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The Costs and Receipts Arising from the Gulf Conflict

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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); .
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