Attachment 2
CAPITAL INVESTMENT STRATEGY: DEPARTMENT FOR
INTERNATIONAL DEVELOPMENT
INTRODUCTION
1. This paper sets out DFID's capital investment
strategy. It comprises four sections:
— the first explains DFID's key objectives;
— the second explains the role of capital
expenditure in DFID;
— the third explains the investment
strategy and its links to DFID's objectives and efficiency strategy;
and
— the fourth summarises the procedures
and systems used within the Department to set priorities, take
investment decisions, manage capital projects and evaluate them
on completion.
DFID'S OBJECTIVES
2. DFID's aim is the elimination of poverty
in poorer countries. DFID's key objective is the promotion of
sustainable development and in particular by:
(i) building development partnerships with
poorer and transition countries;
(ii) working more closely with the private
and voluntary sectors, and the research community;
(iii) working with and influencing multilateral
development organisations;
(iv) promoting consistent policies affecting
poorer countries; and
(v) using our knowledge and resources effectively
and efficiently.
THE ROLE
OF CAPITAL
EXPENDITURE IN
DFID
3. DFID is not a capital-intensive organisation.
Under Government Accounting conventions, two types of capital
expenditure are recognised within DFID. The first is "traditional"
capital expenditure financed from the Government's Investing in
Britain Fund. This expenditure is limited to providing the essential
infrastructure needed to support activity associated with the
formulation of policy and the administration of the aid programme
and of overseas pensions. A record of capital assets arising from
such expenditure is maintained in the Department's Asset Register
and details are published in the resource accounts and the National
Asset Register. The second type of capital expenditure relates
to that portion of the aid programme invested in international
financial institutions (financial transactions). Both types of
expenditure are discussed below. International Financial Institutions
are discussed in greater detail in Chapter 4 of DFID's Departmental
Report for 1999. It should be noted that DFID grants, whether
through bilateral or through multilateral channels, that contribute
directly to fixed capital or human capital formation in developing
and transition countries are scored as current expenditure under
Government Accounting conventions and are not discussed further
in this report.
ADMINISTRATIVE CAPITAL
EXPENDITURE FROM
THE INVESTING
IN BRITAIN
FUND
4. DFID maintains a modest stock of capital
assets to suport the administration of the aid programme and overseas
pensions. In recent years expenditure in this area has been largely
on the development and maintenance of information systems and
the provision of office accommodation, equipment and furniture.
A particular focus has been on modernising or enhancing systems
to provide the information necessary to track policy objectives
and outputs; to help ensure that value for money is achieved from
the aid programme; to help ensure that financial propriety is
maintained; and to increase administrative productivity. We estimate
that the net value of capital assets supporting the administration
will be in the region of £14 million at the end of the last
financial year. Details are provided in table one (below).
Table One
VALUE OF DFID ADMINISTRATIVE ASSETS
|
| £ million (rounded) | Cost
| Accumulated depreciation
| Net book value |
|
| Freehold buildings | 3.7
| (0.4) | 3.3
|
| Vehicles | 0.8
| (0.5) | 0.3
|
| Office and domestic furniture and equipment
| 4.0 | (2.0)
| 2.0 |
| IT equipment | 5.3
| (2.6) | 2.7
|
| IT systems | 6.0
| — | 6.0
|
| Total | 19.8
| (5.5) | 14.3
|
|
INVESTMENT IN
INTERNATIONAL FINANCIAL
INSTITUTIONS (NOTED
AS "FINANCIAL
TRANSACTIONS")
5. DFID recognises the unique contribution the International
Financial Institutions (including the Multilateral and Regional
Development Banks) make to development and the attainment of the
International Development Goals, not least through the scale of
their resources and the influence they can exercise over the policies
of borrower governments. At present around 50 per cent of the
development programme is spent through multilateral channels of
which 24 per cent is distributed through International Financial
Institutions. The White Paper on International Development envisages
an increased effort by the entire international community for
the elimination of poverty aimed at implementation of the International
Development Goals. It sees the multilateral development institutions
as key players along with bilateral donors, the private sector
and civil society.
6. To reinforce the above aim, DFID has made contributions
to the capital of a number of international financial institutions
involved in aid activity. On the advice of HM Treasury, the paid-in
portions of these contributions are accounted for in our resource
accounts as fixed asset investments on the premise that we are
entitled to the return of monies if we so request (although in
practice this is highly unlikely). Under resource accounting,
the value of individual investments is based on the lower of cost
or net realisable value of subscriptions made. We estimate that
at the end of the current financial year the value of such investments
will be in the region of £570 million. Details are provided
below in table two.
Table Two
DFID INVESTMENTS IN INTERNATIONAL FINANCIAL INSTITUTIONS
|
| International Institution | Value of paid-in capital
subscription, £ million
equivalent (rounded)
|
|
| African Development Bank | 18.6
|
| Asian Development Bank | 27.4
|
| Caribbean Development Bank | 6.2
|
| European Bank for Reconstruction and Development
| 172.4 |
| Inter-American Development Bank | 21.1
|
| International Bank for Reconstruction and Development
| 256.5 |
| International Finance Corporation | 72.9
|
| Multilateral Investment Guarantee Agency |
3.1 |
| Total | 578.2
|
|
INVESTMENT STRATEGY
(1) Administrative Capital Strategy
7. No asset sales or PFI projects are planned. Figures
in table 3 over the three year period differ from those agreed
during the Comprehensive Spending Review of £2.1 million,
£2.2 million and £2.3 million to reflect latest forecasts.
Funds additional to those agreed during the Comprehensive Spending
Review will be found from within DFID's overall budget allocation.
The figures in respect of capital investment may change when final
decisions are taken on relocating DFID's London HQ although it
is too early to estimate the costs at this stage (see paragraph
14).
Table Three
OVERALL INVESTMENT STRATEGY: ADMINISTRATIVE CAPITAL EXPENDITURE
|
| £ million (rounded) | 1998-99
| 1999-2000 | 2000-01
| 2001-02 |
|
| Gross investment | 4.5
| 5.3 | 6.8
| 4.2 |
| less depreciation | (2.0)
| (3.1) | (3.2)
| (2.3) |
| Net capital investment | 2.5
| 2.2 | 3.6
| 1.9 |
|
8. On the administrative side, the focus will continue
to be on modernising information systems to meet the challenges
of the new millennium while maintaining other assets at current
levels. The increase in our capital stock will almost entirely
be concerned with information systems.
Table Four
PLANNED CAPITAL EXPENDITURE 1999-2000
|
| £ million | 1999-2000
| 2000-01 | 2001-02
|
|
| Information systems and hardware | 3.6
| 5.2 | 2.7
|
| Furniture and office equipment | 0.6
| 0.4 | 0.3
|
| Overseas building maintenance | 1.0
| 1.0 | 1.0
|
| Other including vehicles | 0.1
| 0.2 | 0.2
|
| Total (excluding relocation of HQ) | 5.3
| 6.8 | 4.2
|
|
INFORMATION SYSTEMS
9. High quality and modern information systems are a
pre-requisite to improved efficiency and this will continue to
be the main focus of capital expenditure within the Department
over the next three years. Planned modernisation and enhancements
to the Department's information systems over the period include:
(i) introducing resource accounting and budgeting. This
includes the introduction of activity based management software
and techniques which should help us identify new areas for efficiency
measures;
(ii) a DFID intranet was made available last year to staff
in the UK. This will be made available to some staff overseas
in the later part of this year in conjunction with providing them
with on line access to the new accounting system;
(iii) the development of a new Performance Reporting Information
System for Management (PRISM), which will in particular enable
us to take a clear view of the performance of our project portfolio;
(iv) access to the internet to all staff in the course
of the next 12 months to promote information sharing and lesson
learning within DFID;
(v) the redevelopment of DFID's account code in order
to replace it with something that balances relative simplicity
and the flexibility to react to changes in DFID policy and structure
over the coming years.
10. Maintaining and improving DFID's information systems
will also help us to achieve and/or demonstrate how we have met
the following key administrative targets:
(i) to reduce central administrative and support costs
as a percentage of aid policy and administrative policy by 1 per
cent or approximately £0.5 million per year;
(ii) to maintain and improve the performance of the bilateral
aid programme by increasing the proportion of project objectives
judged likely to be fully or largely fulfilled, based on scores
allocated in rigorous project completion reports, from 64 per
cent to 75 per cent by 2002. Introducing and testing a new system
for scoring ongoing projects during 1999-00;
(iii) to maintain each year the unit costs of administering
overseas pensions at a level in line with or below the costs of
inflation as defined by Treasury deflators;
(iv) to reduce sickness absence rates subject to the conclusions
of an audit of the actual level and pattern of absence in the
Department. Formal targets will be agreed with the Cabinet Office
by June 1999;
(v) to pay at least 95 per cent of undisputed bills within
30 days, or other agreed credit period;
(vi) to reply to 100 per cent of ministerial correspondence
within 20 days of receipt;
(vii) to work on developing an overall indicator of efficiency
during 1999-00; and
(viii) to regularly and systematically review services
and their delivery over a five year period as required by the
Government's "Better Quality Services" initiative.
FURNITURE AND
OFFICE EQUIPMENT
11. DFID's ongoing programme of replacing obsolete furniture
and office equipment in our East Kilbride office and overseas
offices should remain fairly constant at around £3-400K.
But there will be a one-off major furniture replacement exercise
in London (the cost of which has yet to be determined) when we
relocate to a new Headquarters building in 2001. This will be
necessary to make the most efficient use of space in the new building
and to properly accommodate personal IT equipment on desktops.
There will be a small fall of some £200K in the costs of
the ongoing programme of replacing obsolete furniture as a result
of the exercise in 2001 and 2002. We expect replacement costs
to return to their former level in real terms shortly thereafter.
OVERSEAS BUILDINGS
MAINTENANCE
12. We rent office and domestic accommodation for staff
working overseas in a number of locations. We have no plans to
become a major holder of property overseas. The exception is in
Harare where DFID owns three domestic houses (total value £300K)
and where there is a strong value for money case for doing so.
We have no plans for further purchases.
13. Following the establishment of DFID as a separate
government department we have taken responsibility for aspects
of overseas office accommodation from the FCO. In large measure
this comprises a need to contribute towards meeting the relevant
capital costs of refurbishing office accommodation in FCO owned
High Commission and Embassy buildings where we are co-located
with the FCO. Before meeting such costs we will ensure that there
is a strong value for money case for doing so and will consider
alternative options. Nevertheless, we believe such costs may be
high and consider it prudent to make a provision of £1 million
per year over the period.
RELOCATION OF
LONDON HQ
14. We need to move to a new London Headquarters in 2001
as the lease expires on our present building in Victoria Street.
The options for this, including PFI, are currently being considered
and costs cannot yet be determined. They will be factored into
future versions of our investment strategy once determined.
(ii) Strategy for capital contributions to the International
Financial Institutions
15. DFID's planned expenditure on financial transactions
includes paid in capital of £45.41 million over the three
years 1999-00 to 2001-02. This will increase DFID's asset base
as recorded in DFID's resource accounts and is discussed in this
section of the report. Table five details planned contributions
of paid-in capital to support capital increases to the Multilateral
Investment Guarantee Agency (MIGA), the African Development Bank
(AfDB) and the European Bank for Reconstruction and Development
(EBRD). The first two of these commitments remain subject to Parliamentary
approval, which will be sought during 1999. The table does not
cover DFID contributions to concessional replenishments operated
by the International Financial Institutions, which are included
under financial transactions in the Comprehensive Spending Review
but which are not classified as capital expenditure for the purposes
of the Capital Investment Strategy.
Table Five
CURRENT FORECASTS OF PAID-IN CAPITAL CONTRIBUTIONS TO
THE IFIs
|
| £ millions | 1999-2000
| 2000-01 | 2001-02
|
|
| Current forecasts | 13.12
| 15.14 | 17.15
|
| of which | |
| |
| Multilateral Investment Guarantee Agency[7]
| 1.5 | 1.5
| 1.5 |
| African Development Bank and Fund[8]
| 0.9 | 0.9
| 0.9 |
| European Bank for Reconstruction and Development[9]
| 10.72 | 12.74
| 14.75 |
|
16. The international development system is complex.
The financial crisis which has affected Asia and other regions,
has increased this complexity and has thrown into sharp relief
the role of International Financial Institutions within the overarching
international financial architecture. The financial crisis has
thrown up a range of issues about the structure and functioning
of the international financial system some of which go beyond
DFID's Departmental responsibilities. Nevertheless, DFID has an
important role in helping to ensure that the common interest in
sustainable development which benefits the poorest groups is taken
account of in discussions on global architecture. To this end,
DFID promotes good co-ordination between the International Financial
Institutions so that reform programmes at the country and regional
level are balanced between short-term crisis measures and medium
term structural reforms, and that they take account of the interests
of poor and vulnerable groups.
17. In the light of the international financial crisis,
the Executive Boards of the International Bank for Reconstruction
and Development (IBRD) and the International Financial Corporation
(IFC) have been asked to explore appropriate options to ensure
they are able to respond quickly and effectively to the development
needs of their members. We await a report from a team of Four
Wise Men who the Bank has appointed to review the capital adequacy
of both IBRD and the IFC. Capital adequacy is being reviewed in
the light of the Bank's response to financial crises around the
world, and shareholders' views of the role of these institutions
in such circumstances. In the case of the IBRD, although lending
levels and portfolio risk have increased substantially over the
past year, there are mixed signals about whether a capital increase
(probably with a high paid-in element) is required. In the case
of the IFC, a request for a capital increase seems more likely,
but this could be justified only if shareholders agreed an enhanced
role for IFC in providing support for financial restructuring
in middle-income countries. Historically, IFC capital has been
on the basis of fully paid-in rather than a mix of paid-in and
callable capital.
18. Of the other Regional Development Banks, a General
Capital Increase is not in immediate prospect for either the Inter-American
Development Bank (IBD) or the Caribbean Development Bank (CDB).
In the case of the Asian /Development Bank (AsDB), however, there
is recognition that its response to the Asian financial crisis
may have brought forward the need to assess capital adequacy.
The Bank is looking at this issue. Our expectation is that a capital
increase will be required in the medium term, and discussions
may commence in 2001 with a target of having a GCI in place by
2003.
PROCEDURES AND
SYSTEMS OF
CONTROL
Administrative capital expenditure
19. DFID has mature systems which ensure that capital expenditure
is properly controlled and represents value for money. They are
under continuous review for possible improvements and consist
largely of the following:
(i) Appraisal and evaluation—all high value
capital projects are subject to formal appraisal along the lines
of Treasury guidance and should show a positive net return. Major
projects are also subject to evaluation post completion to ensure
that objectives have been met and to identify any lessons that
might be learned for the future. Some projects are also subject
to evaluation at an interim implementation stage to ensure that
objectives are being met and implementation is proceeding along
the lines envisaged. A good example of the latter within DFID
is the PRISM project which is currently under implementation;
(ii) Approval—annual capital budgets are
approved by the Management Board as part of our Resource Allocation
Round. Major infrastructure and IT projects above £2 million
arising in year are approved by the Accounting Officer and are
usually put first for consideration to the internal Management
Board or the IT steering committee which comprises a number of
senior managers and is chaired by the Principal Finance Officer.
Some major projects also have a dedicated steering committee which
meets regularly to monitor progress and to take any important
decisions required during implementation. A good example of the
latter within DFID is the resource accounting project which has
also been monitored closely by the Treasury and the National Audit
Office. Capital budgets for the general upgrade, modernisation
and maintenance of our existing capital stock are scrutinised
as part of our annual resource allocation exercise and considered
by the Management Board before being put to the Secretary of State
for approval;
(iii) Management—major projects are assigned
a dedicated project manager, usually at A2 (former G7) level who
is held accountable for all aspects of the project and who reports
to a member of the Senior Civil Service or steering committee.
Ring-fenced budgets are also set for major infrastructure and
IT investments which are set in accordance with those appraised
and subsequently approved. The project manager is delegated with
the authority to spend up to the approved budget. Capital budgets
for the general upgrade, modernisation and maintenance of our
existing capital stock are subject to normal DFID budgetary control
procedures ie the Budget Manager (usually a member of the Senior
Civil Service) is accountable for ensuring that the money is spent
in accordance with the purpose for which it was allocated, that
budgetary ceilings are not breached and that value for money is
obtained. The latter requires, inter alia, ensuring competition
during procurement;
(iv) Audit—Internal Audit provide an assurance
to the Accounting Officer on the adequacy, effectiveness and efficiency
of DFID systems through a programme of audits agreed on the basis
of assessed risk. The National Audit Office, in addition to conducting
audits of the Department's accounts, also carries out value for
money audits of Departmental expenditure and has been closely
monitoring, in particular, the development of resource accounting
and budgeting.
Capital contributions to the International Financial Institutions
20. In order to give its links with the multilateral
agencies a more strategic institutional focus, DFID has launched
a process of producing and publishing in a consultative process
Institutional Strategy Papers for all the main multilateral development
institutions with which it works. We expect to publish these Papers
in the course of 1999.
21. The Institutional Strategy Papers will set out the
basis for a working relationship between DFID and the institution
concerned. They will contain:
— a summary outline of DFID's strategy;
— an assessment of comparative advantage, the institutional
changes and challenges each institution faces;
— a statement of objectives and priorities for DFID's
relations with the institution; and
— an analysis of the modalities and instruments
available for co-operation.
Resource accounting and budgeting
22. Although DFID is not a capital intensive organisation
resource accounting and budgeting has three major implications
for the future management of capital expenditure and in particular
the decision making process within DFID:
— better information will be available on asset
holdings and their value;
— capital investment will no longer be treated as
an affordability issue for one year, only to be forgotten after
cash has been spent. Delegated budgets and activity analysis (based
on full costs allocation) will inform senior management on the
full costs of services and activities for which they are responsible
including depreciation and the cost of capital consumption, and,
in light of the above;
— investment appraisal is likely to be more rigorously
applied in light of the above and the long-term impacts on budgets.
7
The UK share of MIGA's General Capital Increase will be US$ 40.08
million of which US$ 7.08 million (approximately £4.29 million)
is to be paid in over three years from 1999-2000, subject to Parliamentary
approval. Back
8
The UK share of the AfDB's General Capital Increase V will be
Unit of Account (UA) 140 million of which UA 8.4 million (approximately
£6.9 million) is to be paid in over eight years from 1999-2000,
subject to Parliamentary approval. Back
9
The UK share of the EBRD's General Capital Increase will be ECU
851.7 million of which ECU 191.6 million (approximately £174.2
million) is to be paid in over 12 years from 1998-99. Back
| 
