-96 the current estimate for the costs being incurred and yet to be incurred for the repair, maintenance and reconstitution of equipment, ammunition and stocks. The Department advise that figures cannot yet be treated as firm. The final level will only become clear over a period of time when the programme of inspections of materiel recovered from the theatre is complete. The estimate for replenishment expenditure is net of f 91 million of savings in these years arising from planned orders having been brought forward for Operation GRANBY (and charged to additional costs in 1990-91 or 1991-92) but not then consumed in the Conflict.

Uncertainties in estimate 28 The Department recognise that the estimates are subject to some degree of uncertainty relating to: . the Department’s ability to assess the additional costs in 1990-91 precisely; . the doubt that understandably remains as to the exact degree of repair and replenishment that will be necessary, and hence the consequential costs over the next three years or so; . the requirement for further internal audit of costs incurred in 1991-92, costs of Options for Change savings and future costs in general;

l the desirability of being able to show suitably in the calculations the value of equipment and stores consumed without replacement; and . the particular difficulty of estimating the latter when it was not possible to follow peacetime accounting procedures for stores and assetsdeployed to and used in the Gulf theatre. These uncertainties have been addressed by the National Audit Office (paragraphs 29 to 40). Problems associated with accounting for equipment deployed to and recovered from the Gulf are discussed at paragraphs 48 to 60.

Identifying additional costs correctly 29 The Department’s accounting and forecasting systems were not designed to provide the sort of selective analysis of expenditure required as the Operation evolved day by day in 1990-91. As discussed in paragraphs 18 to 21, the system of reports from vote managers produced imprecision initially in forecasts in some areas, and especially in assessing when expenditure would actually be incurred. Particular problems were encountered in quantifying accurately and, in some cases, identifying commitments,

12 MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

expenditure and savings attributable specifically to Operation GRANBY. This activity required judgements to be made by a considerable number of staff at various levels in Headquarters and elsewhere. Where procurements for the Gulf were covered by existing contracts, it often proved difficult to distinguish specific Operation GRANBY elements and their timing. The Department also found it difficult to separate savings from Operation GRANBY, from those designed to prevent overspending in the 1990-91 financial year.

30 The Department’s Internal Audit review showed that whilst the reporting system employed had in due course accounted for the additional costs in 1990-91 as finally assessed by the Department, there could still be some residual effects of the earlier imprecision. In consequence the auditors could not provide an assurance as to the completeness of the costs and pointed to a possible understatement of gross additional expenditure of at least some f 30 million. However, the Department advised the National Audit Office not to place too much significance on this figure as a net increase since there was a degree of doubt whether all offsetting savings were identified.

31 In April 1991, shortly after the Conflict ended, the Department introduced changes in their cost reporting systems for expenditure other than equipment procurement. Teething troubles with the new systems had repercussions for the timely identification and reporting of Operation GRANBY expenditure in the earlier months of 1991-92. A reliable picture, to support the provision sought in Summer and Spring Supplementary Estimates 1991-92, (see Appendix 1), did not appear for a number of months. The Department’s Internal Auditors, when undertaking their review in Autumn 1991, were unable to test the accuracy of the estimates, and have recommended that a further audit be carried out. By the end of 1991 the Department estimated the direct costs for 1991-92 as f803 million. But subsequently not all of this expenditure was incurred and the Department have declared a shortfall of f86 million, arising mainly on the procurement vote. Of this, an estimated f39 million are costs which are likely to be incurred in 1992-93.

32 Equipment and stores lost or consumed are only classified as additional costs of Operation GRANBY if they are to be replaced. Since replacement contracts will take several years to complete, it will be some time before the total additional costs are known precisely. The full extent of work and necessary purchases will only be identified when all returned items have been examined, repairs undertaken and new equipment contracts placed, taking into account the future size of the Forces. There is uncertainty, for example, in estimates for munitions replenishment since it is still not clear how much of the ammunition deployed to the Gulf is in a fit state to be returned to store. Inspection of this ammunition is unlikely to be completed before late 1994,~and the cost of reworking and repackaging may not be known for some time. Thus the Department’s figure for spending from 1992-93 onwards, f529 million as shown in Table 2, is an estimate of the possible liability based on the best information currently available. By the same token the length of time required to complete inspection of returned stores and to validate the associated documentation is such that the value of consumption in the deployment is subject to uncertainty. In these circumstances the Department’s Internal Audit review was not able to give an audit opinion on the estimates of costs in 1992-93 and beyond. They recommended further audit review by them at the appropriate time.

13 MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

Effects on Options for Change savings foregone 33 A further dimension to Operation GRANBY issues was how the deployment of forces, particularly those based in Germany, would affect the Options for Change measures due to be introduced from the 1991-92 financial year onwards. Operation GRANBY delayed final decisions on Options for Change and the achievement of savings from reductions in force levels. As a consequence, the Department had to reassess their earlier plans for implementing the first stages of Options for Change reductions and to reprogramme these measures. This exercise was undertaken as part of the Department’s work on their 1992 long term castings. The Treasury have scrutinised the results. As a result the Department’s additional cost estimate includes f336 million of savings foregone in 1991-92 to 1993-94. The National Audit Office acknowledged the difficulties in determining the value of such savings because of the uncertainty of forecasting what would have happened under Options for Change had the Gulf Conflict not taken place. They noted that Internal Audit had recommended that they should validate any consequential costs resulting from the impact of Operation GRANBY on Options for Change decisions before their inclusion as an Operation GRANBY cost.

Losses and consumption of equipment without replacement, and opportunity costs 34 Public announcements in February and March 1991 included costs of major equipment lost and munitions consumed in the Operation and associated training. Some of these losses and consumption will not be replaced and have been excluded from the Department’s later presentations of additional costs and hence from Table 2. The National Audit Office noted that, even though there were no replacement costs, such items had a value either for disposal or for use in other conflicts or military operations. The Department pointed out that these costs had been excluded from their assessment of additional costs since they represented sunk costs which did not need to be funded again. Moreover, whilst the first purpose of investment in equipment and military assets is to deter conflict, it must be expected that equipments will be consumed in military operations if deterrence fails. Operation GRANBY proved to be such an operation. Thus, in the Department’s view there is not an opportunity cost inherent in preserving equipment for another operation.

35 The Department recognise that the value of equipment and stocks lost or consumed without replacement should be costed and published where such is readily practicable. They have advised the National Audit Office that the value of aircraft lost during the Conflict was of the order of f150 million with a further f50 million attributable mainly to munitions which will not be replaced.

36 The Department are still examining the extent to which they can place value on smaller equipments which were consumed or abandoned following the Operation or not worthy of repair, and not requiring replacement. Thus further cost information which could increase the present assessment of f200 million will become available. The National Audit Office noted that costs also accrued from accelerated wear and tear to equipments and stores as a result of the Gulf deployment. The Department have not been able to propose an assessment of costs of extra depreciation arising on this account.

14 MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

37 The Department’s own Internal Audit review has recommended that in any future out-of-area operation, the value of stock consumed should be costed in order that an adequate assessment of these costs is available to set alongside the estimate of costs requiring funding. Arising from this the review also recommended that in such circumstances the Department should identify costs in three ways: full operating costs: additional costs - i.e. including costs of items and assets consumed without needing to be replaced; and costs requiring funding as represented for Operation GRANBY by Table 2.

38 The Department have accepted these audit recommendations as a general aim although they believe that the precise approach must depend on the circumstances of each operation and on the practicalities of assessing in detail the value of consumption and every aspect of full costs in a military operation. During the Gulf Conflict the Department did disclose broad loss and consumption figures within days of these being incurred. On the other hand, final assessments of consumption may only be available long after military operations have been completed.

39 Besides the opportunity costs of equipment, there would in principle be the opportunity costs of personnel resources to bring into consideration. But the Forces involved in service in the Gulf Conflict were fulfilling their primary purpose and the goal of all their training. Thus opportunity costs do not fall to be considered in this instance, and the National Audit Office understand why the Department considered it reasonable to exclude from their assessment of additional costs the opportunity costs of resources employed in the Gulf.

Funding costs 40 The National Audit Office identified the cost of funding the Conflict as one other factor to be assessed. In total, contributions in cash from foreign Governments [f 2,049 million) exceeded the Department’s estimate of additional expenditure in 1990-91 and 1991-92 (f 1,737 million). Although this was not a complete assessment of additional costs and expenditure ran ahead of contributions up to Summer 1991 [Tables 2 and 3), inclusion of the costs of funding over the two years would not significantly affect the calculations of costs.

Burdensharing, 41 As their forces were deployed, participating non-Gulf countries made efforts Host to obtain financial support from the Gulf area States involved and from some Nation Support other countries who did not contribute military forces. Contributions in cash and assistance are known as Burdensharing; contributions in kind from Gulf States are known as Host Nation Support; non-cash contributions from other countries in kind are described as assistance in kind [see Glossary of terms). Cost recording initiated in August 1990 took into account the potential need to recover costs from host, beneficiary and other nations. Burdensharing and Host Nation Support were, in the main, pursued separately in negotiations with other nations.

42 The main thrust of the United Kingdom’s efforts to obtain cash contributions towards the costs of the Operation came after full deployment and when the Conflict was beginning. The United Kingdom’s policy was to follow the precedents set by the United States, who were generally in the strongest

15 MINISTRYOF DEFENCE:THE COSTSAND RECEIPTSARISING FROM THE GULFCONFLICT

Table 3: Contributionsin cash to British costs of OperationGRANBY fm fm fm Receivedin Receivedin country 1990-91 1991.92 Total Belgium 15 1.5 Germany 274 - 274 Hong Kong 16 - 16 Japan 25 167 192 Kuwait 110 550 660 Saudi Arabia - 582 582 South Korea 16 $;d Arab Emirates ii 192 2:: 13 1 14 TOW 524 1,525 2,049

NOtes: (a) Apart from f2.5million from Japan taken as Appropriations-in-Aidof the DefenceBudget in 1990-91, cash contributionswere accountedfor as ConsolidatedFund Extra Recetptstn the DefenceAppropriation Accounts. The Treasurymade all the necessaryarrangements for payment of contributionsto the Bank of England. (b) In addition to cash contributions,Host Nation Support and Assistancein Kind is valued by the Departmentat an estimatedf 108 million. The major contributor was SaudiArabia.

position to obtain contributions. The United Kingdom therefore sought assistance comparable to that obtained by the United States, having regard to the urouortions of troous deuloved. Cash contributions received totalled E2,049~miilion; a detailed-breakddwn is contained in Table 3.

43 [n addition to receiving cash contributions, the United Kingdom benefited from Host Nation Support and various types of assistance in kind from 20 countries for operations in the Gulf. For example, nine nations provided medical assistance; several countries provided supply ships to support the Royal Navy, made available aircraft, vehicles and other equipment and flew sorties in support of the Operation. The Department’s assessment of the value of this Host Nation Support and assistance in kind is f 108 million. The major contributor was Saudi Arabia. This figure excludes the value of loaned equipment and ammunition, much of which has been returned to the lenders. The United Kingdom’s Forces provided assistance in kind to, and received assistance in kind from, other Allied Forces, particularly those of the United States. No information is available on the value of such assistance.

Departmental 44 Soonafter the Gulf Conflict,the Departmentset in train a numberof reviews reviews, designed to collect together a record of how issues were handled in and reports Operation GRANBY, for future reference, and to draw conclusions leading to specific recommendations. The National Audit Office examined the finance and Internal Audit reviews and also a report on the withdrawal of Land Forces.

Finance and Internal Audit reviews

45 The main findings and recommendations of the finance review for similar deployments in the future were: . Basic guidance on how to proceed on cost recording and estimating, financial control and scrutiny and contractual matters should be current and readily available in all areas, so that it does not have to be developed at short notice from peacetime procedures for use in an operational situation, as was the case in some areas of Operation GRANBY expenditure.

16 MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

. Machinery must continue to be available, and systems in place, to provide information on costs to meet the needs of the Department, the Treasury, Parliament and the public. . In any future operation, in-theatre expenditure should, in the main, be controlled by the Top Level Budget Holder for the Joint Headquarters. . There was a need for consistency and standardisation in the use of portable computer systems in-theatre to support the finance function. . A Civil Secretary post, plus support staff, should be created in-theatre from the outset, embracing finance and contracts functions, and providing advice on Defence policy matters.

l In any future similar operation the earliest practicable consideration should be given to whether to seek bi-lateral agreements on Burdensharing and Host Nation Support, or seek close alignment with the allies, in particular the United States. . Operation GRANBY demonstrated that the arrangements for providing financial protection for selectively called-out reservists require updating along with other matters relating to the use of reservists. A wide-ranging review was required to address the issues and to propose legislation as necessary. Work began in late 1991 to implement as applicable the main recommendations. In particular, the revision of the financial arrangements for reservists is being carried forward in conjunction with the Department’s work on the more flexible use of reservists.

46 The finance review did not cover in any detail: the financial aspects of the movement of personnel, equipment and supplies to and from the Gulf; the financial and accounting aspects of both the recovery phase and disposals by local sales; or the accounting for equipment and stores. These aspects were covered by Internal Audit, whom the Department commissioned in May 1991 to record and evaluate the financial and accounting implications of Operation GRANBY. Both these wide-ranging reviews have highlighted the need to reconsider procedures in the light of experience gained.

47 In many respects Internal Audit’s main findings and conclusions were similar to those of the Finance review. However, Internal Audit made other detailed recommendations. additional to those referred to in preceding paragraphs, including the following (subsequent action by the Department is shown in brackets): . A common accounting system with suitable information technology support should be designed for tri-Service use in future out of area operations. (The Department are examining this.) . A policy for the most cost-effective accommodation of personnel should be examined, to avoid inconsistencies in treatment of different personnel, including high allowances to some, such as occurred in the Gulf. (The Department are examining this.)

l There was a need for a general review of the Department’s use of plastic credit/charge cards and the regulations governing their use, with particular reference to out of area operations. There was evidence of some unauthorised expenditure in the Gulf and some of it resulted from the use of these cards, which were more closely controlled in the Army

17 MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

than in the other two Services. (The Department have indicated that they are currently conducting a review by Internal Audit of management controls on the use of credit/charge cards for official expenditure.) . There was a need for a more positive instruction to state specifically what should be done to account for materiel in war. It should be made clear to units that peacetime accounting should continue until relaxation of normal procedures is specifically authorised. (The Department are acting on these recommendations.) . Rear parties should be retained in-theatre for each unit in future out of area operations to ensure the orderly preparation and return of unit equipment. (The Department are acting on this recommendation and recognise the need to retain rear parties with the relevant expertise to effect recovery in the best manner (see paragraphs 54-60).)

Report on the withdrawal of Operation GRANBY Land Forces 46 A post Operation report on the withdrawal of Land Forces highlighted stores accountability problems which had risen in an operational situation (paragraphs 49 to 60 below). These did not necessarily have any significant effect on the total cost of Operation GRANBY but illustrated the difficulties of exercising financial control when responding to a crisis. The Services, particularly the Army, were faced with an enormous task in planning and managing the deployment of such a large Force and the associated equipments, stores and ammunitions several thousand miles from the United Kingdom. The developing and unpredictable nature of the crisis and the hostile desert environment made this a particularly difficult Operation.

Civilian vehicles 49 Some 1,200 civilian vehicles were leased or hired during Operation GRANBY, ranging from small cars to heavy equipment transporters and plant. As the Department began to recover the smaller self-drive vehicles, it became apparent that little management control had been imposed on their use. At the end of the recovery exercise, 19 vehicles remained untraced, seven were totally destroyed and damage claims were registered against a further 111 [excluding those damaged in an explosion in Kuwait on 11 July 1991). The report concluded that in any future operation involving the widespread hire of civilian vehicles, full accountability must be imposed fromthe outset.

Contracts, real estate leasing and claims 50 The Department depended upon a wide range of locally provided services. A considerable amount of local purchasing, contracting and leasing of land was required. Until specialist contracts staff were established in-theatre from November 1990, no central control was exercised over the contracts for these services. In the early stages many of the contracts had been drawn up by Service personnel inexperienced in contractual issues and under operational pressures. On occasions this resulted in conditions being applied which were unfavourable or difficult to interpret. In the particular area of real estate, although some camps in Saudi Arabia were made available as Host Nation Support, more than 30 other camps had to be procured through lease agreements. Many of these contracts had to be let urgently in a market where demand was outstripping supply with rents soaring accordingly. The

18 MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

Department paid very large annual rents in advance to secure their real estate requirements. In all, some f 35 million [Table 2) was committed in- theatre on rents.

51 This approach to contracting and the lack of continuity in running some of the contracts made it difficult to establish liability for damage caused, for example, to hired vehicles. Lack of appropriate contractual documentation at first made it difficult to settle contractors’ claims equitably, but the Department advised that the problems were subsequently resolved satisfactorily by the employment of a loss adjustor.

52 The Department found themselves in a difficult bargaining position when returning property to certain private owners, who already had the rent. The law of landlord and tenant in Saudi Arabia is very different from that in Britain. The Department were often expected to accept responsibility for major works services in leased camps and it was common practice for those owners who had insured their premises to cancel their policies on handing over their property. The Department’s staff involved devoted much of their time to negotiation and attempting to minimise public expenditure. In contrast, some owners offset damages against rent for the unexpired period of the lease.

53 The report concluded-and the finance and internal audit reviews made similar recommendations-that it was essential for contracts and other specialist staff to be deployed at the outset of military operations to prevent a recurrence of the experience of Operation GRANBY and to free Service personnel from a task in which they were not trained. This would also help to ensure that contracts were properly drawn up, with correct documentation and a degree of accountable continuity.

Recovery 54 The logistic back-up to the deployment of forces in the Gulf is regarded by operation the Department as one of the major triumphs of the campaign. In total, 18,000 tons of ammunition, seven million litres of fuel and 6,000 tons of materiel were moved some 460 kilometres up country from the base at Al Jubayl. The Commander in charge of the recovery operation commented that the recovery was a remarkable logistic operation and was achieved in a shorter timescale than the most optimistic forecasts due to the efforts of the soldiers involved. This was despite the difficulties that were faced.

55 His report observed that the sheer volume of stores arriving in theatre during the six weeks immediately prior to the land campaign overwhelmed the system. The major problem faced by the recovery unit was the absence of a baseline from which to begin. They found that lack of accounting was in evidence at all levels down to individual units responsible for the control of vehicles, equipment and weapons. All units had been given externally imposed manpower ceilings to keep numbers in the Gulf to a minimum, and bayonet strength and deployment for war took priority over book keeping and accountancy. Whilst the quantities of equipment and stores deployed to the Gulf were known, there was no detailed record in-theatre of what equipment and stores had arrived, or what had been lost or expended before, during or after the Conflict. Thus a reconciliation of exactly what had to be recovered was not available to those responsible for that

19 MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARlSlNG FROM THE GULF CONFLICT

operation, although the Department pointed out that logistics and some field force units managed to maintain peacetime accounting throughout the operation.

56 Following the Government decision that troops should return home quickly, in the pressure of moving some units abandoned equipment in the desert or in their camps at Al Jubayl and some failed to arrange for recovery. A desert search operation subsequently resulted in over QOO,OOOof stores being recovered and brought to charge. The Department pointed out that although the circumstances were regrettable, this was not a large amount in the context of the total value of stores deployed to the theatre, and the problems were partly due to the fact that units were not able to take everything with them as they moved forward and did not return through the same locations.

57 Because the land campaign lasted only “100 hours” much of the stores stockpile was not consumed. The recovery group were left with a large number of stores which they had to put into order before they could be returned to stock or units in Europe; for example, inspection of items where primary packaging had been broken.

58 With the ever escalating cost of military equipment and the obvious need for stock visibility and control, the Commander’s report questioned whether the concept of wartime accounting procedures remains a valid concept for future operations; the Department are addressing this question. Because the ground fighting lasted only a few days, the majority of the stores required to sustain a much longer period of operation were still held in readiness in the rear areas and did not reach the units to which they had been consigned. After inspection these stores could be returned to depots in their original packing with nothing more than amended documentation.

59 The report recorded that computerised systems exist which can handle the volumes encountered by Operation GRANBY and that the Army must invest in such systems and track equipment and materiel wherever it goes in peace and war. It concluded that in the pressure of a logistic build up for war, the receiving operational theatre would never be able to account for all receipts. Nevertheless, it should be able to account for many of them, and retrospectively account for what it failed to trap initially. The onus must, however, lie on the despatching theatres to keep records of what they send.

60 At unit level many of the accounting difficulties which did arise were due to operational pressures as well as a lack of manpower. But the report considered the dumping or abandonment of serviceable equipment and not correctly securing unit weapons as illustrative of lack of control at unit level. Pressures were not constant, and provided the correct establishment of accounting personnel were deployed with units, less busy and pre- recovery preparation periods could be used to update accounting records in any future operation.

81 I have commented further on relaxations in stores accounting during the Gulf Conflict in my Report on Defence Appropriation Accounts Class I, Votes 1, 2 and 5 1991-92. In that Report, I state that I am generally satisfied that, in the circumstances, the Department took all reasonable steps to maintain control over their stores and equipment. I intend to comment

20 MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

further on the Department’s systems and arrangements for tracking equipment and materiel in a separate Report on the movement of personnel, equipment and stores to and from the Gulf to be published in 1883.

The United 82 In the United States the cost of their commitment to the operation has been States approach viewed in terms of total (full) costs, incremental (additional) costs and funding requirements. In May 1992 the United States General Accounting Office estimated that the total cost of the Operation would be over US $120 billion (E71,OOOmillion). This total included about US 550 billion for the direct and indirect costs to raise, equip, operate, maintain and support a force of 540,000 personnel. The total cost also included the incremental costs of the Operation estimated as US $61 billion (E36,OOOmillion).

63 The United States Office of Management and Budget estimated the funding requirements of the Operation to be 547.5 billion for the financial years 1991 to 1993 and possibly beyond. The balance of the incremental costs, some US $14 billion, comprised costs that were previously funded, would never require funding or would not require funding until after 1882. Costs that would never require funding including US 55.8 billion in assistance in kind provided by allies and US 51.2 billion in equipment lost and munitions consumed that would not be replaced. Thus the United States incremental costs figure of US 561 billion is not directly comparable with the Department’s additional cost estimate because of the exclusion of such items from the latter.

64 The United States received $48 billion of foreign contributions to help defray the United States costs of the Operation. These contributions were placed in a Defence Co-operation Account to be used to meet the Gulf Conflict funding requirements of the Department of Defense.

65 The General Accounting Office recorded difficulties in tracking incremental costs of the Operation because the Services only captured total costs at the unit level and did not subtract the costs they would have incurred had there been no crisis in the Gulf. These adjustments were made at the higher reporting levels. Also, cost data were aggregated into broad and general categories that made it difficult to verify whether or not specific costs had been properly charged to the Operation.

86 The Department’s finance review noted that by contrast with their own approach, the United States Forces had considerable civilian support and expertise (financial and contractual) in-theatre from the start in August 1990. The Department’s reviews recommended that there should be appropriate in-theatre support from the outset in any future deployment (paragraphs 45 and 53). The National Audit Office nevertheless noted that the United States Forces generally faced difficulties similar to those of the United Kingdom in identifying and recording the costs of the Gulf Conflict.

21 MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISlNC FROM THE GULF CONFLICT

Glossary of terms

In this Report certain terms have the following definitions as used by the Ministry of Defence.

Burdensharing-contributions in cash from other nations towards the costs of military and logistics operations.

Host Nation Support-contributions in kind (mainly petrol. oil and lubricants, food, water, accommodation and free use of facilities) provided without charge to the Allied Forces by Saudi Arabia and other Gulf States.

Assistance in kind-various types of assistance provided without charge to the Allied Forces by nations other than the Gulf States.

Full operating costs-reflected the resource input to the operation and were expressed as a combination of one-off costs-new equipment requirements plus deployment --and a management accounting daily rate covering the costs of manpower and the operation of weapons platforms in-theatre. These costs included items such as military pay and equipment maintenance at normal rates, which were not additional costs, but excluded costs such as amortised costs of training and existing equipment.

Additional costs-were those costs the Department would not have incurred but for the Operation, offset by savings in the Defence programme as a result of deploying Forces to the Middle East.

22 MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

Appendix 1

Additional costs of Operation GRANBY in 1990-91

Additional Costs: f852 million [a) were financed by SuoolementarvEstimates

Class 1 vote 1 Vote2 votes3-5 Total fm fm fm fm Revised Winter HC 76 140 340 - 480(b) Spring HC 170 100 197 3 300(C) Total Voted in Supplementary Estimates 240 537 3 760(d) First Japanese Burdensharing Contribution to be treated as Appropriations-in-Aid 25 - - 25 Excess Vote 132 (W 4 47 Total -397 448 -7 852

Notes: (a) The additionalcosts of f852 million represent the gross costs of f903 million less savings of f5f million. (4, AS part of the WinterSupplementary estimate process the Governmentannounced an increasedprovision of f553 million for the Defenceprogramme, of which f480 million related to OperationGRANBY. (c) In the Spring Supplementaryestimate the Departmentreallocated the existing provision among subheads.As a result the funds requiredfor OperationGRANNY were not identifiablein the Estimates.For example. the Estimatesincluded an increasein provision for Class 1, Vote 2, subhead M6 (Aircraft and engine support) of f350 millton. Of this only f27 million was directly attributable to OperationGRANGY, white the remainingf323 million reflecteda mm? realistic level of expenditureto meet increasedrequirements and higher prices. (d) Of the f780 million. the Treasuryexpected the Departmentto meet f40 million from their existing cash limit. However,the Departmentwere unable to do this and in the event the Treasurydid not impose this requirement.

23 MINISTRY OF DEFENCE: THE COSTS AND RECEIPTS ARISING FROM THE GULF CONFLICT

Additional costs of Operation GRANBY in 1991-92

Estimated Additional Costs: E971 million was to be financed by SupplementaryEstimates Summer HC 486

Gulf-related Other Causes T0kll Deferred Direct Options costs Savings Class1 fm fm fm fm fm vote 1 95 93 69 257 vote 2 300 75 494 669 vote 3 - - 5 5 vote 5 - - 26 26 Total 395 168 594 1,157- 563 Spring HC 226 Cash Limit Changein Decrease(a) Cash Limit Class 1 fm fm vote 1 101 45 146 (16) 130 vote 2 288 41 329 329 vote 3 G (5) vote 4 2 (5 (2 (501 ‘;;I vote 5 17 - Total 40s -ii 463 111, 392 1991-92 Total 971(b) i-ii 1.620 Notes: (a) The decreaseof f7l million in the Cash LknitLimit is to wmpensatecompensate for a non-GRANGYoverspend on Class f, Votes ,, 4 and 5 in 1990-91. (b) In the event actual expenditure was f&%5million. a” underspendof f86 million on Gulf-relatedcosts (see Table 2).

Additional costs of Operation GRANBY in 1992-96

Estimated Additional Costs: f697 million to be financed as follows:

Direct Costs DeferredOip Savings Total fm 1992.93 &I, 101 351 1993-94 191 67 256 1994-95 76 - 76 1995-96 12 - 12 Total -529 166 697 Note 1: Includesan estimatedf39 million of expenditurewhich was due to have been incurredin 1991-92. Note2: With regard to expenditureyet to be incurred, Treasuy agreed the following revised approval SrrSnOeme”tS: (S) the Treasurywill review the Department3 scrutiny procedures,including the guidelinesgiven to the Services,and the questionsaddressed i” the scrutiny proceSs: (b) the T&wry delegatedauthority in respect of any contract let in respect of direct OperationGRANEY costs is reducedto f5 million. Normally the Treasuryare active/y involved only in those projects where the spend exceeds f25 million: (c) the TrSSsu!ywill follow in much more detail than usual the scrutiny process applied to ? @v sa~pfe projects. This will require SomeSIXSSS to the relevant papers and people down the decfsro” makfnoline: (d) lnternatAudit w;ll be tasked in due c”urSe to review whetherthe scruhnyprocedures and guidelines have been correctly followed in pracdce.