Intelligence and Security Committee Annual Report 1999-2000

Programme of work

6. In our last Annual Report3 we identified a number of issues that would form the basis of this year's programme. These were:

- the process of establishing the requirements and priorities for the Agencies and the allocation of sufficient resources to requirements;

- the details and costs of the Private Finance Initiative (PFI) for GCHQ's New Accommodation Project;

- the Agencies' ability to operate into the year 2000 and other Y2K issues;

- co-ordination between the Agencies and law enforcement organisations in fighting serious organised crime, in particular the Agencies' work conducted overseas;

- the intelligence contribution to the Kosovo campaign and the analysis of the material produced;

- in respect of personal files:

i. whether individuals should have rights in connection with the destruction or otherwise of any file held on them and protection against having inaccurate information gathered, stored and used against an individual's interests;

ii. the position under current/future data protection legislation; and

iii. implications of the European Convention on Human Rights;

- recent measures taken to enhance the Agencies' internal security policies and procedures; and

- any changes in the funding and structure of the Defence Intelligence Staff (DIS) as a result of the Government's Strategic Defence Review, and the implications that these may have for the work of the Agencies.

7. We also proposed to continue our inquiries into the UK's defences against information warfare and the Agencies' Information Technology (IT) systems, in particular the co-operation between the Agencies and their customers.

8. In the event, our programme of work had to be reorganised to meet your request to conduct an inquiry into the Security and Intelligence Agencies' handling of the material provided by Mr Mitrokhin. This proved a substantial undertaking, including taking oral evidence from 32 witnesses. As a result, our planned programme had to be adjusted. During the year we:

- monitored the impact of Y2K issues on the Agencies before and immediately after the New Year, in terms of technical resources and impact;

- took evidence on the process of establishing the Agencies' requirements and priorities, in particular the roles of the Ministerial Committee on the Intelligence Services (CSI), the Permanent Secretaries' Committee on the Intelligence Services (PSIS) and the Joint Intelligence Committee (JIC);

- took evidence on and a great deal of interest in GCHQ's New Accommodation Programme, as it is now known, including reporting to you in March 2000 our concerns over the large increase in transition costs;

- took evidence on the impact of the Strategic Defence Review on the DIS and the Agencies;

- examined the intelligence contribution to the Kosovo campaign, taking evidence from the Foreign Secretary and the Ministry of Defence in their role as customers;

- examined the co-ordination between the Agencies and law enforcement organisations in the area of excise evasion; and

- visited Romania, Poland and the USA, which gave us a good insight into parliamentary oversight systems that control and allocate funds for the intelligence agencies.

9. The two items we could not complete were consideration of the UK defences against information warfare and the implications of the new data protection and human rights legislation. We will, therefore, carry these forward in the coming year.

10. The Investigator completed two investigations during the course of the year. He reported to the Committee on the Agencies' Security Policies and Procedures, and carried out supplementary work into the security of laptop computers. He has also reported to us on the Agencies' IT Systems and Policies.

11. In addition, the Committee considered a number of other intelligence and security matters, which are relevant to our remit. We continued to work closely with the National Audit Office (NAO) and examine any NAO reports pertaining to the Intelligence and Security Agencies.

The Agencies' Current Activities

12. Every year each of the Heads of the Agencies gives formal presentations to the Committee on their performance, priorities and future plans, and, in addition, we conducted a number of joint sessions with them. We continued to take an interest in the activities of the Defence Intelligence Staff (DIS), the Joint Intelligence Committee (JIC), and the law enforcement agencies, examining in particular these organisations' work with the Agencies. The DIS has a particularly close relationship with the Agencies, as it is both a collector of intelligence and a customer for the Agencies' product. The Chief of Defence Intelligence (CDI) gave evidence to the Committee in these regards, (see paragraph 24). There is a particularly close relationship between the DIS and GCHQ as currently *** military personnel work within GCHQ4.

SIS

13. SIS continued to devote significant resources to Russia and the Balkans. There are currently about *** officers working on this latter area and this level of commitment is expected to grow. Work against the proliferation of Weapons of Mass Destruction also continued to account for a substantial share of SIS's effort. About *** of SIS's effort is devoted to the fight against drugs ***

***.

In total, approximately *** of SIS's effort is directed at meeting JIC First Order of priority tasks. SIS has also been more involved in Africa in the last year, particularly ***

***.5

GCHQ

14. GCHQ has continued to provide valuable intelligence for both policy makers and operational deployments of UK forces. *** of their effort is targeted against Russia, which includes strategic, political, and military reporting, *** on terrorism, and *** on the Balkans. The quality of intelligence gathered clearly reflects the value of the close co-operation under the UKUSA agreement. A recent illustration of this occurred when the US National Security Agency's (NSA) equipment accidentally failed and for some three days US customers, as well as GCHQ's normal UK customers, were served directly from GCHQ6.

15. The major challenge to the continuing effective performance of GCHQ will be the successful completion and transition to the new single site as part of the New Accommodation Programme, which we discuss further in paragraph 51.

Security Service

16. The Security Service devotes over 50% of its effort to the fight against terrorism. A significant proportion of this is linked to Irish related terrorism, with work against state sponsored, separatist and Islamic terrorist groups covering the remainder. The bomb attacks in London during June and July indicate that the threat from Irish-related terrorism still exists. Just over 20% of the Service's work is directed against hostile activity by foreign intelligence services. The Committee was told once again of the significant Russian activity in the UK. Other countries mentioned in this context include ***
***7.

The Security Service's role in support of the law enforcement agencies is clearly increasing and it is likely to continue to do so.

Central Intelligence Machinery

National Intelligence Requirements

17. The Committee has investigated the role of Ministers, the Joint Intelligence Committee (JIC), the Intelligence Co-ordinator and customers in establishing, authorising and verifying the National Intelligence Requirements, which are the requirements and priorities for secret intelligence for the SIS and GCHQ. The National Intelligence Requirements paper is a five-year forward look, but with particular concentration on the year ahead. The Security Service's priorities are directly determined by its own statutory function, which is to protect against substantial, covertly organised threats, primarily from terrorism, espionage and the proliferation of weapons of mass destruction, and support law enforcement agencies in fighting serious crime. However, the National Intelligence Requirements are noted in drawing up these priorities. The Security Service's work is reviewed and validated by a separate Cabinet Office committee, known as the Sub-Committee on Security Service Priorities and Performance, and then agreed by Ministers.

18. The present system is that the Intelligence Co-ordinator compiles the National Intelligence Requirements paper, following discussions with the customers of secret intelligence within Whitehall and other organisations such as the police, and the Agencies. The paper is then endorsed by the JIC before being passed to the Permanent Secretaries' Committee on the Intelligence Services (PSIS), which is chaired by the Cabinet Secretary. PSIS, which also considers the Agencies' budgets, endorses the National Intelligence Requirements and then passes them on to the Ministerial Committee on the Intelligence Services (CSI), which you chair. CSI approves the National Intelligence Requirements, but this is done by correspondence8.

19. We were surprised to learn that the CSI has not met since 1995 and that PSIS has only met 3 times since 1997. We were told that CSI is not responsible for setting the Agencies' budgets, because it is done within the Single Intelligence Vote (SIV) which is jointly sponsored by the Home, Foreign and Defence Secretaries in the public expenditure planning process. The Secretary of the Cabinet is the Principal Accounting Officer for the SIV. We believe that there should be a clear recognition and demonstration of the lines of responsibility and authority for these important Agencies. We recommend that CSI should meet, under your Chairmanship, at least annually to approve the National Intelligence Requirements and endorse or approve the Agencies' budgets.

The JIC and the Intelligence Co-ordinator

20. The Intelligence Co-ordinator also develops and approves the *** regional and functional Guideline papers, which supplement the National Requirements Paper, and also only apply to the SIS and GCHQ9. These Agencies and their customers engage in a bilateral process, know as "fine-tuning", to ensure that the intelligence collected is focused to the needs of the customers. These Guideline papers do not need to be approved by the JIC.

21. Turning to the JIC itself, we were surprised to learn that the Home Office only became a permanent member of the JIC in April 200010. The JIC is currently formed by its Chairman, the Chief of Assessments Staff, three MOD members, two FCO members, a DTI member, a Treasury member and the three intelligence and security Agencies' heads. The Intelligence Co-ordinator used to have a seat on JIC, but as the Chairman of the JIC currently holds that appointment as well there is no need for separate representation. There are no representatives from Law Enforcement Agencies on the JIC. We were told that they are invited to attend as necessary. This means that the Police, NCIS and HM Customs and Excise are only able to influence the Requirements and Priorities and the assessments when they are consulted. With the increasing involvement of the Agencies in the fight against serious crime, we are concerned that interests of law enforcement are not properly represented within the JIC. We recommend that a NCIS representative be appointed to the JIC, in addition to the Home Office representative. Additionally, we believe HM Customs and Excise's interests should be directly represented.

22. The Committee noted the Government's decision to combine the position of JIC Chairman with that of the Intelligence Co-ordinator. This allows the central government customer, the JIC Chairman, to set the Agencies' requirements and priorities, and advise on their funding needs. Traditionally, the JIC Chairman has been from the FCO, whilst the Co-ordinator had been ex-Agency at a minimum of Deputy Secretary level.

23. The Committee is concerned that, by appointing the JIC Chairman as the Intelligence Co-ordinator without previous Agency experience, the position is being reduced in scale and influence. The joint JIC Chairman/Intelligence Co-ordinator may not "know and understand" the Agencies' business nor does the position of the Intelligence Co-ordinator carry sufficient authority within the Central Intelligence Machine. We have noted in our Investigator's reports (for details see paragraph 41) that there is a weakness in the centre and that the Agencies need stronger co-ordination. The Committee believes that the person appointed to this joint position will have to be at least as senior as the Agency Heads in order to be able effectively to co-ordinate the Agencies. It is for consideration that the post should be filled from within the intelligence community rather than the Diplomatic Corps. We believe that the joint position of JIC Chairman/Intelligence Co-ordinator will only be successful if the post holder has sufficient authority and influence to formulate and implement policy, as well as offer guidance to the Agencies.

Defence Intelligence Staff

24. The Committee notes that the Joint Air Reconnaissance Intelligence Centre (JARIC), now joined with Military Survey to form the Defence Geographic and Imagery Agency (DGIA), is controlled by the Chief of Defence Intelligence (CDI). JARIC is tasked by the MoD to support the intelligence requirements of operational commanders, military staff and the DIS. Whilst JARIC does not fall within the remit of the JIC and the National Intelligence Requirements, CDI stressed in evidence to the Committee that he and the Commanding Officer at JARIC used the JIC's requirements to guide its work. However, in the MoD's report into Kosovo "Lessons from the Crisis"11, the lack of Intelligence, Surveillance, Target Acquisition and Reconnaissance (ISTAR) capability was highlighted. It is also important to remember that the UK's modern precision weapons all need highly accurate target data. This is an area where strategic assets can play a role.

25. In evidence to the Committee CDI stated that the Agencies were using more and more of JARIC's product as part of their work12. In the Committee's view JARIC is a national resource and could be better tasked from the national level. This would mean that the JIC National Intelligence Requirements paper would act as the prioritising document and that JARIC would then serve the national requirement and its performance would be assessed by the JIC. This would not mean a degradation in the product that JARIC produces for operational commanders, as support to UK armed forces and operations is ***.

The Committee believes that this administrative move would recognise that JARIC supports national interests and therefore opens the way for JARIC to be funded in part from outside the MoD budget.

26. During our visit to the US, we were able to meet with the Directors of the National Reconnaissance Office and the National Imagery and Mapping Agency. From our discussions with them on *** it became apparent that *** will be upgraded ***.

 

We believe that the UK needs to be *** to ensure that the UK remains ***.

***

***

***

***

***

***

***

***

***

We believe that the UK cannot afford not to be involved in this work. We will continue to monitor this matter.

Personnel and Management Issues

Recruitment and Retention

27. The Agencies confirmed that they have been able to recruit sufficient main stream staff but they were still having difficulty recruiting specialist staff, such as IT and electronics specialists. The Security Service stated that it was employing more casual staff on short contracts to ***. The Service also was having retention problems with staff after 3-4 years, in common with other Government Departments.

28. The Agencies have continued to consult their staff over a number of issues, by means of staff surveys. The Committee notes that these have generally shown satisfaction with the Agencies as employers. In the recent staff survey in the Security Service, the main complaint was that a significant number of the staff did not believe that they were paid enough for their work. In GCHQ's case the staff expressed concerns about management, team working/communications and pay. The Committee notes that the senior managers of both Agencies are taking steps to address these issues. The report by Lt Gen. Sir Edmund Burton into GCHQ's NAP also highlighted the need for better training and career planning within the Agency to ensure that it has the correct skills base in the future. We believe that the staff surveys and the more recent Burton report were valuable, and we shall continue to monitor them, and management responses to them.

Employment Tribunals

29. In our 1997-98 Report13 we recommended that a dedicated and specially cleared Employment Tribunal be established to hear Agency staffs' cases when they could not appear before a normal Employment Tribunal for national security reasons. Last year the Government amended the Employment Relations Bill in the Lords to allow the Agencies' employees the opportunity to attend a specially constituted Employment Tribunal. The Committee, which was not consulted about the drafting of the amendment, was concerned that the Government would have the ability to exclude the applicant and/or their legal representative from all of the proceedings. Whilst the Secretary of State for Trade and Industry did not accept the amendments tabled in the Committee's name, which wished to limit the applicant's exclusion to only part of the proceedings, an amendment was later accepted allowing an applicant to make a statement prior to their exclusion. The Secretary of State also offered us the opportunity to comment on the draft Rules of Procedure covering the Employment Tribunals (National Security).

30. In our Report last year14, we said that, if the Government required special powers of exclusion on grounds of national security, we believed that the Commissioners should examine the use of those powers. We recommended that you require any Minister exercising this power to submit their direction to the Commissioners for their consideration. We also recommended that this provision be incorporated in legislation. Our reaction had been based on our view that the Act, as amended, did not fully meet the objective of the Committee because access to a tribunal was potentially severely limited and reliance was placed on Judicial Review as the only means of redress by an excluded applicant.

31. In the response to our Report15, the Government stated that it had "legislated quickly to allow all staff of the Agencies to take grievances to an employment tribunal. This followed the Committee's recommendation last year". The response continued "The Government is therefore disappointed at the reaction of the Committee to this prompt improvement in the rights of members of staff of the Agencies". The response addressed the issue of the involvement of the Commissioners as follows "In view of the Committee's recommendation, the Government will consider, in the light of experience of the operation of Ministers' powers of exclusion, whether there would be any benefit from involvement by the Commissioners". The Government once again stated that if an applicant wished to challenge a Minister's decision to exclude them "judicial review would provide an immediate remedy".

32. During the debate on the Committee's Report16 on 22 June 2000, the Foreign Secretary stated that the Department for Trade and Industry intends "to consult the ISC next month on draft regulations, and I hope that that will enable us to make progress"17. As we prepare this Report for you, we have not yet been given the draft Rules of Procedure for the Employment Tribunals (National Security). This delay in producing the regulations for the operation of the tribunal is not "a prompt improvement in the rights of members of staff in the Agencies". The Committee expects to be consulted on the Rules of Procedure and to see them carried into effect without any further delay.

Efficiency Advisor

33. In our Report last year we requested that the Efficiency Advisor's reports be copied to the Committee. The Government gave us a copy of the Efficiency Advisor's first report, dated April 1999, in June 2000, over 14 months after it was produced. We have just received a copy of the Efficiency Advisor's second report dated April 2000. The Committee hopes that further reports will be passed to us in a timely manner. These reports build on the areas of efficiency identified in the Single Intelligence Vote Review and the Efficiency Advisor's first report. The first report recommends that the Agencies "need to consider on a consistent basis and at a strategic level the potential for synergies with other parts of UK public service engaged in analogous work, notably the law enforcement agencies". We have not examined these reports this year, but it will be part of our programme of work for next year and we will report to you in due course.

34. We noted with interest that the Agencies now have formal Public Service Agreements (PSA), which are currently being revised. One of the major difficulties the Agencies have in producing a workable PSA is in defining the measurable outputs of the organisations. While the Agencies are working to develop sensible but challenging measures that they can then be assessed against, some of those developed to date seem unrealistic. We support the development of sensible, quantifiable measures, but believe that more work is needed in this area.

Commissioners and Warrants

35. In our last Annual Report18, we requested sight of the confidential annexes to the Commissioners' reports to the Prime Minister under the Interception of Communications Act 1985, the Security Service Act 1989 and the Intelligence Services Act 1994. In the Government's response19 you declined our request, stating that the Government would seek to provide the Committee with the information necessary to satisfy any particular concern the Committee had. This request for the annexes did not mean that the Committee wished in any way to scrutinise the warrants, which is the sole task of the Commissioner, nor would the Committee wish to have unnecessary access to operations or technical methods. But we do wish to establish how mistakes were made and to oversee the action the Agencies have taken to ensure the errors do not occur again. We still believe that it is important for us to see the classified annexes to be able to establish the corrective action that the Agencies have introduced following the Commissioners' identification of errors and thus fulfil our statutory requirement to oversee the Agencies' administration processes.

36. Lord Nolan and Lord Justice Stuart-Smith retired as Commissioners earlier this year. The Committee appreciated the opportunity to discuss their work and we recognise the serious and conscientious approach that they both brought to their important tasks. We look forward to an early opportunity of meeting their successors Lord Justice Swinton Thomas and Lord Justice Simon Brown.

The Investigator

37. The Committee's Investigator completed two substantial reports for us during the year. In November 1999, he completed his report into the Agencies' Security Policies and Procedures. Additionally, as part of this, the Investigator produced a short report on the Agencies' use of laptop computers and the security issues arising. We then tasked him to look at the Agencies' IT Systems and Strategies. The aim of this latter report was to examine the Agencies' record of IT procurement, in light of the prominent IT failures within other areas of the public sector, and establish the views of the Agencies' customers on the IT connectivity between them and the Agencies.

Security Policies and Procedures

38. Since its establishment the Committee has maintained a keen interest in the security policies and procedures of the Agencies. In his report to the Committee the Investigator set out to establish what progress had been made in the areas which concern us most, notably personnel and IT security. The Committee:

a) notes that the Cabinet Office provides the policy framework for protective security, but Departments, including the Agencies, manage their own security risks. The Security Service is pursuing what it believes is scope for significant improvements in overall UK security standards. The Investigator told us that in recent years the Agencies have taken significant steps to improve their overall security and have further promising measures in train;

b) notes that the Agencies are working on methods of psychological testing to identify adverse character traits as a supplement to the DV process. However, the cases ***

have highlighted the importance of personnel security and of identifying individuals with problems at the earliest possible stage. We recommend that a more co-ordinated and rigorous project-based approach is adopted, building on US experience;

c) notes that the Annual Security Appraisal (ASA) exercise for all DV'd staff provides a valuable method of identifying emerging problem cases. We recommend that all three Agencies adopt an ASA procedure based on the GCHQ approach as representing best practice;

d) recommends that the periodic (generally 5-yearly) DV review process is strengthened to detect lifestyle mismatches and the possession of unexplained wealth by holding more DV review interviews at the subject's home;

e) notes that each of the Agencies maintains its own small team of vetting officers. While it might appear that a common pool would be more efficient, we agree that there are strong grounds for retaining individual Agency ownership of the vetting process;

f) notes that GCHQ's 7-point Risk Rating system provides a systematic way of identifying character defects and measuring the personnel security "health" of an organisation. We recommend that SIS and the Security Service give serious consideration to adopting it as best practice, despite their belief that this is an unnecessary addition to their procedures;

g) notes that the Agencies are seeking to improve security by reducing the volume of paper records and as far as possible eliminating ***.

These steps make it harder for a spy or a person with malicious intentions to remove classified material. ***

***

***

and deterring anyone who may be tempted to breach the "need to know" principle. We were told that the SIS and Security Service plan to bring in *** as soon as possible and it may be applicable to other organisations. By contrast, GCHQ are seeking to control access to information through the establishment of ***

We accept that ***

***

***

***; and

h) believes that it would be a cause for serious concern if the high levels of security in the Agencies were not matched by correspondingly high standards in the Departments receiving their products. We recommend that where best Agency security practice is identified, it should be considered for application by the wider UK DV community.

Information Technology in the Agencies

39. The Investigator's wide-ranging review of Information Technology in the Agencies covered four interlocking elements:

a) the Intelligence Community's central IT policy mechanisms and how these affected IT developments in the Agencies;

b) the Agencies' internal IT systems;

c) the secure electronic communications systems linking the Agencies, their customers and other organisations; and

d) IT developments in the Agencies' key customers, and the extent to which IT developments in the Agencies and their customers affected each other.

40. Thus the investigation embraced IT developments throughout the UK Intelligence Community. It included an examination of each Agency's performance against its IT plans during the past decade. In addition, at the Committee's request, the Investigator undertook a detailed review of David Shayler's public allegations of IT mismanagement in the Security Service, (see paragraph 41 e).

41. The review of IT developments in the three Agencies since 1990 concluded that the overall record of each is creditable. There have been significant problems with administrative IT projects in each Agency, while some core business IT projects have gone through difficult patches. But these were no more than might be expected in comparable public or private sector organisations. The Committee:

a) notes the concerns about ***
***
***
***
The Committee is awaiting a Security Service memorandum on the subject;

b) notes that there were worries in the Community about a "void at the centre", in particular the feeling that the JIC should play a more active role in developing IT issues. The Investigator concluded that the central IT machinery was not appropriately structured to support Community-wide developments such as the UK Intelligence Messaging Network (UKIMN) and its *** development, ***. We are concerned that a proper business case had not been produced *** (which is as yet not funded centrally) and that it had still to find agreement on the right balance between security and functionality. The Committee notes that the Chairman of the JIC/Intelligence Co-ordinator is now playing a more active role in the co-ordination of community-wide IT issues, ***
***
However, we recommend that a Project Manager is assigned to this project;

c) notes that there are specific concerns about ***
***
***;

d) notes that the threat from computer viruses and worms is not receding and may increase; ***

***
***;

e) notes that the Investigator carried out a detailed examination of David Shayler's allegations about Security Service IT incompetence in the 1990s. He concluded that Shayler's allegations can be discounted as unjustified, that the situation was not as Shayler described and that the Service's record on IT is creditable;

f) notes the Investigator's conclusion that the Agencies' current IT planning is well integrated with their business strategies, and that they are taking account of lessons learned, in particular the need to involve users more closely in projects and have an effective change management strategy. However, there has been a historic weakness in carrying out formal Project Implementation Reviews in SIS and the Security Service, both of whom are now taking appropriate action. The Committee accepts these findings, but in the case of GCHQ it will be considering the broader issues raised subsequently in Lt Gen Sir Edmund Burton's "Review of GCHQ New Accommodation Project". The Committee is concerned that IT planning is not adequately integrated within the New Accommodation Programme. This is further covered in paragraph 58;

g) notes that the Agencies are still unable to offer the market pay rates needed to retain or recruit all the skilled and specialist IT staff they require. This is due at least in part to internal policies, but also to HM Treasury rules which forbid switching money between staff and non-staff costs. The result is an excessive (and expensive) reliance upon the long-term use of external, contract staff. We recommend that this situation is reviewed to ensure that the Agencies can provide the best value-for-money service; and

h) there is good co-operation between the Agencies on IT issues and mutual support where appropriate. But we recommend that there should be more active interchanges between the Agencies and the DIS, their largest single customer, in particular to resolve outstanding *** relating to the storage and use of Agency products.

 

Laptop Computers

42. The loss (and subsequent recovery) and theft respectively of SIS and Security Service laptop computers led the Committee to ask questions about the Agencies' security policies for portable digital storage equipment. We commissioned a short report by the Investigator on the basis of which the Committee:

a) recognises that laptops are a necessary element in Agencies' work;

b) supports the basic assumption that on occasion it will be necessary for laptop computers to be taken out of an Agency. The Agencies are clearly aware of the risks involving laptop computers off their premises and have appropriate protection measures in place;

c) recommends that where there is a loan pool of laptops, they must be issued by the competent IT organisation for a specific period on a "recall and wipe" basis;

d) recommends that when laptops are issued for extended personal use there must be a procedural system to ensure the laptop's contents are monitored regularly to ensure there is no excessive build-up of classified information and to remind the user of their security obligations;

e) notes that there is an imperative requirement for further development of Kilgetty Plus (a hardware/software kit developed by CESG (Communications-Electronics Security Group, GCHQ) which provides complete technical security) to ensure that it keeps up with hardware and software developments. We recommend that robust funding arrangements are put in place to cover this work. Assuming this is done, the Committee:

f) recommends that Kilgetty Plus ***
***

Security checks on entry and exit can verify that the laptop is ***. Special arrangements, ***, will be necessary to cover laptops ***;

g) notes that Biometric techniques (e.g. fingerprint recognition) may some day prove useful in protecting laptops against attack, but the technology is far from mature; and

h) recommends that Agencies ensure that their security procedures are laid out as clearly as possible and regularly reviewed, that staff know whom to consult in case of doubt, and that there are periodic publicity campaigns on the importance of observing the set procedures.

Expenditure Issues

Annual Budgets

43. Following on from our Report last year and the Government's response to it, the Committee met the Heads of the three Intelligence and Security Agencies. At that meeting it was agreed on all sides that, subject to Ministerial approval, the budgets for the individual Agencies could be made public next year for the first time as part of the process of increasing transparency. This will allow the figures to be published in the new Government Resource Account method. However we understand that at present Ministerial approval is not forthcoming for this. The Committee would not wish to see the figures published annually as this would indicate the funding trends for the Agencies, which would not be in the National Interest. We request that you give the issue of publication further consideration.

44. The Agencies' budgets are shown below, with the figures for 2001/02 onwards taken from the Comprehensive Spending Review announced on 18 July 2000. The individual Agency budget and expenditure figures are at Appendix 4. The Committee has noted that the figures given are under resource rather than cash accounting and that, due to the different treatment of civil estate costs under resource accounting, the annual budgets have appeared to increase significantly. The Committee was told that the Single Intelligence Vote has increased by just under 10%, largely to fund GCHQ's New Accommodation Programme.

All figures £m (Cash)
 
SIS
GCHQ
Security Service
SIV TOTAL
1994/95
***
***
***
855.1
1995/96
***
***
***
780.8
1996/97
***
***
***
740.7
1997/98
***
***
***
703.3
1998/99
***
***
***
685.7
1999/2000
***
***
***
768.9
2000/2001
***
***
***
802.8
2001/2002
***
***
***
876.0
2002/2003
***
***
***
885.9
2003/2004
***
***
***
940.9

Notes:

1. These figures exclude the costs of the SIS and Security Service pension schemes.

2. 'Exceptional' costs associated with the moves of SIS and the Security Service into Vauxhall Cross and Thames House respectively are included in the earlier years.

3. Figures for 1998/99 onwards show a net reduction of around £14m, reflecting accounting adjustments with the introduction of capital charging for property.

4. The figures for 1998/99 are the final outturns for the period, the figures for 1999/2000 are provisional outturns.

5. The figures for 2000/2001 to 2003/2004 are taken from the Comprehensive Spending Review announced in July 2000 and are the new resource account. They include provision for the GCHQ New Accommodation Programme.

45. We examined the budgets for the three Agencies, both in cash terms and the new, draft resource form, with the NAO. Our biggest concern was the GCHQ Resource Account, which showed that GCHQ had not developed a suitable system of locating, tracking and agreeing ownership of its assets. We noted that GCHQ is working with the Valuation Office to ensure that its asset register is current and that the assets listed are identified. The SIS budget also increased this year as a result of the PES transfer from the FCO to cover the accommodation abroad and a share of FCO infrastructure costs at missions and in the UK. This means that the Service now pays for what it uses.

46. All three Agencies submitted bids for additional funding within the Comprehensive Spending Review (CSR) to enable them to maintain the current service they provide and to take on additional work, such as funding for the National Technical Assistance Centre (NTAC). The Director General of the Security Service confirmed that next year was going to be difficult. He had ***

***

***

Additional work requiring new money was bid for as policy options, in which the Government was invited to choose which options it wanted the Service to pursue. These included ***

***

***

47. The Chief of the SIS stated that, ***

***

***

***

***

***

***

***

***

***

 

48. We are also concerned that GCHQ has to find additional funds from its already stretched budget to fund the transition costs for its move into the New Building at Benhall. This additional burden of an average of *** per annum for the next five years is forcing the Director to cut back on both operational and research spending. In evidence, the Director told us that GCHQ was "***

***

***

***

***

***

***

***

***

***".

49. The Committee believes that the Government needs to consider carefully these requests, particularly if it wishes the Agencies to do more work in these areas, which include additional work against serious crime and drugs, Critical National Infrastructure Protection and support to the Government Technical Assistance Centre. We will review the individual Agency budgets to establish that the Agencies are not being overstretched by being asked to do more for less. We are also very concerned about the budgetary pressure that is being placed on GCHQ.

***

50. ***
***
***
***
***
***
***
***
***
***

 

GCHQ New Accommodation Project20

51. In our last Annual Report21 to you, we stressed "the challenge of ensuring that the project [GCHQ New Accommodation Project] is brought in on time and to cost with no interruption to operating capabilities during this reorganisation is a daunting one, which will demand the highest levels of management and technical skills". We set out the key principles for managing a project such as this:

i. Initial estimates should be adequately drawn up.

ii. Objectives including time and cost targets should be set at the earliest opportunity.

iii. The cost of consultancy work should be set against a pre-determined target percentage and be subjected to rigorous competitive tendering.

52. We were particularly concerned because we saw the GCHQ NAP as a much more complex and critical project than the other two new headquarters, in which cost had significantly exceeded early estimates. We were determined to warn against a repeat of this with the new GCHQ building.

53. In December 1999/January 2000 we learnt that while the negotiations with the PFI preferred bidder were slowly progressing, GCHQ had revised the transitions costs of the move from the two existing sites to the new building. We understood that Ministers would be asked to authorise transition costs between four and ten times the original estimates. We therefore recalled with interest the Government's statement in its response to our Annual Report "GCHQ has sought to ensure that the maximum likely costs have been identified (and included in value for money assessments) before Ministers are invited to reach a final decision on whether or not the project should proceed"22.

54. We visited GCHQ on 28 February 2000 to discuss the NAP with GCHQ managers and to meet the NAP team. During the course of the presentation we learnt that, while the negotiations with the PFI bidder had proceeded successfully, the estimated transition costs (which are not part of the PFI package) had now risen from the approximate £60 million given previously in evidence23. We were told that if GCHQ conducted the move in the way it had initially wished, with a significant element of duplication and parallel running, the cost would be approximately *** million. However, GCHQ had revised its transition method and an estimate of *** million was put to the Treasury and Cabinet Office. Further work had been done on this plan and the cost was brought down to an estimated *** million. This was over four times the original estimate.

55. We also noted that by December 1999 the net present value of the PFI contract had risen to £540 million. This, we were told, compared favourably with the revised (September 1999) Public Sector Comparator Benchmark of £763 million.

56. The Chairman wrote to you and the Foreign Secretary on 1 March to express the Committee's concern at the scale of the cost increases. The Foreign Secretary replied on 3 March stating that the only alternative to the Benhall PFI proposal that would substantially reduce the costs of transition would be to continue on their two existing sites. This two-site option had been estimated to cost £842 million (net present value) while the Benhall PFI and transition costs was estimated at £793 million (net present value). The Foreign Secretary stated that the Benhall PFI "is therefore substantially cheaper, as well as offering considerably greater efficiency and economy in operation. The Chief Secretary [to the Treasury] and I are therefore satisfied that the Benhall PFI proposal continues to provide better value for money". However, the Foreign Secretary admitted "the detailed work to identify the full costs has certainly been undertaken later than it should have. But it has been carried out before we took a final decision that the single site PFI option (including transition costs) represented the best value for money".

57. The Foreign Secretary was also under pressure to take that final decision and authorise GCHQ to sign the contract with the PFI consortium. The PFI consortium needed to start preliminary work in March and was content to do so without contract signature, provided they were assured that the Foreign Secretary had approved the project. This meant that the Foreign Secretary had to approve the project in early March.

58. In the light of the increase in cost, the Secretary of the Cabinet, Sir Richard Wilson, invited Lt. Gen. Sir Edmund Burton, formerly Deputy Chief of Defence Staff (Systems), to conduct a review of the management of the project. The aim of the review was to establish the reasons why a substantially based cost estimate and options for the technical decant emerged only late in 1999; and, whether the arrangements now in place for managing the project as a whole are effective and provide confidence that it will be implemented successfully. The Committee welcomed this review, which was concluded on 1 June 2000 and passed to us on 12 June 2000. The review confirmed in the clearest terms the scale of the challenges that the programme presents GCHQ, and the range of high risks that could affect its successful completion.

59. We discussed the review with the Foreign Secretary on 21 June 2000, during which we stressed again the critical importance of high quality project management skills within GCHQ to ensure that the Benhall PFI and the transition were completed within budget, on time and with minimum disruption to the service. We also met Sir Edmund on 19 July. The Committee is in substantial agreement with his conclusions and believes that Sir Edmund can play a very important role in the NAP to facilitate its successful completion and we recommend that he remains involved in an advisory capacity.

60. The Committee believes that the NAP represents a very substantial additional responsibility to the already demanding responsibility of managing the normal operations of GCHQ. It is essential that this is recognised and that the Director gets the support necessary for this dual responsibility.

61. Work is in hand in the NAO to examine the arrangements surrounding the PFI contract and we look forward to seeing their report in due course.

 


3. Cm 4532, November 1999.

4. Evidence from GCHQ, May 2000.

5. Evidence from the Chief of SIS, May 2000.

6. Evidence from the Director of GCHQ, May 2000.

7. Evidence from the Director General of the Security Service, April 2000.

8. Evidence from the Cabinet Office, March, April, May 2000.

9. Evidence from Cabinet Office, April 2000.

10. Evidence from the Cabinet Office, May 2000.

11. Cm 4724, June 2000.

12. Evidence from the Chief of Defence Intelligence, March 2000.

13. Cm 4073, October 1998.

14. Cm 4532, November 1999.

15. Cm 4569, January 2000.

16. Cm 4532, November 1999.

17. Hansard 22 June 2000 Col 538.

18. Cm 4532, November 1999.

19. Cm 4569, January 2000.

20 The New Accommodation Project became the New Accommodation Programme in early 2000 to encompass both the PFI and the transition.

21 Cm 4532, November 1999.

22 Cm 4569, January 2000.

23 Evidence from GCHQ, June 1999.


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Prepared 2 November 2000